NEW YORK—Ericsson received mixed reviews this week from Moody’s Investors Service, which confirmed the company’s investment-grade A3 long-term debt ratings, but changed the ratings outlook to negative from stable.
“The confirmation of Ericsson’s ratings is based on the expectation that the company will maintain its technological edge and leading market share in mobile telephone systems and will be able to turn around its terminal business through joint development and marketing with Sony and outsourcing of manufacturing to Flextronics,” said two Frankfurt-based Moody’s analysts, Juergen Berblinger and Wolfgang Draack.
The rating agency also expects Ericsson’s network infrastructure business to stabilize its profit margins through cost-cutting measures and to reach positive free cash flow status by the end of this fiscal year.
“The outlook for Ericsson’s ratings is negative, because there are no signs yet for recovery of demand for mobile-phone equipment (as) more carriers now are expected to defer upgrades to the GPRS (General Packet Radio Service) standard, are postponing installations of third-generation (3G) networks … or are agreeing with partners on network sharing,” Berblinger and Draack said.
So far, Ericsson has been able to offset maturing traditional cellular phone markets in Europe and North America with GSM contracts in the Asia-Pacific region and Latin America, where growth is faster but margins are lower because of greater competition among equipment suppliers.
“A material weakening of these markets, which contribute an increasing share to Ericsson’s order book, without a commensurate improvement in its other regions, would likely depress the company’s cash flow potential and, consequently, pressure ratings,” the Moody’s analysts said.
