Component shortages and a widespread shift to entry-level phones impacted second-quarter earnings from L.M. Ericsson. The company’s stock fell 11 percent on the news and was trading around $20.13 at RCR press time.
Ericsson reported net income of $1.13 billion, a dramatic rise from the $253.51 million posted a year earlier. Earnings per share increased by 225 percent, to 13 cents from 3 cents. Net sales rose to $7.21 billion from $5.63 billion during the year-ago quarter.
For the full year, Kurt Hellstrom, president, projected overall sales growth of more than 25 percent, ahead of company expectations. However, he also said, “positive cash flow will be a bit more of a challenge, but we will hang in there.”
The cash-flow projections are strongly influenced by Ericsson’s Consumer Products division, which accounts for about 20 percent of its total revenues. The company is struggling with severe shortages of important components due to a catastrophic fire at a key supplier’s plant and is in the early stages of its transition to outsourced manufacture of low-end wireless handsets, Hellstrom said.
At the start of 2000, Ericsson had an estimated worldwide handset market share of 11 percent to 12 percent and a goal of “returning to 15-percent market share this year,” the company president said. It does not expect to achieve that benchmark this year, nor does it expect its Consumer Products business to return to profitability for at least another 12 months.
By contrast, network infrastructure systems for mobile wireless carriers “are the main driver … of the strong growth” during the second quarter, accounting for 64 percent of total sales, he said during the earnings conference call. Including wireline infrastructure, Ericsson’s Network Operators business constituted 70 percent of revenues, said Sten Fornell, chief financial officer.
In General Packet Radio Service, Ericsson has won more than 50 percent of the market, both in terms of numbers of contracts and subscribers, Ericsson reported. These comprise 47 commercial agreements covering more than 104 million subscribers and 44 test systems.
For third-generation wireless networks, seven carriers have selected Ericsson as a supplier, including five that have chosen it as the lead vendor.
Consumer Products sales for the first half of this year are 40 percent ahead of the same period in 1999, despite a second-quarter 2000 loss of $254.8 million on sales of $1.48 billion.
Components shortages had a $166.2 million impact on profits during the first half. Despite its expectations that handset sales will increase by 20 percent during the third quarter, Ericsson also anticipates the negative impact of components shortages to increase by an additional $277 million to $388 million during the second half, Fornell said.
The widespread market shift to low-cost handsets also has hurt the company because its product mix is geared to more advanced units. Ericsson has established a special organization in Asia for external manufacturing of entry-level handsets, and will announce contracts under negotiation when the agreements are final, Hellstrom said.
In general, the company plans to transfer its “high-volume production to low-cost manufacturing centers … while moving more of our advanced phone production closer to our R&D centers,” he added.
