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All eyes on Nokia, Ericsson

July 17, 2001 Posted: 1341 GMT

LONDON (CNN) -- Finland's Nokia and Ericsson of Sweden are back in the spotlight this week as they announce second-quarter earnings.

The biggest mobile phone maker and wireless network provider respectively will also give investors an update on trading and order books, as a U.S.-led economic slowdown crimps spending by telecom operators worldwide.

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Paul Cooper, Director of Sarisin Asset Management, told CNN: "Ericsson will report a loss of $1.8 billion and Nokia a profit of $1 billion."

"But key to the industry is how profit margins are holding up to competition and a deterioration in demand," he said of the companies which are among the most widely held by European investors and the most watched.

According to a poll by Reuters of 17 analysts, Nokia is expected to post a 24 percent decline in second-quarter profit of graphic1.1 billion ($936 million).

And Ericsson is expected to post a second-quarter pretax loss of 19.4 billion Swedish crowns ($1.8 billion), according to 19 analysts polled. Excluding extraordinary items, Ericsson's pretax profit was 6.7 billion crowns last year.

"The infrastructure market has collapsed and margins have fallen from 20 percent to 4 percent," Cooper said.

"In the handset market until we see capacity falling by the removal of players, such as Alcatel, Siemens and Philips in Europe and some Asian companies, margins will remain depressed," he added. 

Investors will be hoping to see "revenues rising and margins improving to justify Nokia and Ericsson's current stock prices." Nokia is trading at 31 times next year's earning and Ericsson at 20 times.

Nokia's shares hit a new low on Tuesday midday, sliding 3.6 percent to graphic19.93 in Helsinki. The stock has fallen more than 45 percent to close at 20.68 on Monday from a high for the year of 48.50 in January. The Finnish company will report earnings on Thursday.

Ericsson stock fell 4.2 percent to 49.90 crowns. The stock was as high as 122.20 crowns in early January before sliding about 60 percent. The Swedish company will report on Friday.

In April, Ericsson posted a first-quarter pretax loss of 4.9 billion crowns, excluding a gain of 5.5 billion crowns from the sale of its stake in Juniper Networks Inc. of the U.S.

The company, which has announced plans to cut 22,000 jobs or a quarter of its workforce, also said it saw a lower growth rate in network systems sales in the next three months and lower phone sales, compared with the first quarter 2000, and said second-quarter pretax income would not improve from the first quarter.

Ericsson, Nokia and rivals such as Motorola (MOT: Research, Estimates) are suffering the effects of the economic slowdown in the U.S. and a reduction in orders from debt-laden phone companies. At the same time, fewer people than expected are replacing their old mobile phones with new models.

In June Nortel (NT: Research, Estimates), the world's biggest supplier of telecoms equipment, said it did not expect any meaningful growth in operators' spending before the second half of 2002.

Ericsson suffered huge losses at its mobile phone business. In a bid to stem losses and save 38 billion crowns annually from 2002, it agreed to farm out production of mobile phones to Singapore-based Flextronics and launched a handset joint venture with Japan's Sony.

But critically, Sarisin's Cooper told CNN all eyes will be on sale of 3G networks and the outlook for the infrastructure business.

European telecom operators spent more than graphic100 billion on winning the right to offer 3G (third-generation) services, or high speed mobile phone networks that allow the Internet, video and voice services on cellphones.

The same companies are expected to spend a similar amount on rolling out those services, according to estimates from analysts. But many telecom companies have fallen heavily into debt and now plan to share networks.

Nokia warned in June that it will post a lower-than-expected profit in the second and said earnings per share in the period, excluding special items, will come in the 0.15-to-0.17 range, or 13-to-15 cents a share.

The company earned 0.21, or 19 cents, per share a year ago. It too blamed overcapacity in the mobile handset market and slowdown in global telecom spending.    

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