Ericsson Clouds Hopes for Wireless Rebound

Posted by: Jack Ewing on October 22

Swedish telecom equipment maker Ericsson (ERIC) disappointed investors who had been looking for signs that the wireless market is recovering—and perhaps were hoping for another positive earnings surprise. The company reported Oct. 22 that its quarterly sales fell 6% to $6.8 billion from a year earlier, as mobile operators slashed the amount they spent on expanding their wireless networks. Analysts had been expecting the company to report a sales increase.

However, operating profit beat expectations after Ericsson, the world’s largest maker of equipment for wireless networks, was able to cut costs enough to compensate for the decline in sales. Operating profit slipped just 3% from a year earlier to $803 million. “We do see effects from the economic environment but our restructuring is successful,” Ericsson CEO Carl-Henric Svanberg told analysts on a conference call.

The Ericsson results were a reminder that the global economy remains fragile and that companies are still hesitant to make big capital expenditures. Better-than-expected earnings by other big companies in recent days, including carmaker Daimler and Germany’s Deutsche Bank, had buoyed hopes that world economic growth is finding its footing. But a dismal earnings report from Nokia (NOK) that owed largely to problems at its Nokia Siemens Networks wireless infrastructure unit gave investors reason to worry about the state of the telecom equipment sector.

Ericsson shares slumped as much as 7% after the earnings announcement, closing down 3.45% in New York trading. Svanberg said he thinks investors were reacting to statements the company made about weak demand in emerging markets. “Emerging markets in general are good for us. But in smaller emerging markets where you see currencies decline, where you see GDP decline, consumers have less buying power. Russia and Ukraine are some examples,” Svanberg said in an interview.

Ericsson did not give a specific forecast for coming quarters, frustrating market-watchers looking for solid indications of a pickup. “There is no visibility into Q4 whatsoever,” analyst Stuart Jeffrey at Nomura said in an e-mail. While Nomura rates Ericsson a good long-term investment, “the short term is certainly looking a little shaky,” Jeffrey said.

(With reporting by Peter Elstrom)