|
Ericsson investors hang up
|
 |
July 21, 2000: 4:54 p.m. ET
Profit up sharply on special items, but mobile division sinks into the red
|
NEW YORK (CNNfn) - Sweden's LM Ericsson AB, the world's biggest supplier of equipment for cellular phone networks, announced Friday that its second-biggest division slumped into the red in the second quarter, prompting a huge sell-off in the company's stock.
Investors, concerned by deepening difficulties at the firm's handset division, sent the company's shares down 7 percent to190 krona ($21.15) in Stockholm after the earnings release. In the United States, Ericsson's American depositary receipts (ADRs) dropped 2-17/32 to 20-1/32, an 11 percent loss, on Friday afternoon on volume that was more than four times its daily average.
 Ericsson warned the unit would post a loss for the whole business year, saying sales of its highest-priced phones are dwindling as a share of the total.
"We had been gradually improving and getting back on track with that operation about a year ago, and then in March we had a very unfortunate accident with one of our suppliers of components, and that has hit us and that has reduced the volume that we have been able to ship to the market during the second quarter, and unfortunately we will not recover in the third quarter either," Ericsson President Kurt Hellstrom told CNNfn.
"Ericsson and Motorola have had a different approach to the handset market than Nokia," Charles DiSanza, a telecommunications equipment analyst at Gerard Klauer Mattison & Co. told CNNfn.com. "Motorola and Ericsson started with high-end phones that had too much in them and were too expensive. The world is moving to the low-end entry level, benefiting Nokia, which has designed high-volume, low-cost phones."
However, Ericsson also managed to post hefty one-time gains that fueled a big increase in second-quarter earnings. The company's overall revenue in the second quarter rose 28 percent to 65 billion krona ($7.25 billion), and pretax profit, excluding one-time gains of around 6 billion krona, more than doubled to 6.7 billion krona ($750 million). Earnings per share rose 90 percent to 0.59 krone, excluding the non-recurring items.
|
|
VIDEO
|
|
CNNfn's Charles Hudson reports on Erickson's stock taking a beating.
|
|
Real
|
28K
|
80K
|
|
Windows Media
|
28K
|
80K
|
|
For the first six months, revenue rose 34 percent to 124.1 billion krona ($13.8 billion), while underlying pretax profit tripled to 12.8 billion krona ($1.43 billion), or 1.13 krona per share.
In response to Friday's news, CS First Boston analyst Marc Cabi lowered his estimate for Ericsson's year 2000 earnings per ADR to 21 cents from 30 cents and his 2001 estimate to 34 cents from 40 cents. Thus, the company's ADRs now sell for 95 times his 2000 estimate and 50 times the 2001 figure -- a valuation level too high to be called a bargain.
"Handsets continue to plague Ericsson," Cabi said in a research note issued Friday afternoon. "A manufacturing plant fire at a key LCD supplier for Ericsson's high-end handsets limited revenue growth and severely impacted profitability ... We anticipate a further weakening situation in September before incremental improvement in the December quarter."
Losses in the mobile phone division
While Ericsson's handset division revenue increased 29 percent in the quarter, the unit plunged to an operating deficit of 2.29 billion krona ($255 million) from breakeven a year earlier and a small profit in the first three months of this year. The firm blamed a deteriorating product mix and extra expenses associated with a fire at component supplier Philips Electronics that left Ericsson short of parts.
The components shortage will continue in the current quarter, the company warned, and the division will lose money for the year as a whole. Ericsson's management is addressing the company's mobile phone problems by focusing on handsets adapted for Internet use and forming an Asian unit to focus on the design of low-end phones.
"Since late last year, and the first quarter beginning this year, we have seen this switch from high-end to entry level phones, and our program has not been matching that movement very well," Ericsson's Hellstrom told CNNfn. "What we have done is create a dedicated unit for low-end entry-level products, and have put that organization in Asia. We have taken a number of actions to really focus on the entry-level segment," Hellstrom said.
Analyst Stuart Jeffrey of HSBC Securities told CNNfn the numbers were very disappointing, and raised the issue of how many other aspects of the company's operations rely on one key supplier. The delay in informing the market of its problems also did the company's image little good, he said.
The silver lining is Ericsson's "exceedingly strong" position in the market for new Internet-related wireless services, a market that will be a "key driver," Jeffrey added.
On the other hand, Ericsson's communications infrastructure division, which generates most of the company's earnings and sales, continues to do well. In the second quarter its revenue increased almost 33 percent to 46.1 billion krona ($5.14 billion), and operating profit rose 170 percent to 9.8 billion krona ($1.09 billion).
Gerard Klauer Mattison's DiSanza noted that Ericsson generates only about 20 percent of its revenue from mobile phones, and that the main reason investors should own the stock is for its sales of equipment that telephone companies use to build wireless and wireline communications networks.
Ericsson is a global leader in equipment that phone companies are using to build "generation 2.5" and "third generation" wireless networks, DiSanza said. Third generation, or 3G, refers to the combination of voice service and Internet access at speeds above 100 kilobits per second on mobile phones. Generation 2.5 phones are those that have a packet-switched interface so that they have a constant connection to the Internet. By contrast, older phones need to dial into the Internet, creating slow set-up times when users try to access information from the Web.
"So far, we have captured over 50 percent of both the General Packet Radio Service and the 3G market -- solid proof of our unmatched position as market leader," Ericsson's Hellstrom said in a news release.
General Packet Radio Service (GPRS) greatly improves and simplifies wireless access to packet data networks, such as the Internet. That means mobile phones using GPRS benefit from shorter access times and higher data rates. In conventional mobile phone systems, the connection setup takes several seconds and rates for data transmission are restricted to 9.6 kilobits per second. 
|
|
|
|
|
|
Ericsson
|
Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney
|
|
|
|
 |
|
