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Reuters
Ericsson Beats Consensus, Shares Soar
Friday July 18, 4:37 am ET
By Jan Strupczewski


STOCKHOLM (Reuters) - Swedish telecoms equipment maker Ericsson sent its shares soaring on Friday with much better than expected second quarter results and a pledge to return to profit this year despite a falling market.
Shares in Ericsson, the world's biggest producer of mobile networks, rocketed 22 percent in early trade to 10.70 crowns, beating the DJ Stoxx European technology index by some 20 percentage points.

"We can conclude that we have the financial crisis now behind us. We are on steady ground," Chief Executive Carl-Henric Svanberg told a news conference, adding the order inflow was stabilizing and the wider market had hit bottom.

"(The market) will probably not deteriorate further," he told Reuters after the news conference.

Like others in the sector Ericsson has been grappling with a spending freeze from telecoms operators for more than two years, more than halving its workforce, selling off non-core businesses and changing management four times in five years.

Ericsson cut its pre-tax loss to 200 million crowns ($24.40 million), adjusted for one-off items, in the April-June period compared with a 3.1 billion crown loss a year ago and a consensus forecast of a 2.0 billion crown loss.

To see it through the industry downturn, the company made a $3.2 billion rights issue in 2002. After 11 successive quarters in the red it finally seemed close to profitability, excluding restructuring costs. "We remain determined to return to profit during 2003," Svanberg said.

OUTLOOK BETTER THAN COMPETITORS'

The pledge compared well with a statement from U.S. competitor Lucent Technologies earlier this week that it would miss its 2003 target of returning to profitability, despite even deeper job cuts.

Ericsson reiterated its outlook that demand for mobile networks this year was likely to decline by more than 10 percent in dollar terms against 2002, a similar one to that of arch-rival Nokia and U.S. competitor Motorola.

But Ericsson said its own sales in the third quarter would be flat or slightly lower than in the second quarter, which analysts said was positive compared to a gloomy forecast of a 15 to 20 percent decline in network sales by Nokia on Thursday.

"I think it's a lovely report. We will have to adjust our models significantly and we will probably increase our rating from outperform to buy," said Thomas Langer at WestLB Panmure.

"The nicest thing was that they were break-even in the important systems business," he said.

MAIN UNIT BACK IN BLACK

Ericsson's main systems unit returned to the black with a 600 million crown adjusted operating profit, after five quarters in the red and despite a 30 percent year-on-year plunge in mobile network sales, as cost-cutting started to take effect.

Ericsson sales fell 28 percent year-on-year to 27.6 billion crowns, better than a consensus of 27.3 billion crowns, with about one third of the decline a result of the weak dollar.

Evidence that sales have seen the bottom was reflected by the seven percent increase in revenues versus the first quarter. Further improvements could come from new orders of 28.3 billion crowns -- also up, by five percent, from the first quarter.

Analysts applauded Ericsson's progress in cost savings. The company reduced its operating expense run rate in the second quarter to 42 billion crowns, coming close to its end-2003 target of 38 billion crowns. Its gross margin increased one percentage point to 35.1 percent quarter-on-quarter.

"It's a very good report. The cost-cutting is biting," said Per Lindberg, analyst at Dresdner Kleinwort Wasserstein.

Lower investments and cost savings pushed Ericsson's cash flow up to 5.1 billion crowns, from a cash outflow of two billion a year earlier, reducing its reliance on debt financing.

Ericsson's benchmark dollar bond due 2009 was bid at 97 percent of face value, dealers said, 3.5 percentage points higher on the day. (Additional reporting by Anna Peltola and Jenny Dehlen in Stockholm and Alex Clelland in London)