Ericsson Debt Ratings Downgraded on Operating Pressures
Standard & Poor's Ratings Services says that it has revised to negative from stable its outlook on Swedish telecommunications equipment supplier Ericsson. The 'BBB+' long-term and 'A-2' short-term corporate credit ratings were affirmed.
The outlook revision follows Ericsson's announcement that fourth-quarter 2007 revenues will likely be in the low end of its very broad expectation range of SEK53 billion-SEK60 billion. This follows significantly weaker-than-expected profits and cash flows for third-quarter 2007, the announcement of low fourth-quarter profits in October, and the ensuing departure of the company's chief financial officer.
"Although we expect Ericsson's performance to pick up by second-half 2008, the negative outlook reflects the possibility of a one-notch downgrade if this does not occur or if performance deteriorates further in the coming quarters," said Standard & Poor's credit analyst Patrice Cochelin. "Notably, we will closely monitor the company's margins and cash flow. We will also monitor developments on the proposed shareholder lawsuit which has followed the company's recent share price drop."
"An improved operating performance, coupled with the maintenance of conservative debt measures, could lead to the outlook returning to stable," said Mr. Cochelin. In the current trading environment, however, we would not expect this to occur before year-end 2008.
Ericsson's revenues and profit expectations attest to very strong competition among telecom equipment suppliers, in spite of recent large-scale consolidation. In addition, visibility on demand is likely to remain poor, as telecom operators in developed markets continue to postpone or delay investment decisions amid regulatory and competitive pressures, leading to overcapacity in the telecom equipment sector. Growing subscriber numbers in emerging markets have failed to offset this overcapacity, in revenue terms, because of strong pricing pressure.
Although Ericsson's profit margins are significantly higher than those of competitors, third-quarter margins and revised forecasts are below S&P's previous expectations of operating margins in the high teens.
Posted to the site on 27th November 2007
