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Ericsson's earnings solid, future less so

  • 2002-07-25
  • Pia Ohlin
Beleaguered telecoms giant Ericsson posted better-than-expected earnings July 19 but its stock plunged 22 percent after the group announced a severely discounted share issue and said it saw no signs of a recovery for the battered telecom sector.

"The only comfort I find is that I believe (the recovery) will happen one day in this industry," a near-despondent Ericsson chief executive Kurt Hellstroem told reporters.

Ericsson shares plunged by 17.93 percent to close at 11.90 kronor, rattling other leading European telecoms equipment stocks.

Finnish rival Nokia was down 4.67 percent at 13.06 euros, Alcatel of France fell 12.5 percent to 6.30 euros, and Germany's Siemens stock was off 5.29 percent at 55.50 euros.

The telecoms industry has been hit hard by the global economic slump. Concerns have arisen in recent months about the future of an industry crippled by debts and doubts about whether new technology will be as profitable as forecast.

Compounding the problems are repeated delays in the launch of third-generation mobile telephony technology or 3G, which features sound and image messaging and mobile e-mail and is considered key to the sector's revival.

Finnish rival Nokia, which on July 18 again bucked the trend in the sector by announcing a 10 percent rise in first-half profits, was also pessimistic about the market climate but predicted a turnaround could come next year.

"Economic conditions in the latter part of the year will continue to be hard," Nokia chief executive Jorma Ollila warned.

And Canadian telecom equipment giant Nortel Networks said Thursday it did not expect to return to profit until June 2003.

Ericsson, which reported a net loss of 7.2 billion kronor ($770 million) in the first six months of the year, said it hoped to return to operating profitability "at some point" in 2003.

However, the road to profits will require major restructuring, including a total of 47,000 job reductions during the period 2001-2003 and 50 billion kronor in annual savings by 2004.

"We must adapt to the market conditions. I see no other way to adapt than to bring down costs," Hellstroem said.

Not to mention practically giving the Ericsson share away in a new issue aimed at strengthening the balance sheet.

Ericsson set the price of its share issue at 3.80 kronor July 19, a steep discount from the 14.50 closing price in Stockholm on Thursday and the 230 kronor at which the share traded during the high-tech boom in 2000.

"We have to provide a good motivation for (investors) to subscribe," Ericsson chairman Michael Treschow explained, well aware of the plunging share price and the fact that the company, once the crown jewel of Swedish industry, has not reported a profit since the first quarter of 2001.

Treschow has previously said the money from the rights issue would be used to strengthen the company's balance sheet by debt repayment and restructuring programs, and would not be spent on acquisitions.

Ericsson's main shareholders, including Swedish investment groups Investor and Industrivaerden, said they would subscribe for a maximum of 10 billion kronor, while a group of banks has underwritten 20 billion of the issue.