In its 2007 annual report, published earlier this month, Ericsson concludes that “our strategy has been effective and should not be changed”. Perhaps not, but the latest upset – a profit warning from Sony Ericsson, the Swedish company’s handset joint venture – suggests that market conditions, at least, are unfavourable. Down 8 per cent on Wednesday, shares in Ericsson have lost almost two-thirds of their value in the past six months.
Sony Ericsson’s problem is a lack of growth in sales of mid-market and high-end phones. First-quarter revenues will fall about 10 per cent year-on-year. Coupled with higher spending on research and development ahead of the introduction of several new phones later this year, operating margins will almost halve in the first quarter. A slowing market looks partly to blame, with consumers taking longer to replace mobiles. While similar weakness is yet to be reported by handset competitors, the story fits with a recent warning from Texas Instruments, which suffered order cancellations for chips used in 3G phones.
The prognosis, then, for Ericsson is not great. The hit from the handset joint venture should cut Ericsson’s earnings forecasts for this year by at least a tenth. Meanwhile, the outlook for telecoms infrastructure continues to darken. The shift to 3G means that the 2G market is now clearly in decline in developed countries. Yet if adoption of the high-end phones that drive data usage also slows, there will be less pressure on the telecoms operators to add capacity to their 3G networks. At the same time pricing remains brutal in developing markets, where growth seems likely to slow in 2009, as network rollouts are completed in several countries.
At €10.60 a share, Ericsson is still well above its post-bubble 2002 low of €3.60. As earnings slump for the second time this decade, investors can at least console themselves that this time round Ericsson’s balance sheet looks in decent shape.