Ericsson: Mobile market improving
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Ericsson says mobile systems market has stabilized and expects sales to pick up in 2004.
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STOCKHOLM, Swedish (Reuters) -- Swedish telecoms equipment maker Ericsson reported surprisingly strong fourth-quarter profits on Friday and signaled a return to growth in 2004 with healthier margins, boosting its shares.
The world's biggest producer of mobile networks made an adjusted pretax profit of 5.5 billion Swedish crowns ($754.4 million) in October-December, more than doubling expectations of 2.66 billion crowns.
It reported a pretax loss adjusted for restructuring costs of 2.1 billion crowns in the fourth quarter of 2002.
Ericsson, which used massive cost-cutting to return to a profit only in the third quarter after almost three years in the red, reported fourth-quarter sales of 36.2 billion crowns.
Revenues exceeded expectations of 34.6 billion crowns thanks to year-end spending by U.S. operators as well as continued rapid expansion by carriers in China and India. Following brighter outlooks from competitors, Ericsson reinforced hopes of a sector turnaround.
"The report was much stronger than expected,'' said analyst Hakan Wranne at brokerage Fischer Partners. "The company has an incredible lever to improve earnings. This means that everybody will upgrade their margin estimates.''
Goldman Sachs raised its investment rating on Ericsson to "outperform'' from "in-line'' shortly after the earnings statement.
Ericsson's stock traded 13.5 percent higher at 19.2 crowns at 1037 GMT, the highest since the first half of 2002, and sparked a 3.6 percent gain in the DJ Stoxx technology index, which it has outperformed by 25 percent this year.
Analysts said the one weak area was the order book of 29.5 billion crowns, slightly below year-ago levels and fourth-quarter sales, indicating pressure on future revenues.
But Ericsson was positive on sales in 2004 measured in dollars, a weakening currency, and said it was pleased with orders.
Brighter outlook
Ericsson said the mobile systems market had stabilized and upgraded its 2004 outlook, estimating demand would be flat or grow slightly in U.S. dollar terms versus 2003. Its previous forecast had been for 2004 to remain "in-line'' with 2003.
"The mobile infrastructure market has definitely stabilized, traffic continues to grow and operators are increasing their focus on network quality and capacity,'' Svanberg said.
The cautious upgrade and strong results are in line with improved results and growing optimism among competitors. Ericsson is the last of the large telecoms equipment makers to report fourth-quarter results.
To adjust to shrinking demand, Ericsson and competitors such as Alcatel of France and Nortel Networks of Canada have been shedding jobs. A slimmer workforce helped boost Ericsson's gross margin to 41.6 percent in the fourth quarter from 35.9 percent in the third -- much better than the company's forecasts.
"What I especially liked was the adjusted gross margin,'' said Jussi Hyoty, analyst at FIM Securities.
Svanberg said the gross margin "may see some small drop in the first quarter'' as Ericsson continued to benefit from lower costs but it expected to suffer from a seasonal quarter-on-quarter fall in sales. The sales drop would "not be dramatic,'' he said.
Compared to a year earlier, Ericsson forecast first-quarter sales would grow between five and 10 percent, which would mean to between 27.2 billion and 28.5 billion crowns.
The company, which had to ask shareholders for funds in 2002 to see it through the industry's downturn, reported a net cash position of 27 billion crowns, pleasing investors.
"There are not a lot of negatives and there are a whole lot of positives. I think it's worth buying,'' said Robert Sellar, fund manager at Aberdeen Asset Management, who said he held a large number of Ericsson shares.
"The cash pile... allays all the concerns investors have had about the quality of the balance sheet and its very positive. It makes the stock, which looked previously a bit expensive, look very cheap relative to the U.S. names.''
The company, which aims to cut its workforce to 47,000 in the third quarter of this year from 51,583 at the end of 2003, said its annualised operating expense run rate was now 37 billion crowns. Its target is 33 billion in the third quarter.
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