Ericsson's Possible Side Deal With Sony Overshadows Its Quarter

Sure, go ahead, pay attention to the man behind the curtain.

Swedish communications giant Ericsson (ERICY) has successfully diverted attention from the 100-foot specter of an ungodly first-quarter earnings report before the European market opens tomorrow. Investors had been bracing themselves for a Motorola-like (MOT) monster, after Ericsson's March 12 warning that rather than the 15% growth anticipated, sales would be flat, and the company wouldn't break even in the quarter. Analysts were expecting a loss of 5 cents per share and $5.8 billion in revenue, according to Multex.com, vs. the previous quarter's profit of 2 cents per share and $8.1 billion in revenue. Now the investor community is tugging at the curtain obscuring a joint venture revealed on Japanese television that will pair Ericsson with Sony (SNE) to create cell phones.

You're out of the dark; you're out of the woods; you're out of the night.

Step into the light of the first positive piece of news to come out of Ericsson in the past several curves along the yellow brick road. The company has spent the greater part of 2001 revising downward its predictions for worldwide handset sales during the year, to its current peg around the 450 million range, due to the maturing European and U.S. markets for cell phones. Combined with Nokia's(NOK) push to prominence and Ericsson's internal failings, the latter has been a flagging No. 3 player, looking like it was going no place but down.

Not so Thursday, as investors took heart at the possibilities of a joint venture with consumer-electronics mastermind Sony, pushing Ericsson's stock price up 7% in early Nasdaq trading to $6.77. With Ericsson's handset channel and Sony's cash and reputation for marketing, analysts seem to think the deal will help Sony gain footing in Europe and push Ericsson to new heights in Asia. Critical question marks remain when it comes to who will own what percentage stake in the venture, how much cash Sony will put up and whether the duo will focus on more future-oriented third-generation (3G) wireless handsets or handsets that can be manufactured and sold widely immediately.

"This potentially brings Ericsson back as a credible player of size," explains Brant Thompson, head of European communications technology at J.P. Morgan. "At this point it's too early to tell. It will take 12 months to develop the first handset out of the joint venture. In the near term it can minimize Ericsson's risk. We're looking to stabilize the patient." (J.P. Morgan has done banking for Ericsson and Sony.)

Ericsson press officials acknowledged that discussions were taking place with Sony, but no formal announcement has yet been made, so facts about the partnership won't likely be included in its earnings call. Thompson is looking for "more bad news" as investors resign themselves to a downsize surprise from the company. But with the joint venture comes the potential for a revival in the handset business. "Investors know that if the handset business is turned around, there is a tremendous amount of leverage in the business."

Somewhere over the rainbow.

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