Ericsson Tanks After Earnings Release and Ugly Outlook

The Swedish mobile phone giant reports a drop in income and earnings -- and says it will outsource cell phone manufacturing.
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A lousy earnings report from Swedish mobile phone company

Ericsson

(ERICY)

has the stock poised to drop in U.S. trading today. The company reported a 46% drop in pre-tax income on a year-over-year basis and a 64% drop in earnings.

The company said it would begin to outsource its mobile phone manufacturing unit to

Flextronics International

(FLEX) - Get Report

. Ericsson instead said it would focus on technology, design, branding and sales of phones.

This move leaves Ericsson to concentrate on its

mobile infrastructure business, which is both profitable and market-leading.

The outlook isn't good. The cell phone company said an "uncertain" economic outlook and a more "cautious" capital market makes the coming quarters uncertain. Ericsson lowered its sales growth outlook for the first quarter of 2001 to a range of 15% to 20% from growth projections of more than 20%.

The cell phone maker reported net income of 2.25 billion Swedish krona ($234 million), or 0.28 krona a share (equal to 3 cents a share), for the fourth quarter, which Ericsson said was in line with guidance. That compares with earnings of 0.78 krona a share a year ago. The company reported an adjusted operating income loss of 1.5 billion Swedish krona, or $155 million, which includes restructuring and capital gains costs.

"The results in our mobile phones business, while in line with expectations, remain unsatisfactory. As announced, the losses are caused by delivery failure from key suppliers and an inadequate product mix in the entry-level market," CEO Kurt Hellstrom said in a prepared statement. "The delivery failures have lead to the loss of large sales volumes and serious under-utilization of production capacity, which has forced us into costly restructuring measures.''

The stock was down sharply in Europe, and shares of other cellular phone makers were lower in overseas trading as well. In preopen trading stateside, Ericsson was recently down 16%.

Ericsson's position as the third-largest handset maker in the world -- behind

Nokia

(NOK) - Get Report

and

Motorola

(MOT)

-- is tenuous at best. In the third quarter, Ericsson only managed to maintain its ranking with a 9.7% market share, according to market research firm

Dataquest

. Today's release, however, said the company's market share is over 10%.

Much of the Swedish company's woes stem from an inability to make any money on its phones. Currently in its third year of handset struggles, Ericsson has said that a return to profitability won't come until September. There had been

rumors that Ericsson would throw up its hands and sell some or all of its handset business -- which did come to pass today, when it announced the outsourcing of its manufacturing business.

The situation hasn't been helped by progressively gloomier forecasts for industry-wide handset sales this year. Earlier this month,

Motorola

declared that it expects those sales to come in at the low end of its 525 million to 575 million range. Since then, a number of analysts have followed suit in taking down their estimates, largely because consumers aren't

replacing their handsets as quickly as originally thought and because penetration rates in some parts of the world, most notably Europe, are rather high. Motorola earlier this month met sharply lowered earnings estimates and Nokia said it missed sales targets.

-- Staff reporter Carolyn Koo contributed to this article.