Ericsson outlook seen key in Q2 report
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By Jan Strupczewski
STOCKHOLM, July 17 (Reuters) - Swedish telecoms equipment
maker Ericsson is likely to report a second-quarter loss similar
to the first quarter, but investor focus will be on the margins
of its key systems unit, its order book and the sector outlook.
The world's biggest producer of mobile networks and
fourth-biggest handset supplier is due to release its April-June
results on July 20 at 0530 GMT, a day after Finnish rival Nokia
.
Telecoms operators worldwide have put investment on hold as
a slowdown in the U.S. economy spreads globally, cutting demand
for telecoms services and equipment. Investors are waiting to
hear if Ericsson is optimistic about a rebound later this year,
similar to statements by U.S. peer Motorola last week.
"Demand drivers -- what they say about that will be very
important. Second to that will be all company specific issues,"
said a Swedish fund manager with a large stake in Ericsson.
"What they say about the order book for the next six months
is obviously very important," he added.
The company had said in its first-quarter report it would
not improve in the second quarter on the January-March pre-tax
loss of 4.9 billion Swedish crowns ($455.7 million).
A 19-analyst Reuters poll showed the market expects Ericsson
to report a 4.4 billion crown pre-tax loss in the second quarter
plus a 15 billion crown restructuring charge.
Analysts said Ericsson's loss was already priced in by the
market. "Whether it is 20 or 23 billion crowns doesn't matter so
much. What matters is the outlook," a Swedish analyst said.
In June Nortel, the world's biggest supplier of
telecoms equipment, said it did not expect any meaningful growth
in operators' spending before the second half of 2002.
PROFIT MARGIN ON SYSTEMS KEY
Ericsson is in the red because heavy losses of its handset
division have not been offset by shrinking profits of its main
mobile networks business. The performance of the profitable
systems division will therefore be crucial.
"The critical issue is...how low will the systems margin
fall," Deutsche Bank analysts Bruce MacDonald and Keith Westhead
wrote in a research note.
"Our forecasts assume a one percent margin, although we
cannot rule out the possibility of a negative margin. It is this
more than anything else that will, we believe, determine the
share price reaction," they said.
The operating margin in the systems division tumbled to four
percent in the first quarter from 14 percent in the first
quarter of 2000 as a result of falling global demand and the
costs of excess capacity and investment in 3G.
To return to profit, Ericsson has already announced job cuts
of up to 22,000 people, one fifth of its workforce, mainly in
the loss-making handset unit and administration.
An Ericsson source has said an insufficient number of
deliveries of third-generation mobile phone systems this year
may force the firm to cut several hundred more jobs.
The company has already outsourced mobile phone production
to Singapore-based Flextronics from April and will
launch a handset joint venture with Japan's Sony Corp <6758.T>
in October. The measures are to save Ericsson 38 billion crowns
annually from 2002.
"Ericsson is in the process of the biggest restructuring
programme ever in a country with very strong trade unions. They
will therefore be very cautious what they say about the future,"
said the Swedish analyst, who asked not to be identified.
Ericsson shares, which traded at 51 crowns early on Tuesday
in Stockholm, have fallen 51 percent since the start of the year
and 78 percent from their peak in March 2000.
CASH FLOW, FUTURE OF SONY JV IN FOCUS
Investors will also look at Ericsson's progress in its
attempt to return to positive cash flow after reporting a 17.7
billion crown cash drain in the first quarter. The group has
made cash flow its top goal this year.
"It is important because it shows if there is greater or
lesser risk, Ericsson will go to the market asking for more
money," the Swedish fund manager said.
Analysts said a second-quarter loss of similar size to the
first quarter would make it very difficult for the company to
end full-year 2001 in the black, unless there were a sharp
rebound in demand for telecoms equipment in the second half.
The Reuters poll showed analysts expect a 4.2 billion crown
pre-tax loss for the whole of 2001.
Analysts also said they would look for reassurance that the
planned handset joint venture with Sony is on track to start in
October. Ericsson has said the joint venture will be profitable
from day one, but some analysts remain sceptical.
"We wish to ascertain whether the preparations for the Sony
Ericsson mobile communications are on track and if the company
still believes that the jv will break-even as of day one," ING
Barings analysts Hendrik Zonnenberg and Eric de Graaf wrote.
"We do not expect the phones business to return to
profitability before the fourth quarter of 2002."
($1=10.752 Swedish Crown)
For the Ericsson results poll double-click on [nL10222511].
For the Nokia poll double-click on [nL16280607].
REUTERS
Rtr 05:37 07-17-01 |
