Ericsson (ERICY) is going to inhale a little more of the ocean when it reports second-quarter earnings Friday.
The market leader in the wireless infrastructure business has been treading water for several quarters, punctuated by episodes of choking and sinking. The European slowdown outlined by
Thursday earnings call will add more weight to Ericsson's legs unless the massive streamlining efforts detailed in its first quarter can buoy its results. Analysts expect Ericsson to lose 6 cents a share on $5.8 billion in revenue, according to Multex.com. That would constitute a slight uptick in revenue from the dismal first quarter's $5.4 billion, but a wider loss by three pennies. Ericsson's stock was swept up by more than 4% in Thursday trading on the heels of Nokia's mildly positive earnings report.
Recapping the state of Ericsson's affairs: The company is losing money at swelling rates from its handset business. Its market share fell to 7% in the first quarter, with mobile-phone sales down 50% from the first quarter of 2000. It's spinning off the segment this fall into a joint venture with Sony, but investors can expect more carnage in its second-quarter report.
said it gained 1% to 2% market share during the quarter, but it would be surprising if Ericsson could say the same.
Given that, all eyes will be on the company's industry-leading infrastructure business. Slow current generation sales sullied first-quarter results as carriers cut spending on TDMA systems. That trend has continued. According to Nokia's second-quarter results, carriers continue to save up for third-generation equipment purchases by cutting buys of current-generation products. Nokia reported on weak European carrier spending, which will clamp down on Ericsson's systems sales. Around one-third of Ericsson's business comes from Western Europe. On a bright note, Ericsson is holding its own in 3G equipment wins, and the Street will eagerly devour any details of strength in that area.
Which leaves us with two crucial questions: How are the massive restructuring efforts and their financial benefits coming along, and when will we see Ericsson perform better? Ericsson CEO Kurt Hellstrom spent a great deal of the first quarter's conference call outlining how 10,000 employees could be laid off and the $1.9 billion to be saved per year starting in 2002 through two separate reorganization initiatives. The Street will be looking to see if the results of those measures will help Ericsson in this time of need.
Back in April, Ericsson management held out hope for a recovery in the second half of 2001. Any indication that Ericsson believes it can right itself in the third or fourth quarters will be positives for the stock. Since Nokia warned that it saw sales softening across the globe, it seems implausible that Ericsson would get relief in the next quarter. Next-generation GPRS mobile phone technology is a potential helper in the fourth quarter, but it won't be high-volume ordering just yet, two quarters before carriers get the service rolling. If it's any consolation, SG Cowen analyst Scott Searle explains that there isn't much downside left in a stock pushed down this far, and he estimates that $4 to $5 is as low as Ericsson will go. SG Cowen hasn't done banking recently for Ericsson.