Ericsson's Growth Hits the Slowdown Wall

Ericsson (ERICY) lived up to analysts' fears Friday over growth projections and missed revenue estimates in a miserable first quarter ended March 31. The mobile-equipment maker turned in a loss of 3 cents a share on revenue of $5.4 billion.

According to Multex.com, analysts had been expecting a 5 cent loss on $5.8 billion in revenue, after Ericsson warned on March 12 it would not meet its projected 15% growth in sales for a break-even quarter, but would instead fall into the red.

Due to what CEO Kurt Hellstrom called, "the most abrupt downturn we have ever seen in our industry," Ericsson's leading network-equipment segment stumbled. Network bookings and sales slowed to 8% and 9% growth, respectively. After years of 20% company growth, Hellstrom is bracing for network equipment growth of only 5% to 15% for the year as North American TDMA (time division multiple access) sales dry up. The company will lay off thousands of workers and cut consultants as part of a plan to bring costs down.

Ericsson again reduced its industry predictions for wireless handset sales in 2001 by 20 million to a range of 430 million to 480 million, following last month's 50-million unit downward revision. Ericsson is currently maneuvering to alleviate the drain of its handset business, in which orders and sales declined in the first quarter a monstrous 51% and 52%, respectively. Ericsson's unit shipments dropped off from 10.5 million to 6.2 million in the quarter, putting its share of the handset market at less than 10%.

In January's fourth-quarter earnings call, Ericsson announced it would begin outsourcing the manufacture of its handsets to contract manufacturer Flextronics (FLEX). Ericsson expanded its outsourcing plans in its first-quarter report -- it will focus on research, design, marketing and sales only. Additionally, Hellstrom addressed yesterday's news of a potential cell-phone partnership with Sony (SNE), confirming discussions but saying nothing final has been decided.

Any business from that deal would not be fruitful for at least a year, leaving Ericsson to lay off workers and brace for a $2 billion "efficiency" cost-cutting program on top of a previously announced $1.5 billion "back to profitability" reduction. According to its report, as many as 10,000 workers could be affected and the mobile-phone company will seek to drop half the 15,000 consultants it employs. A $1.5 billion charge for both these programs will be taken in the next quarter. "We do not see any signs of recovery in the market," Hellstrom said.

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