Nokia, Ericsson Turn Focus to Cost Reductions as Demand Slows
04/16/01 01:11 AM
Source: Bloomberg News
URL: cnetinvestor.com
Stockholm, April 16 (Bloomberg) -- Nokia Oyj and Ericsson AB will focus on cost cuts when they report first-quarter results on Friday as sales of mobile phones slow and phone companies curb spending on network equipment, analysts said.
Nokia, the biggest cellular-phone maker, has said first- quarter profit will be unchanged as lower costs offset easing sales growth. Ericsson, the top supplier of wireless networks, will give more details on last month's cost-reduction plan while posting its first quarterly loss from operations in nine years.
After years of booming demand for mobile phones and networks that transfer calls between them, sales at Ericsson, Nokia and rivals such as Motorola Inc. are slowing along with the economy. To keep profits from shrinking or losses from mounting, the companies are stepping up efforts to lower costs and sell assets.
''When growth stops, you have to think of how many people you need,'' said Eric de Graaf, an analyst at ING Barings, who has a ''sell'' rating on Ericsson and a ''hold'' on Nokia. ''Cost control is clearly more important in a negative market.''
Ericsson, based in Stockholm, last month said it plans to trim 3,300 jobs, or 3 percent of its workforce, to help lower annual costs by 35 billion kronor ($3.5 billion) from next year. Espoo, Finland-based Nokia said unspecified cost cuts would keep first-quarter profit unchanged even as sales lagged projections.
Shares of Nokia, once Europe's most valuable company, have slid 37 percent this year, while Ericsson's have fallen 44 percent. The stocks trade at about 33 times estimated 2001 profit, below Motorola Inc.'s 80 times and Nortel Networks Corp.'s 87 times.
Full-Year Outlook
Ericsson is expected to report a first-quarter pretax profit of 532 million kronor, according analysts surveyed by SME. That figure includes a one-time gain of 5.5 billion kronor from selling shares in Juniper Networks Inc. Nokia is set to post a 1.6 percent drop in pretax profit to 1.33 billion euros ($1.18 billion).
Nokia in January forecast first-half sales would rise as much as 35 percent. Last month, it reduced the first-quarter sales forecast to 20 percent, from 25 to 30 percent. Ericsson has projected sales will climb as much as 20 percent this year.
While the companies haven't given any new forecasts beyond the first quarter, some analysts expect them to trim projections for the rest of the year when reporting earnings.
''We think there are likely to be downward revisions of 2001 guidance,'' Morgan Stanley Dean Witter analysts Angela Dean, Marcus Nash and Angus Lund wrote in a March 30 note to clients, rating both stocks ''neutral.'' ''Despite the declines in their prices, we continue to feel it is too early to buy these stocks.''
Motorola, the No. 2 cellular-phone maker, on April 11 said it will lose more money in the second quarter than in the first and forecast annual revenue will drop. The company plans to slash 4,000 jobs, bringing the cuts announced since December to 26,000.
Changing Market
Nokia, Motorola and Ericsson have all reduced forecasts for 2001 industry sales of handsets as consumers balk at buying new models amid a lack of phones that let them surf the Internet and as operators reduce subsidies. Nokia expects the industry to sell as few as 450 million phones this year, implying that growth may slow to 9 percent from 46 percent in 2000.
Demand for network equipment is also easing. Ericsson last month said growth in the phone-equipment market may halve this year to between 8 and 10 percent. In the U.S. alone, the market is set to stagnate after expanding as much as 30 percent last year.
''The market has changed,'' said Kurt Hellstroem, Ericsson's chief executive, in an interview last month. ''It started in North America and spread to Europe.''
To counter the slowdown, Nokia and Ericsson are leaning on their suppliers to provide components and services at lower costs.
At a March 30 meeting, Ericsson asked its 27 so-called ''preferred suppliers'' of consulting services to help it find ways to lower spending, said Johannes Rudbeck, head of investor relations at AU-System AB, which helps Ericsson develop software used in mobile phones and cellular networks.
Pressing Suppliers
Allgon AB, Nolato AB and PCI Ltd. are among suppliers of parts to cellular-phone makers that are struggling to make money as Nokia, Ericsson and their rivals push them to cut prices.
''A year ago, the focus was on boosting capacity,'' said Tomas Sjoelin, chief executive of Nolato, a Swedish maker of plastic and rubber components, in an interview last month. ''Now it has shifted to cost efficiency.''
Ericsson is also farming out phone production to Flextronics International Ltd. to reduce costs and halt losses at its handset business, which accounts for about a fifth of total sales. Still, Hellstroem indicated last month that Ericsson may not meet its target to turn the unit around in the second half of this year.
''I can't see how things are going to get better in the short term,'' said Ed Protheroe, a global technology fund manager who helps manage $250 million at Aberdeen Asset Management Plc in London. ''I'm not at all confident we've heard all the bad news.'' |
