In a period when bad earnings news and guidance warnings have become commonplace, some releases are worse than others.
The announcement this morning by LM Ericcson ADR (ERIC) that its joint venture with Sony (SNE) for the marketing of mobile phones will post significantly lower results for the first quarter than had been expected has been greeted with alarm.
Sony Ericcson has projected that first quarter sales will drop to 14 million units, down from 24 million in the fourth quarter. The joint venture is now projecting a loss of $465 million to $533 million for the quarter.
Sales of the Sony Ericcson mobile phones have been affected by declining consumer demand throughout the world. Company revenues have also been adversely affected by the global financial crisis and the reduction of inventories at wholesalers and retailers.
Of even greater importance, however, has been the decline in market share as competitors Apple (APPL), Research in Motion (RIM) and Samsung have captured more consumer interest with their I-phone systems.
Sony Ericcson is projecting a 42% decline in phone sales for the quarter, double the decline forecast by most analysts. Many analysts are looking at a downgrade of their recommendations as a result of the guidance.
The dismal prospects for the company in 2009 and beyond have given rise to concerns about viability. The joint venture began the year with a cash balance of 1.125 Euros, or about $1.4 billion. Losses for the first quarter and for the balance of the year will likely reduce available cash by half.
If the losses continue at the projected level Ericcson will be faced with a choice of either withdrawing from the partnership or infusing additional cash so that the joint venture can continue to operate.
Stockholm based Ericcson has had greater success competing for wireless communications systems installations in China, where it was recently awarded the contract for the installation of third generation Wireless Code Division Multiple Access System (W-CDMA) in fourteen China provinces. The value of the contract has not been released.
Ericcson is the global leader in the delivery of technology and services to telecom operators. While the difficulties with the joint venture with Sony are irksome, Ericcson’s balance sheet is not likely to be adversely affected to any great extent.
At year end, Ericcson had current assets more than twice the size of the current liabilities and long term debt of less than 15% of the company’s equity.
This article was written by Jamie Dlugosch, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
