Ericsson Falls as It Forecasts Wider Losses in Mobile Phone Division

LONDON -- For something that has become so small and light, the cell phone is weighing very heavily on Ericsson's (ERICY) balance sheet.

The Swedish maker of wireless infrastructure and handsets announced Friday morning that although its third-quarter profits rose, the company expects increased losses at its troubled consumer products division. Ericsson cut its revenue outlook for full-year 2000. The company's shares were down 13% by midday.

The continuing problems at the consumer products division is detracting investors' attention from Ericsson's very successful infrastructure business, prompting questions about whether a sale or, at the very least, the company striking up a partnership with another handset maker is the best way forward.

Ericsson said pretax profit for the period rose 12% to 4.1 billion Swedish kronor ($410 million), which was above most analysts' expectations. Revenue grew 37% to 67.3 billion kronor.

But its latest quarterly earnings report is really a tale of two companies. The infrastructure part of the business saw revenue rise 37% to 47.9 billion kronor and it posted an operating profit of 8.1 billion kronor. Operating margins rose to 17%, up from 15% in the same quarter last year.

In the consumer products division, revenue increased 47% in the quarter, but the division had an operating loss of 4.1 billion kronor compared with a 619-million-kronor loss last year. Ericsson is now expecting a loss of around 16 billion kronor for the division during the year, which means it has cut its total revenue forecast for 2000 to around 25% from a projection that had been above 25%, with operating margins between 6 and 7%.

Ericsson blames the higher losses at the consumer division on "a weakening replacement market in Europe and increased price competition in the fourth quarter."

So what to do?

Kurt Hellstrom, Ericsson's president, appears determined to hang on to the division and return it to profitability. Assuming a "four-point back-to-profit plan," which Ericsson today said will include transferring mobile phone production from Sweden and the U.S. to low cost areas in Asia, South America and Eastern Europe, is viable, its success then becomes a question of execution.

Hellstrom is loath to sell the division because the value of a mobile phone business lies with the engineering expertise, not in production facilities. So, Ericsson would be unlikely to get all that much for it.

Ericsson and other phone equipment makers such as Alcatel (ALA) argue that operators want an infrastructure provider to be also able to supply the devices that can be used on it. This is likely to become more true as the era of third-generation mobile telephony comes into being, with its new infrastructure and phones.

"If they can't get this right within a reasonable time frame then they maybe should look to partner with somebody and gain access to the handset business through that way," says Susan Anthony, analyst at Credit Lyonnais, who has a buy rating on the company. Credit Lyonnais has no investment banking relationship with Ericsson.

With the most earnings of the three largest mobile phone makers now released, it seems only the leader, Nokia (NOK), is producing the kind of growth in the technology for which investors had hoped. Nokia reported strong earnings this week, news that yesterday helped propel the tech sector to strong gains. But Motorola, following its earnings call with analysts last week, cut earnings expectations for the fourth quarter.

Investors are an impatient lot. And with signs that growth in the infrastructure business may actually be slowing, Ericsson's Hellstrom is likely to find himself under increasing pressure to remove the heavy burden that mobile phones have become for Ericsson.

TheStreet.com's sister site, RealMoney.com, recently ran a series on the new leaders in the cell-phone business.

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