Wednesday, July 23, 2008

Is Ericsson losing its grip in the mobile market?

Ericsson AB, the world's largest maker of wireless networks, may report its steepest profit drop in more than three years on costs to cut 4,000 employees and waning demand for phones at the handset venture with Sony.

Net income in the second quarter fell 56 percent to 2.82 billion kronor ($472 million), according to the median estimate of 15 analysts surveyed by Bloomberg. Sales at the Stockholm- based company probably rose 1 percent to 48.1 billion kronor, the least in more than four years.

Chief Executive Officer Carl-Henric Svanberg, who has presided over three straight quarters of falling profit, cut revenue forecasts twice last year because of a slump in North American and European consumer spending. Sony Ericsson Mobile Communications, the handset venture with Sony, said on July 18 that second-quarter net income was almost wiped out.

"The uncertainties continue to be regarding growth, competition in the industry, and pressure on profit margins," said Jan Dworsky, an analyst at Handelsbanken Capital Markets in Stockholm. "The global network market will be flat going forward, with limited growth next year, and competitive pressures will weigh on profit margins this year and next."

Ericsson forecast in February that demand for wireless and fixed-line telephone networks used by Telecom Italia SpA, Telefonica SA and other customers will be "flattish" this year, and announced plans to trim 1,000 jobs in Sweden and probably three times as many abroad.

'Troubled Portfolio'

WestLB analyst Thomas Langer in Dusseldorf, who cut his rating on Ericsson to "hold" from "buy" on July 15, estimates the company booked about 800 million kronor in restructuring charges at its network unit. Ericsson spokesman Fredrik Hallstan declined to comment on the coming earnings report.

Sony Ericsson said on July 18 it aims to cut annual costs by 300 million euros ($474 million) and said the handset market will remain "challenging" this year. Net income fell to 6 million euros from 220 million euros a year earlier and sales dropped 9.4 percent to 2.82 billion euros, the venture said.

"We expect Sony Ericsson's troubled portfolio to lose money through the second half, in contrast to market expectations for a substantial fourth-quarter recovery," London-based Goldman Sachs analyst Tim Boddy said in a July 16 note. He rates Ericsson "neutral."

The phone venture contributed more than 20 percent of Ericsson's operating profit in the first quarter, and Ericsson received a 2.2 billion-krona dividend from the company in the period. Svanberg is chairman of the joint venture.

Missed Twice

Svanberg saved Ericsson from the brink of bankruptcy after he took over in April 2003. He accelerated cost reductions started by his predecessor, Kurt Hellstroem.

Between the end of 2000 and early 2004, Ericsson cut more than half its workforce. The company had 75,000 workers at the end of the first quarter.

Earnings have met or exceeded analysts' estimates twice in the past four quarters and missed them twice.

The company reports at 7:30 a.m., followed by a press conference at 9 a.m. Chief Financial Officer Hans Vestberg will speak also. He took over in October from Karl-Henrik Sundstroem, who stepped down in October after Ericsson cut earnings targets.

Ericsson fell as much as 1.4 kronor, or 1.9 percent, to 70.9 kronor in Stockholm, and traded at 71.1 kronor at 9:41 a.m. in the Swedish capital. Before July 21, Ericsson lost 4.7 percent this year, compared with a 23 percent drop for the Dow Jones Europe Technology Index of 22 companies. Alcatel-Lucent SA, the largest supplier of telecommunications equipment, has lost 24 percent.

Job Cuts

Paris-based Alcatel-Lucent posted a fifth straight quarterly loss on April 30 on costs to cut jobs and lowered its full-year sales forecast. Alcatel SA bought Lucent Technologies in November 2006 and plans to cut 16,500 jobs.

About 50 percent of commercial wireless broadband operators use Ericsson technology, according to the company. Ericsson's largest source of sales is China, which contributed 7 percent of total sales in the first quarter, followed by India and the U.S.

"It's a tough environment," said Dresdner Kleinwort Group. analyst Janardan Menon in London. "Most of the revenue upside is coming in emerging markets, where price and margin pressure is even more aggressive than in Europe or the U.S."

Svanberg, who was paid 15.2 million kronor in fixed salary last year, has organized Ericsson into three main divisions: networks, professional services and multimedia.

"We view multimedia and its products, with the exception of mobile platforms, merely as an enabler for networks and profession services," Stockholm-based Nordea analyst Mats Bergstroem said in a July 16 report titled "A Bumpy Ride." "Mobile broadband and network expansion will continue to drive demand." He advises investors buy
Ericsson shares.

Is cutting manpower the solution for Ericsson to go back on track?