Ericsson Lowers Outlook, to Transfer Phone Production (Update3)
1/26/01 2:54 AM
Source:Bloomberg News
Stockholm, Jan. 26 (Bloomberg) -- Ericsson AB cut its forecasts for sales and profit margins this year and said it will stop manufacturing at its mobile phone unit to stem losses at the business. The company's shares fell as much as 13 percent.
Fourth-quarter net income fell to 2.25 billion kronor ($234 million), or 0.28 krona a share, including a 15.4 billion-krona gain from asset sales and an 8 billion-krona charge mainly for transferring phone production to Flextronics International Ltd.
Chief Executive Kurt Hellstroem has been under pressure from investors to turn around the phone business, which accounts for less than a fifth of sales at the biggest maker of cellular phone networks. Ericsson, which has lost market share to Nokia Oyj, expects the unit to be profitable in the second half.
''We would rather they got rid of the handset business altogether,'' said Henrik Tell, who manages $100 million in technology stocks at Oehman Kapitalfoervaltning AB. ''Basically, nothing has changed. 2001 is not going to be a strong year.''
Ericsson lowered its 2001 sales growth forecast to between 15 percent and 20 percent from more than 20 percent. It expects an operating margin -- operating profit as a percentage of sales -- of between 6 percent and 8 percent. The company earned 6.32 billion, or 0.78 a share, in the fourth quarter of 1999.
Flextronics
''Analysts have been forever optimistic about Ericsson's outlook and they're being shot in the foot again,'' said Rob Sellar who helps manage about $1.5 billion in European equities at Aberdeen Asset Management Plc in London.
Flextronics, which is based in Singapore, will take over Ericsson's phone plants in Brazil, Malaysia, Sweden, the U.K. and part of a production site in Lynchburg, Virginia, on April 1. To finance the agreement, Flextronics said it will sell 25 million shares, worth $914 million at the close of U.S. trading yesterday.
Ericsson said 4,200 of its employees will join Flextronics, while 600 people will be fired. It will cut jobs at its phone unit to 7,000 people by year-end from 16,800 at the end of last year.
Shares of Ericsson, which will continue marketing and selling phones under its own name, fell as much as 15.5 kronor to 103. The stock had gained 10 percent this year before today, after losing a fifth of its value last year.
The phone unit had an operating loss of 10.3 billion kronor in the fourth quarter as sales fell 17 percent. Ericsson's biggest business, which makes equipment for wireless and traditional phone networks, had an operating profit of 9.4 billion kronor. Sales at the network unit rose 21 percent.
'Sound Basis'
''We are committed to remain a top player in mobile phones,'' Jan Waereby, head of Ericsson's phone unit, said in a statement. ''With this new set-up, we respond to a much tougher business environment, and we create a sound basis for long-term profitability.''
Ericsson is already the biggest customer for Flextronics, which is based in Singapore and analysts estimate gets about 5 percent of revenue from cell-phone production. The Swedish company accounts for about 5 percent of Flextronics's sales.
Flextronics expanded through acquisitions last year, including the purchase of the phone production assets of Robert Bosch GmbH of Germany. Bosch earlier had sold its phone research activities to Siemens AG, also a Flextronics customer.
Ericsson's phone unit has struggled in the past two years as it lagged Nokia in getting new phones on the shelves. Last year, it also suffered from a fire at a plant where Philips Electronics NV makes chips for Ericsson. The Swedish company wrote down phone inventories by 5.9 billion kronor in the fourth quarter.
Shrinking Market Share
Its share of the cell-phone market fell to 9.7 percent in the third quarter from 10.3 percent in the second, according to Dataquest Inc. Nokia lifted its share to 30.6 percent from 27.5 percent, while Motorola Inc. fell to 13.3 percent from 15.6 percent. Siemens AG boosted its ranking by two notches to No. 4 and may overtake Ericsson this year, analysts said.
Nokia is expected to report that fourth-quarter net income rose 30 percent to 1.11 billion euros from 853 million euros in the year-earlier period, according to estimates from analysts surveyed by Bloomberg News. It reports earnings Tuesday.
This year may prove more difficult for all phone makers. Analysts and executives expect industry sales growth to slow as world economies slow and clients await new technologies before replacing their phones.
Ericsson said it expects the industry to sell between 500 million and 540 million phones this year. That's below Nokia's prediction of 550 million phones.
More than half of Ericsson's sales come from mobile networks. Demand in that business is set to rise as phone companies order an estimated $200 billion of equipment for faster cellular services. Still, to win those contracts suppliers may have to offer generous financing arrangements, eroding profit margins, analysts said.
1/26/01 WestLB Panmure Ericsson Cut to 'Underperform' at WestLB Panmure Bloomberg News
1/26/01 Delta Lloyd Ericsson Rated New 'Reduce' at Delta Lloyd Bloomberg News
1/26/01 Merrill Ericsson Cut to 'Short-Term Accumulate' at Merrill Bloomberg News
Jim |
