Bloomberg News

Ericsson Profit Drops 43% as Carriers Cut Spending

October 26, 2012

Ericsson AB Chief Executive Officer Hans Vestberg

Ericsson AB Chief Executive Officer Hans Vestberg said today in a statement, “We see a continued macroeconomic slowdown and political unrest in parts of the world, which has led to more cautious operator spending in some parts of the world.” Photographer: David Paul Morris/Bloomberg

Ericsson AB (ERICB), the world’s largest maker of mobile-phone networks, reported a 43 percent decline in third-quarter profit as wireless operators curbed spending in a sputtering economy.

Net income fell to 2.18 billion kronor ($324 million) from 3.82 billion kronor, Stockholm-based Ericsson said today. Gross margin, or the percentage of sales remaining after production costs, slid to 30.4 percent from 35 percent, missing the 32.2 percent average of analysts’ estimates compiled by Bloomberg.

Wireless carriers are cutting back on network investments as a slowing economy and competition hurt subscriber growth. To offset the slower demand and rivalry from Huawei Technologies Co. and Nokia Siemens Networks, Ericsson is trying to sell more services such as network management and maintenance.

“The gross margin was weak in the quarter so it seems the pressure on profitability will remain for a bit longer,” Hannu Rauhala, an analyst at Pohjola Bank Oyj in Helsinki who advises buying the stock, said in a phone interview. “Still, the company has a good foundation and once the business mix improves, with the rising use of smartphones around the world, margins and profits will rebound.”

Ericsson fell 3.3 percent to 58.50 kronor at 9:05 a.m. Stockholm time. The stock had lost 14 percent this year through yesterday.

‘Cautious’ Buying

Sales declined 1.7 percent to 54.6 billion kronor. Analysts on average projected sales of 54.8 billion kronor and net income of 1.95 billion kronor. The business mix, with a higher proportion of projects to add coverage, will remain at the current level in the short term, Ericsson said.

Global services and support solutions sales rose 20 percent, while revenue at the networks unit slumped 17 percent to 26.9 billion kronor. Services and solutions sales now make up more than half of Ericsson’s total revenue.

Modernization deals in Europe, which demand more labor hours and are often less profitable, led to Ericsson’s gross margin plunging to 30.2 percent (ERICB:US) in the fourth quarter last year, the lowest level since at least 1989. In March, Ericsson trimmed its sales-growth outlook, saying it expects compound growth of between 2 percent to 8 percent through 2014.

“We see a continued macroeconomic slowdown and political unrest in parts of the world, which has led to more cautious operator spending in some parts of the world,” Chief Executive Officer Hans Vestberg said today in a statement.

Ericsson said Oct. 23 the third-quarter operating loss at ST-Ericsson, the chipmaking joint venture with STMicroelectronics SA, narrowed to $174 million from $224 million a year earlier. Revenue slipped 13 percent to $359 million and the company predicted it will remain at that level in the last three months of the year.

To contact the reporter on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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