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Ericsson Reports a Middling Quarter, Says Things Will Get Worse

Revenue for the first quarter could drop sharply, the wireless giant says.



hasn't let the pack run away with wireless, but the quarter ahead looks dangerous.

Ericsson, the leader in wireless equipment sales, had a fourth quarter somewhere in between those of its chief rivals.


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won back 3 percentage points of the handset market share in the fourth quarter and grew overall revenue 24% sequentially.



let its revenue slide from the fall quarter, but it cultivated an 11% gain in the one sector it's currently good at: mobile phones.

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Ericsson reported revenues of $5.54 billion a 7% rise from the third quarter's $5.1 billion, it reported before the market opened Friday. A full $4.7 billion came from its key systems business, a 17% improvement in that unit from $4.03 billion in the third quarter. The mobile infrastructure market leader wrapped up a year of cost-cutting, reorganizing and massive layoffs by posting a wider-than-expected loss of 4 cents a share. Wall Street was expecting $5.3 billion in revenue and a 3-cents-a-share loss.

The fourth-quarter finish represents a painful 35% fall from the $8.73 billion reaped in the fourth quarter of 2000, an incredible slide for a company of Ericsson's size. Management struggled throughout 2001 to decrease costs, and Friday it said its efficiency plan achieved $426 million in savings during the final quarter of 2001. Another 4,700 jobs were eliminated during the quarter, bringing the total to 10,600, in accordance with the plan. "There is definitely a high degree of urgency in this organization," said CEO Kurt Hellstrom.

The wireless giant reiterated its belief that in 2002 Ericsson's sales would mirror its projections for the infrastructure market, with revenues that will be from flat to a 10% decline. In the next quarter, however, the company says, accelerating weakness in its systems business will contribute to a stunning 32% sequential decline in revenues driven by troubles in the wireline portion of its core systems business. The company expects to take another loss in the first quarter.

Ericsson sees danger ahead for its infrastructure segment. "We have seen a tremendous downturn when it comes to circuit switching in Latin America and Western Europe. This is a volume issue. We have to adjust on a cost basis in a somewhat brutal environment," Hellstrom said. The woes do not come from its sales of wireless systems, which are also sluggish, but instead for conventional wireline networks.

Ericsson's startling revenue forecast for the first quarter of 2001 comes mostly because of a lack of orders tallied in the fourth quarter. "Orders are imperative for us and our continued improvement," Hellstrom insisted as he outlined a 20% year-over-year sales decline for the quarter. If Ericsson's orders pick up, the second quarter could show improvement, something management was hesitant to promise.

Trying to put a positive face on things, Ericsson stressed that its GSM business grew 9% despite dismal conditions for the full year 2001. The company reported higher third-generation equipment orders in the first and second quarters of 2001, and said they fell off at the end of the year. In 2002, the pattern is expected to be the opposite; Ericsson joined its competitors in expecting a second-half rebound in the industry. Hellstrom pointed to western European companies as "very reluctant to order." The company expects 10% of its infrastructure revenues to come from third-generation systems in 2002.

Ericsson's mobile phone venture, Sony Ericsson, celebrated its earnings debut with a $133 million loss, however, the unit grew substantially from the third quarter's $693 million in revenue to $918 million in the fourth. Ericsson argued that it will maintain high average selling prices, limiting itself to high-end phones, which accounted for a low volume of 6.8 million units shipped. By comparison, Nokia shipped 140 million handsets during the year, for an average of 35 million a quarter.

Additionally, Ericsson forecast a minor loss for the mobile-phone effort in the first quarter of 2001. When Ericsson unveiled the joint venture, it had made the ambitious claim that the venture would be profitable from the start, a stance it has since softened.

Ericsson forecast that 429 million mobile phones would ship in 2002, in line with statements from its peers. It backed up Nokia's comments Thursday that over 50% of those would come from current users replacing an older mobile phone.

To illustrate how far out of the mobile-phone race Ericsson has fallen, however, compare it to competitors: Motorola plugged in $3 billion in mobile-phone sales and Nokia managed $5.9 billion. To make Ericsson investors feel better, the equipment champ's revenue still shames Nokia's $1.73 billion and Motorola's $1.4 billion.