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Cellphone market growth slowing, says Ericsson

Stockholm, 25 Oct 2004
Ericsson, the world`s biggest producer of mobile phone networks, said market growth would slow next year, sending its share price down sharply despite reporting a big jump in third-quarter profits on Friday.

Lower than expected orders in the quarter only added to concerns for future sales, analysts said.

By 1314 GMT (9.14am EDT) the shares were off 5.3% at 21.30 Swedish crowns having touched 20.20 in earlier trade, although they have outperformed the DJ Stoxx European tech sector index by 68% this year.

"Orders were on the weak side and the 2005 outlook was not so good either because analysts have pencilled in quite strong growth," said Claes Folkmar, fund manager at Folksam, who said he had sold down his Ericsson shares to a short position.

Orders in the three months rose 3% to 29 billion crowns ($4.03 billion) from a year ago, but fell 13% versus the second quarter, because of lower demand from China where the authorities are moving to cool capital spending in the fast-growing economy.

The merger of two big US mobile operators Cingular and AT&T Wireless, both large clients of Ericsson, reduced orders from North America.

Investors had hoped orders would be on a par with sales, which totalled 31.8 billion crowns, in line with forecasts and up 14% on 2003 but 2% down on the second quarter.

Chief executive Carl-Henric Svanberg played down the disappointing orders. "Do not read too much into it. Orders fluctuate from quarter to quarter," he told a news conference.

He said sales and orders in the fourth quarter, historically the strongest of the year, would be the highest in 2004.

Pre-tax profits for the three months rose to 7 billion Swedish crowns ($973 million), more than six times up on a year ago, and marginally above the average of analysts` forecasts.

The surge in profits comes from years of savage cost-cutting and a jump in demand now that telecoms operators are no longer putting off spending on the new third-generation (3G) networks for which they incurred huge debts in buying operating licences.

Market to slow down

Booming mobile subscriber growth, which will see a third of the world`s six billion people using a mobile phone in 2006, has forced operators this year to start spending again.

Some have been spending more than usual because of overdue network upgrades after years of under-investment, but Ericsson said this effect was already tapering off.

Svanberg told a news conference that up to half of the 2004 market growth so far may have come from this extra spending effect and that most of it would be gone by year-end.

"Therefore, compared with total growth in 2004, we expect the global market for mobile systems to show slight growth in 2005. Excluding this catch-up effect in 2004 we estimate a moderate underlying market growth in 2005," Ericsson said.

Folkmar said the size of the catch-up effect was another setback as it meant a deeper market slowdown in 2005. "I would not be surprised if growth were down to GDP next year," he said.

Analysts polled by Reuters had on average expected Ericsson`s sales to grow 9% next year, while the company has previously quantified a "slight" growth forecast as being between 2% and 5% in dollar terms.

Gaining market share

For 2004, Ericsson repeated its view that the mobile networks market would show slight to moderate growth, earlier quantified as up to 9%, plus the catch-up spending.

Rival Nokia, which last week reported a 21% jump in third-quarter network sales in euros, raised its mobile networks market forecast to "slight to moderate" growth in euros this year from only "slight" growth.

Ericsson reported a 20% annual rise in third-quarter mobile network sales in terms of Swedish crowns. "We believe we are steadily taking market share, step by step," Svanberg said.

Ericsson`s gross margin eased to 47.1% in the third quarter from 47.8% in the second due to the seasonal dip in sales, but above analysts` expectations of 46.2%.

The operating margin, which hit all-time highs of 23.7% in the second quarter, also eased to 22.7%, but beat expectations of 21.2%.

Ericsson has said a sustainable level for the margin is "in the high teens, closer to 20%", but Svanberg told analysts that it was a deliberately cautious forecast so that Ericsson was sure to deliver on it.

(Additional reporting by Alison Tudor in London and Lucas van Grinsven in Amsterdam.)

($1=7.195 Swedish Crown)

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