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Ericsson warns on 4Q
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October 20, 2000: 1:14 p.m. ET
Stock drops as company cuts profit forecast, warns of handset losses
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NEW YORK (CNNfn) - Sweden's LM Ericsson, the world's leading maker of equipment for mobile phone networks, on Friday cut its profit forecast for the fourth quarter to reflect a deepening loss in its cell phone handset unit, even as gains elsewhere fueled an 11 percent increase in underlying third-quarter profit.
In response, the company's ADRs dropped $1.50 to $12.50, or 11 percent, in U.S. trading on Friday. Several securities analysts lowered their ratings and earnings estimates for the company, saying that the stock is likely to remain under pressure until the company's phone handset business recovers.
Stockholm, Sweden-based Ericsson (ERICY: Research, Estimates) said pretax profit for the three months ended Sep. 30 rose to 4.1 billion Swedish crowns ($408 million), excluding one-time items, from 3.6 billion crowns a year earlier, as rising earnings from network equipment outweighed an increasingly serious loss on consumer products, including phone handsets.
Ericsson had warned last July that the consumer products unit would post a loss for the whole business year, saying sales of its highest-priced phones were dwindling as a share of the total.
Ericsson blamed the handset division's deficit mainly on component shortages caused by a major supplier, and said it would file an insurance claim to offset the damage suffered. Analysts noted the contrast to Finnish rival Nokia (NOK: Research, Estimates), which reported better-than-expected income Thursday. 
"It is clearly a profit warning," said Mika Paloranta, an analyst with ArosMaizels in Finland told Reuters. "In the mobile phones business, Ericsson is on a different planet than Nokia -- Nokia is succeeding fabulously and Ericsson is in the throes of death in that business."
Ericsson warned that its consumer products division, which includes mobile phone handsets, is likely to post a loss of 10 billion Swedish crowns ($992 million) in the fourth quarter. The loss includes a 4.7 billion crown restructuring charge, which is likely to include an inventory write-down, said UBS Warburg analyst Jeffrey Schlesinger. The expected loss is five times deeper than what Schlesinger previously forecast for the ailing division.
In response to guidance from the company, Schlesinger lowered his fourth-quarter revenue estimate for Ericsson to 77 billion crowns ($7.64 billion) from 86 billion ($8.53 billion).
"Everything else being equal, our fourth-quarter income before tax estimate of 9.8 billion crowns ($973 million) will likely be reduced by at least 8 billion crowns ($794 million)," the UBS Warburg analyst said in a research note. "We also expect to see adjustments to estimates for the first half of 2001 because of lower profitability levels in the consumer products business."
In an interview with CNNfn, Kurt Hellstrom, president of Ericsson, said that a fire at one of the company's suppliers deprived Ericsson of key components. If the component shortage had not occurred, the company would have been able to sell 7 to 8 million more phones, Hellstrom said.
"They had a fire, and the consequences of this have been hurting us badly, and they continue to hurt us," he said.
As part of a four-point plan to restore the consumer products business to profit, Ericsson said it would transfer production of mobile phones from Sweden and the U.S. to Asia, Eastern Europe and Latin America to lower manufacturing costs.
Reduced guidance for infrastructure business
To make matters even worse, Ericsson reduced its revenue growth guidance for its leading infrastructure business, which is profitable. Analysts now expect revenue growth from infrastructure equipment to be 20 percent in the fourth quarter and 20-25 percent in 2001, down from 29 percent and 30 percent respectively.
"We believe that ongoing weakness in Ericsson's handset business has been widely anticipated by investors, and it may also prompt management to give further consideration to additional strategic options for the handset division," said Lehman Brothers analyst Tim Luke in a research note. "These options could include the sale of the division if some improvement is not seen in the next few quarters."
Ericsson's Hellstrom rejected the idea of selling the handset unit in his interview with CNNfn.
"Handsets are an integral part of our operation," Hellstrom said, adding that selling the unit would be "easier to say than to do." 
--from staff and wire reports
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