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Ericsson sinks into loss
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March 12, 2001: 2:06 p.m. ET
Swedish firm says flagging U.S. economy weighs on sales and profitability
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LONDON (CNN) - Ericsson warned on Monday the deteriorating U.S. economy would push the company deep into the red in the current quarter, the second blast of bad news from the company in as many months.
The Swedish firm, the world's largest telecommunications equipment maker, said it would post a loss of up to 5 billion crowns, or $510 million, in the first quarter of 2001, versus an earlier forecast of roughly breakeven.
The announcement shocked investors, who drove Ericsson's (ERICY: Research, Estimates) American depository receipts (ADRs) down $1.72, or 20.5 percent, to $6.66 in early afternoon Nasdaq trade Monday.
Less than two months ago, the company had predicted its revenues in the period would grow by some 15 percent, although that number was revised down to zero in Monday's statement.
Ericsson warned that the economic slowdown in the U.S. was affecting "all operations," though its mobile-phone handset business was particularly hard hit.
The handset unit has proven to be a major burden to Ericsson, and lost more than $1 billion in the final quarter of 2000. Ericsson plans to exit the manufacturing business, using lower-cost producers to build its products. The company reiterated on Monday its commitment to stick with the handset business, however.
In a conference call, Ericsson executives said the company was facing slower sales across all its regions and across its whole range of handsets.
Merrill Lynch analyst Adnaan Ahmad downgraded his rating on Ericsson's shares to "neutral" from "accumulate" Monday, citing concerns about that unit's growth.
"The main concern regarding Ericsson is its mobile systems division, which is experiencing slower growth in the U.S. and marginally disappointing growth in Europe," Ahmad said in a note to clients Monday. 
"Ericsson said orders as a whole remain strong, but it is just seeing a push out in most mobile system shipments due to economic uncertainty as well as slower subscriber growth in the U.S. as subsidies have been cut," Ahmad added. "Fewer subscribers means lower phone use, which translates into slower systems build-out, which is what we are seeing in the U.S."
Monday's warning had an effect on rivals Nokia (NOK: Research, Estimates), whose shares were down $1.16 at $21.64 on the New York Stock Exchange, a 5.1 percent decline, and Motorola (MOT: Research, Estimates), whose shares fell 40 cents, or 2.6 percent, $15.15.
Ericsson warned the situation could get worse, admitting, "The current economic uncertainty ... makes it increasingly difficult to make forecasts with reasonable certainty."
The company said the number of phones it sells would be "considerably lower" in the first quarter, and that profitability had been further hit by reduced subsidies from network operators, increased inventory, and competitive price pressures.
Ericsson executives told analysts the industry was suffering from an excess of 20 million phones, but refused to be drawn further on the portents for the rest of the year. Ericsson will provide guidance on the second quarter on April 20.
Chief Executive Kurt Hellstrom sought to play up the prospects of the firm's infrastructure unit, which is the world's largest supplier of cellular systems. 
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