Economy crushes Ericsson in the first quarter

(Telephony) There was no excitement in CEO Kurt Hellstrom's voice when he detailed Ericsson's poor results to the investment community.

Hellstrom said second-quarter income before taxes won't improve next quarter and that he could not give them guidance for the rest of the year because of the severe uncertainty associated with the world's economy.

"We have a downturn in the economy, and it has been a very rapid downturn that has taken everyone by surprise," said Hellstrom. "This is the fastest dive in our industry that we have ever seen. I haven't seen anyone who predicted this."

On top of its “Back to Profit” program, which Ericsson announced in October to save $1.5 billion annually, Hellstrom said the company will try to reduce its cost base by another $1.9 billion by 2002. These measures include lowering SG&A expenses, reducing activities in selected markets, decreasing expenditures and consolidating its number of R&D locations.

Ericsson said this new program, known as the "Efficiency Program," could affect as many as 10,000 employees, more than half of them outside Sweden. Ericsson will substantially cut the 15,000 consultants it uses and replace them with employees.

Ericsson's primary focus will be to restore operating margins to 10%, compared with the 2% the company recorded in first quarter 2001, assuming the market doesn't deteriorate even further, said Hellstrom.

While sales in the company's wireless systems business increased 13% in the quarter, the struggling mobile-phone unit saw sales plummet by 52%. Overall sales dropped 5%. Net income fell 90% from first quarter 2000 to $424,132.

Overstocked distribution channels and lower subsidies from operators caused slower growth in the mobile-phone industry as a whole, said Ericsson. The company is cutting another 5,000 jobs in the handset business by the end of the year.