Ericsson looks gloomy

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Ericsson, the world’s largest maker of network equipment, Thursday reported weaker than expected second-quarter revenue and profit, as higher sales of network equipment were partly offset by restructuring charges and the strong Swedish krona against Ericsson’s billing currencies.

Net income climbed to 3.12 billion kronor ($488 million) from 1.88 billion kronor a year earlier. Revenue rose 14 % to 54.7 billion kronor. Analysts had predicted profit of 3.88 billion kronor on sales of 54.5 billion-kronor, the average estimates compiled by Bloomberg show.

Ericsson’s profit was hit by a restructuring charge of 1.3 billion kronor as the company reduced staff in Sweden and was hit with a larger than expected charge for voluntary redundancies and early retirements.

In the quarter we saw a change in market mix where Brazil,China,Germany,Korea, and Russia showed especially strong growth both year-over-year and sequentially, Chief Executive Officer Hans Vestberg said in the statement. The U.S.maintained its high business activity although sequentially the networks business was somewhat slower.

Sales inNorth America, Ericssons biggest market, fell 6 percent, while revenue inIndiaand northeastAsiaincluding China almost doubled on mobile broadband roll-outs. Spending may be muted as companies wait for the outcome of the merger agreement between AT&T Inc. (T)and T-Mobile USA Inc., Vestberg said.

The company forecast that network modernization projects inEurope, which are less profitable than new build-outs, will form a bigger part of sales for the rest of the year.

The same day ST-Ericsson, the semiconductor joint venture between Ericsson AB and ST Microelectronics, said its second-quarter loss widened from a year earlier as sales fell. The net loss was $221 million compared with a loss of $139 million a year earlier, the Geneva-based company said in a statement.

While the present financial situation is very tough, we are on track to complete the transition to our new product portfolio in order to realize our aim of profitable leadership, Chief Executive Officer Gilles Delfassy said in the statement.

Ericsson’s networks unit was its strongest performer, with sales up 31% year-on-year, as demand from telecom operators for mobile-broadband services surged, driven by the increasing popularity of smartphones, such asAppleInc.’s iPhone.

Apple on Tuesday reported a tripling in fiscal third-quarter profit amid surging demand for its iPhone and iPad touchscreen tablet.

Smartphones, such as the iPhone and devices based onGoogleInc.’s Android platform generate approximately ten times more network traffic than feature phones, according to Ericsson.

The company’s closely watched gross margin was 37.8% in the quarter, compared with 39% a year earlier. Ericsson said its network modernization projects in Europe, which generate lower margins than building new networks, will accelerate during the second half of 2011.

Lars Soderfjell, an analyst at Alandsbanken, said the lower gross margin detracts from “some of the positive impression of good sales growth.” He added that investors are also worried by slower growth in the highly profitable U.S.market, even though it wasn’t unexpected.

“It’s clear that Ericsson’s chief executive warns that margins may come under pressure under the second half of this year,” he added.

Middle East slump

In the report, talking about the MENA region, it noted that sales had slump on account of unrest.

Middle East sales decreased 7% year-over-year and increased 16% sequentially. Political unrest continued to impact sales development in the region. 2G sales were weak in the quarter, while mobile broadband sales continued to develop positively across the region. Operators are looking into opportunities to reducing their operating expenses, resulting in a positive development for managed services both year-over-year and sequentially.

Sub-Saharan Africa sales decreased by 25% year-over-year, and were flat sequentially. Subscriber growth is accelerating both in 2G and 3G networks, driving needs for investments. Mobile broadband is picking up, however from low levels.

In a note to investors and financial analysts published today, Ericsson wrote that Middle East and Gulf sales had been “impacted by continued political unrest in the region”.

Ericsson has contracts with major telecommunications operators in markets that have been disrupted by popular Arab uprisings, including Al Jeel Al Jadeed for Technology inLibya, Syrian mobile operator MTN Syria, and Etisalat MISR in Egypt.

Sources: swedishwire, WSJ, Bloomberg, ericsson, consummea

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