Wall Street Warms to Ericsson Firings

Ericsson (ERICY Quote) stoked a tech rally Tuesday, vowing that a new round of cutbacks will keep it on the twisting road back to profitability.

At first glance the news from the Stockholm-based wireless gearmaker didn't appear promising. First-quarter sales fell 30% both sequentially and year-over-year, while the latest-period loss ballooned by more than a billion kronor (about $120 million).

But investors who had expected little from the stumbling company were pleasantly surprised by developments on the cost side of the equation. Gross margins actually rose in the latest quarter despite the sales plunge, and the company's new chief promised to step up the firings that have reduced staffing by more than half since the telecom boom ended three years ago. The new plan will slash 7,000 jobs, taking the company's payroll to 47,000 people from more than 100,000 in 2001.

Shares were up $1.36, or 18%, to $8.81 at midday as Wall Street applauded the company's plan to return to the black this year, excluding the costs of the latest round of layoffs.

"I'm surprised," one Wall Street money manager with no position in the stock says of Tuesday's rally. "I guess going from terrible to just bad gives it a lift."

Race to Zero?

Even with the latest round of cuts, Ericsson remains in a precarious position. The company is a top networking equipment supplier to the sputtering third-generation, or 3G, wireless upgrade in Europe. As debt-heavy carriers have pulled back their commitments to buy new gear, Ericsson has been plunged into a long cost-cutting race with rivals Nortel (NT Quote), Lucent (LU Quote), and Motorola (MOT Quote).

Adding Value Ericsson's decline

But CEO Carl-Henric Svanberg, who previously ran Swedish lock maker Assa Abloy, is intent on returning the sales-challenged telecom equipment shop to viability. As such the company was able to note a few recent successes.

Despite a 90% drop in time division multiple access, or TDMA, phone sales at the Sony Ericsson joint venture, the company was encouraged by the strength of its global systems for mobile communications, or GSM, opportunity. While some observers have expected the two companies to pull back on the cost-intensive handset venture, both Sony (SNE Quote) and Ericsson seem intent on sticking it out.

Ericsson's executives expect the 50/50 joint venture to post its first profit this year based on the success of its new color-screen Net-ready phones.

Ericsson faces a more difficult challenge in the wireless infrastructure equipment market. With telcos cutting back on network expansion plans, Ericsson is seeing continued decline in demand for new gear. The company says that though there is heavy price pressure from the abundance of vendors looking to sell to a small pool of buyers, falling component costs and related expenses have been able to offset most of the effects.

The company says those offsets are best evident in the widened adjusted gross margin, which rose to 34.1% from 31.7% a year ago.

Lower Levels?

Some analysts and investors expect that, in addition to cost cutting, the new CEO Svanberg would also lead Ericsson into a merger that would help address the market's overabundance of gear suppliers.

On a conference call with analysts Tuesday, Svanberg said consolidation wasn't "the most apparent need" in the industry. That "doesn't rule out great fits," Svanberg said. "But it doesn't seem very tempting at this time."

This, of course, leaves networking investors with a familiar theme. In a stagnant equipment market with no mergers in sight, it's the outfit that controls costs the best that is seen as least terrible.