July 18 (Bloomberg) -- Shares of Ericsson AB, the world's largest maker of wireless networks, surged as much as 26 percent as accelerated cost cuts helped the company post a narrower-than- expected loss in the second quarter.

The net loss was 2.7 billion kronor ($327 million), the same as in the year-earlier period and down from 4.3 billion kronor in the first quarter, Chief Executive Officer Carl-Henric Svanberg said at a press meeting. The pretax loss excluding reorganization costs and one-time items was smaller than analysts had predicted.

Svanberg aims to cut the workforce to 1968 levels in 2004 as demand for networks that transfer mobile-phone calls slumps for a third year, hurting Ericsson and rivals Nokia Oyj and Motorola Inc. Svanberg stuck to a target of returning to profit in the third or fourth quarter and said Stockholm-based Ericsson has emerged from its financial ``crisis.''

``The cost-cutting program is starting to get a grip,'' said Marko Alaraatikka, who helps manage about $2.7 billion at Evli Investment Management in Helsinki and may buy more Ericsson shares. ``Ericsson seems to be taking market share from Nokia and Motorola'' in wireless networks.

Ericsson's adjusted pretax loss narrowed to 200 million kronor in the second quarter from 3.08 billion kronor a year earlier. Analysts in an SME Direkt survey predicted a 1.9 billion- krona loss on that level.

The net loss shrank to 0.17 krona a share from 0.25 krona. Ericsson raised 30 billion kronor in a rights offer last year.

Svanberg Windfall

Shares of Ericsson rose as much as 2.25 kronor to 11 kronor, a one-year high. The stock stood at 10.80 kronor at 12:54 p.m. in Stockholm, when 502 million shares had traded, more than double the full-day average of 226 million over the past six months.

Svanberg, who took over in April, bought 15.5 million shares in Ericsson for 100 million kronor when he agreed to become CEO in February. That stake is now worth 167.4 million kronor after jumping by 31.8 million kronor today. Before today, Ericsson's market value had dropped more than $200 billion since March 2000.

He joined Ericsson after building Assa Abloy AB into the world's largest lockmaker during his 10 years as CEO. Less than a month after taking over at Ericsson, he accelerated predecessor Kurt Hellstroem's plan to trim the workforce, announcing an additional 13,000 job reductions.

Svanberg has also reshuffled top management, replacing the chief financial officer and naming a new head of the services division. Ericsson's stock has risen 65 percent since he joined.

``If anyone can turn this ship around, it's this management,'' said Jussi Uskola, an analyst at Nordea Securities, with a ``reduce'' recommendation on the stock.

Trimming Jobs

The company booked 3.8 billion kronor in costs for job cuts. It ended the quarter with 57,600 employees, down from 64,600 at the start of the year and 105,000 in 2000. Svanberg plans to trim the workforce to 54,000 this year and 47,000 in 2004.

The reductions are helping Svanberg lift Ericsson's gross margin, a measure of how much a company earns after paying production expenses. The gross margin rose 1 percentage point to 35.1 percent in the quarter from the previous three months. The CEO said there is ``clear potential'' for gross margin improvements.

Svanberg is ``scaling back costs faster than we forecast,'' Nordea's Uskola said.

`Stabilized'

The market for mobile networks has ``stabilized,'' Svanberg said at a press conference in Stockholm. Still, ``we're not betting on any significant market increase.''

The market for base stations and other wireless equipment is set to drop more than 10 percent this year as phone companies rein in investments, Ericsson said, repeating a forecast made in April. The company's own sales will fall more than the market because of currency effects, it said.

Rival Nokia yesterday said its network sales will decline as much as 20 percent this quarter. U.S. competitor Lucent Technologies Inc. this week pushed back its target date for profitability after third-quarter sales missed forecasts.

Ericsson's ``numbers come as a relief, given that Nokia's report yesterday was something of a cold shower, especially in the terms of the outlook,'' said Tom Bystedt, who helps manage the equivalent of $427 million at 3C Fund Management Ltd.

Network Profit

At Ericsson's network business, which makes both wireless and fixed-line equipment, sales dropped 28 percent to 25.2 billion kronor. The unit had an adjusted operating profit of 600 million kronor. Analysts had expected a loss.

Ericsson controls almost a third of the market for wireless networks, more than double the share of closest rival Nokia, according to researcher Gartner Inc.

Ericsson, which counts 18 of the world's 20 largest mobile- phone operators among its clients, this week won an order worth $500 million from T-Mobile International AG to expand, upgrade and maintain wireless networks in the U.S.

``If third generation networks are put to commercial use soon, there is a chance that this is the last year of a shrinking network market,'' said Evli's Alaraatikka.

Total sales fell 28 percent to 27.6 billion kronor in the second quarter from a year earlier, while analysts had expected 27.4 billion kronor. Orders dropped 20 percent to 28.3 billion kronor.

Revenue this quarter will be unchanged or fall ``slightly'' from the previous three months, Ericsson said. Svanberg said third-quarter sales are typically weaker than in the previous three months.

Cash Flow

The company generated cash flow of 5.1 billion kronor from its operations in the second quarter after pushing customers to pay faster and reducing inventories. It used up 10 billion kronor to pay back bond debt and plans an additional 2.3 billion kronor in debt payments this year.

``We now have the financial crisis behind us,'' Svanberg said at the press conference.

Ericsson bonds climbed, with the company's 2 billion euros of bonds repayable in May 2006 rising to 103.5 by 9:00 a.m. London time from 102.5 yesterday. The bonds were sold in May 2001 paying an interest rate of 6.375 percent. That's been increased to 8.625 percent because of credit-rating downgrades in recent years. The yield declined to 7.45 percent from 7.85 percent.

Ericsson's $500 million of 6.5 percent 2009 bonds rose to 97 from 94.

Moody's Investors Service rates Ericsson B1, four notches below investment grade. It has a negative outlook on that grade. Standard & Poor's rates the company two levels higher at BB, also with a negative outlook.

Last Updated: July 18, 2003 06:58 EDT