Tue, Apr 09, 2002 page17

• Ericsson may miss its profit goals

  COMMUNICATIONS The biggest maker of wireless-network equipment will need to make major changes if it wtill wants to maintain a positive cash flow this year

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  Ericsson AB, the biggest maker of wireless-network equipment, will miss its financial targets this year unless it sells businesses and cuts as many as 10,000 jobs, or 12 percent of the workforce, said investors and analysts.

  The company promised "positive cash flow" and an operating profit of 5 percent of sales this year, after posting a 21.3 billion kronor (US$2.08 billion) loss last year, its first loss in more than half a century.

  CEO Kurt Hellstroem cut a fifth of the workforce and tied managers' bonuses to generating cash after reporting the loss. That's not enough, investors said, because sales continue to slide.

  "Further measures will need to be taken," said Britta Unterberg, who helps oversee 100 billion euros (US$87.9 billion) at DWS Investment. "In the current environment, it will be tough" for the company to keep its promises.

  DWS owns Ericsson shares worth 45 million euros (US$39 million) after selling more than 90 percent of its stake.

  Ericsson declined to comment on whether it would cut jobs or sell more units. ``What we've said is that we'll continue to review the organization,'' said Aase Lindskog, an Ericsson spokeswoman.

  Ericsson's shares have dropped 29 percent in the past year, compared with 15 percent at rival Nokia Oyj, the second biggest maker of wireless gear, and 6.2 percent at No. 3 Motorola Inc.

  "They can't afford to disappoint again," said Jan Otto Holm, who helps oversee US$3.5 billion in assets at Kaupthing Bank.

  European phone companies last year began postponing spending on antennas and switches used to transmit mobile-phone calls as they focused on reducing the US$330 billion in debt they amassed in 2000.

  Ericsson will take "further measures" should sales fall more than 10 percent this year, Hellstroem said at the company's shareholders meeting March 27. Orders have yet to pick up, he told 2,000 investors at the meeting.

  As orders dropped and customers delayed payments, Ericsson resorted to borrowing about US$2.5 billion from bondholders last year to repay debt and develop new products. It also cut its staff to about 85,000 people from 107,000 at the start of last year.

  "They've stated that they have already taken everything they possibly can out of operating costs," said Tim Daubenspeck, an analyst at SG Cowen who rates Ericsson "hold."

  "If a rebound doesn't materialize, they'll be stuck with losses for a couple of quarters more."

  Ericsson may decide to sell some businesses to boost cash flow, which under the company's definition includes asset sales, analysts said.

  Businesses that may go include a chipmaking unit, which employs 2,200 people, analysts said. Ericsson is also trying to sell a 1,600-person division that makes fiber-optic and copper cables and equipment, newswire Direkt reported last month, citing an unidentified person within the company.

  The company raised 16.6 billion kronor (US$161.4 million) last year by selling assets including computer equipment and offices.

  Efforts such as speeding up customer payments and cutting inventories added 34 billion kronor to cash flow last year.

  "Now come the really difficult things Ericsson has to do," said Jamie Wood, an analyst at JP Morgan Chase & Co with a "market underperform" rating on the stock. "If your top line is falling and your gross margin erodes, it's so difficult to generate cash flow."

  Another way to reduce costs is to make fewer products.

  Analysts said systems based on two older wireless technologies could go. Ericsson has only two clients for network gear employing a Japanese system called Personal Digital Cellular. Sales of products using the other technology, called Time Division Multiple Access, are falling as US phone companies shift to rival technologies.

  "Those are two areas Ericsson may attempt to cut costs in," said Matthew Lewis, an analyst at Daiwa SBCM Europe, who has a "hold" rating on the stock.

  Though Lehman Brothers analysts Tim Luke predicted Ericsson will cut as many as 10,000 jobs this year, Hellstroem will likely wait as long as possible before announcing more firings, analysts said. At a shareholders meeting, Hellstroem lamented the job cuts he made last year.
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