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Ericsson CEO says strong profitability to continue

May 5, 2004

Reuters

Ericsson's CEO Carl-Henric Svanberg said the company would maintain its profitability through tight cost controls, having reported forecast-beating margins for the first quarter, but remained vague on sales.

After three years of cost cutting amid shrinking demand the company has been steadily increasing its profitability to reach a 44.7% gross margin and a 16.1% operating margin in the first quarter.

"No company in the world should be able to beat us on costs," CEO Carl-Henric Svanberg said. "We have struggled to survive, but we have succeeded and our strength is now impressive. Don't underestimate how eager and hungry we are."

The company has more than halved its workforce to 47,000 people since 2001, and with most of the cost cuts already in place investors' focus has turned to how fast Ericsson can grow sales amid fierce industry competition.

Rivals like Nokia and Motorola have also reported strong first-quarter results in their network units.

While confident about Ericsson's ability to control costs, Svanberg was careful not to boost investors' expectations for sales growth and cautioned against extrapolating the company's strong first-quarter sales and orders for the rest of the year.

He said first-quarter results included overdue operator spending from pent-up demand after a long period of no investment.

"There is a catch-up effect. To what extent will that start to fade out? We have to see. One has to be very careful in drawing conclusions from the first quarter," Svanberg said. Precise margin values may change slightly from quarter to quarter around the first quarter levels, he said.

Ericsson previously reported a 9% year-on-year rise in sales and a 22% rise in orders for the first quarter to April 23, and said the market for mobile networks would grow 3% to 9% in dollar terms in 2004, upgrading its previous outlook of flat to slight growth.

But it gave no outlook on sales for the second quarter, a forecast which analysts would have welcomed. Svanberg reiterated that the telecoms market had historically grown two to three times faster than gross domestic product, and that it was likely to return to such growth levels.

He said the first-quarter margins were sustainable despite falling equipment prices, because of rising volumes and margins for the ultra-fast 3G networks and falling costs for the popular GSM-standard networks.

Operators with a GSM network in place will eventually all upgrade to the much faster EDGE technology for GSM, also sold by Ericsson, along with the rollout of 3G networks, which use different spectrum. The company was also gaining market share in the smaller but fast-growing CDMA-standard mobile network market.

Ericsson spokesman Henry Stenson said the company wanted to move away from quarterly forecasts that tend to be volatile, and instead focus on longer-term trends such as margins.

"They are diplomatically downplaying the growth prospects," said Per Lindberg, analyst at Dresdner Kleiwort Wasserstein.

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