Ericsson handset business strong despite wider woes

After a large and unexpected earnings miss, Ericsson faces a serious but not yet dangerous situation. However, enterprises can continue to evaluate Ericsson for handsets since this news will mainly affect service providers.

Event
On 22 April 2002, Ericsson announced another loss, further job cuts and plans to raise funds through a rights issue. In the first quarter of 2002, Ericsson's revenue fell to SKr37bn ($2.5bn), down 26 per cent from 1Q01, and it had a loss of SKr5.4bn (£360m) before taxes.

Ericsson said it will cut 17,000 jobs from its workforce of 82,000 by the end of 2003. This reduction follows 25,000 job cuts it made through lay-offs and outsourcing since 2001. The rights issue of B shares will raise up to SKr30bn (£2bn) by the end of September 2002.

First Take
Operators have postponed investments in third-generation mobile systems, and this delay not surprisingly caused revenue to fall at Ericsson, the largest supplier of equipment in the market. Ericsson discovering the scale of its problems so suddenly was a surprise. The figures fell as much as SKr3bn (£200m) short of what financial analysts had expected and Ericsson gave no indication of the setback at its annual general meeting in March 2002.

Ericsson can expect little help from its customers, which have their own challenges. It now aims to cut costs by a further SKr20bn (£1.3bn) a year. Most of the savings it has so far made have come from outsourcing deals and layoffs, which will nearly halve its workforce by 2003, and not through any real efficiencies. Outside of the staff cuts, however, Ericsson has done little to rein in its costs. For example, Ericsson had announced in its 2Q01 report that it would cut R&D by SKr4bn (£260m) yet cuts only appeared in 4Q01, and the full-year results still showed R&D expenses higher in 2001 than in 2000.

Ericsson has virtually scrapped its organisational structure after only about six months. Ericsson will merge its fixed-line and mobile units to offer systems combining fixed and wireless. But whether customers want what this new group will sell - or whether Ericsson can execute on this latest reorganisation - remains unclear. The only good news in the announcement involved Ericsson's joint venture with Sony. The move to outsource manufacturing is paying off, with the joint venture reaching breakeven early.

Ericsson faces a serious but not yet dangerous situation. Still, the group might experience further jolts before it can get back on track. This announcement will mainly affect service providers. For enterprises, handsets remain Ericsson's primary product. Because of the relatively short life cycle of handsets (about 18 months), Gartner believes enterprises can continue to include Ericsson in their handset evaluations.