Ericsson posts big Q3 loss, sees weak 2002

STOCKHOLM/CHICAGO: Swedish telecoms equipment maker Ericsson reported a

deeper than expected third-quarter pre-tax loss on Thursday as it struggled with

weak demand and forecast a falling market for its key product, mobile networks,

next year.

"The slowdown for telecommunications systems accelerated in the third

quarter," Ericsson chief executive Kurt Hellstrom said in a statement.

"We now anticipate that the difficult market conditions will persist well

into next year."

Ericsson, which has 80 per cent of sales from mobile systems, made a 5.8

billion crown ($548.7 million) pre-tax loss in the third quarter against market

consensus of 4.5 billion crowns. The company's sales of 54.6 billion crowns fell

short of market consensus of 59.15 billion.

It posted a worse than expected July-September loss per share of 0.50 crowns

against forecasts of a 0.45 crown loss and down from a 0.55 crown profit in the

same period of last year.

Ericsson, the world's biggest producer of mobile networks and third biggest

handset supplier, also had a more pessimistic outlook for the networks market

for 2002 than many of it competitors like Nokia or Nortel Networks Corp.

"For 2002 we expect sales at least in line with the market development

of flat to down 10 per cent," Ericsson said in a statement released a day

before the scheduled October 26 earnings release.

Ericsson, like rivals, has been hit by the US-led economic slowdown, with

operators postponing new orders, and consumers reluctant to purchase new phones.

Ericsson sees networks sales down



The new forecast is much more pessimistic than the flat to modest growth of the
networks market in 2002 predicted by the company in early September.

"We now estimate the range to be flat to down 10 per cent," it

said. "However, we plan to achieve an operating margin greater than 5 per

cent for the full year, even with sales declining as much as 10 per cent,"

it said.

This was in line with figures in a Reuters story earlier on Thursday which

quoted an industry source.

Finland's Nokia, the world's biggest and still profitable producer of mobile

phones, forecast last week a tough market for networks until the second half of

2002 and said its systems sales would drop 20 per cent in the fourth quarter as

hard-hit operators delay spending on new networks.

Another rival, Nortel, last week would not give a forecast for the future but

said there were signs that operators' investment may have at least stopped

falling.

Ericsson, which has been slashing jobs to cut costs, said its network sales

in the fourth quarter would fall 10 percent year-on-year.

"Our assumptions are a market downturn lasting well into next year,

significant net subscriber additions with continued increasing usage per

subscriber, gradual build-up of GPRS traffic over the next 12 to 18 months and

increased deployment of 3G systems during 2002," it said.

The firm reported positive cash flow of 1.2 billion crowns, in line with an

earlier Reuters story, calming fears it would have to issue new shares. Positive

cash flow is Ericsson's main goal for this year and management bonuses depend on

it.

Ericsson also defied market expectations of a loss in the networks business

with a one percent operating margin on sales of 43 billion crowns. The market

had expected the networks unit to dip into the red for the first time in years.

This was also in line with a Reuters report, citing an industry source.

"While it's certainly an industry issue, we believe Ericsson is having a

hard time competing in networks against competition. That appears to have led to

a major shake up at the top," said Tim Ghriskey, senior partner at

Connecticut-based Ghriskey Capital Partners LLC.

Chairman to step down in 2002



The company said in a separate statement that its chairman, Lars Ramqvist, often
criticized for Ericsson's current misfortunes, would step down at the company's

next general shareholders meeting in March 2002.

The chief executive of the world's biggest major appliances maker Electrolux,

Michael Treschow, would be the candidate to replace him, Ericsson said.

The company said in the quarterly report it managed to slightly cut losses in

its mobile phone unit, which on October 1 was merged with the handset division

of Japan's consumer electronics firm Sony Corp. Sony and Ericsson plan to take

on Nokia in the tough mobile phone market.

Ericsson's handset division, which has been losing money since the second

quarter of 2000 had sales of 8.3 billion crowns against expectations of 8.0

billion and an operating loss shrinking to 4.2 billion from 4.6 billion in the

second quarter.

"There's a glimmer of hope and strengths appearing in handsets but it's

just the opposite affect in infrastructure," said at Ed Snyder, wireless

technology analyst at San Francisco-based JP Morgan H&Q.

"There's no pulse and the timeline of no pulse is getting extended

further and further into 2002 and maybe into 2003."

The company said it now expected global handset sales this year at around 400

million units, at the lower end of a 400-440 million unit forecast made in July.

Ericsson said it expected sales in the fourth quarter to be 55 billion crowns

excluding the parts of the operation shifted to the mobile phone joint venture

with Sony, which analysts said was below their expectations.

To return to the black the company has already announced a 38 billion crown

efficiency programme which entails up to 22,000 job cuts or one fifth of

Ericsson's workforce.

Ericsson said the plan was going ahead of schedule and that savings this year

would reach seven billion crowns rather than the earlier expected 5.5 billion.

"It's a tough environment so they're trying to do the best they can with

controlling their expenses and improving their balance sheet but in the meantime

their order book was not pretty and their outlook reflected that," said

Brian Modoff, wireless technology analyst at the San Francisco-based Deutsche

Banc Alex. Brown.

Ericsson said its order book shrank 35 per cent year-on-year in the third

quarter to 44.9 billion crowns.

But it also said its customer financing exposure fell by one billion crowns

in the third quarter to 21.9 billion crowns with Brazil and the United States

being the markets where the financing was biggest.

(Additional reporting by Eric Auchard in New York and Paul de Bendern in

Helsinki)

(C) Reuters Limited.