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Ericsson Misses Estimates as Global Network Sales Decline

Ericsson AB, the world’s largest maker of wireless networks, missed analysts’ estimates for second-quarter profit as phone companies spent less on telecommunications infrastructure.

Ericsson fell as much as 8.1 percent. Net income rose to 1.88 billion kronor ($260 million) from 831 million kronor a year earlier, the Stockholm-based company said in a statement today. Analysts had predicted profit of 3.12 billion kronor, the average of 17 estimates compiled by Bloomberg. Revenue dropped 8 percent to 48 billion kronor, missing the 50.8 billion-kronor average estimate of 30 analysts.

“Most other regions are still fairly weak,” said Haakan Wranne, a Stockholm-based analyst at Swedbank Markets who rates Ericsson “buy.” “Europe is not performing that well, most emerging markets are in low capex mode. Acquisitions and contracts in the U.S. are what save the report.”

Ericsson’s equipment business suffered as operators held back on spending and merged networks to cut costs. The unit’s sales declined 12 percent, with revenue in India, China and southeast Asia falling the most. Sales in India declined 63 percent as the government imposed new regulations on telecommunications gear.

Ericsson fell as much as 7.15 kronor to 81.7 kronor, the biggest drop since October. The stock was 7.6 percent lower at 82.10 kronor as of 3:50 p.m. in Stockholm.

Ericsson’s woes are similar to rivals supplying network equipment to telecommunications operators. Nokia Siemens Networks yesterday reported an operating loss of 179 million euros on a 5 percent sales drop.

Indian Market

“The conditions we saw in the second half of 2009 with mixed operator investment behavior prevailed also in the first half of this year,” Ericsson Chief Executive Officer Hans Vestberg said in the statement. Component shortages and supply bottlenecks also cut sales in networks and services, it said.

Tight supplies of radio technology components worsened in the quarter, holding up the delivery of 3 billion kronor to 4 billion kronor in orders, Vestberg said in an interview with Bloomberg Television. Suppliers who cut production after the economic crisis in 2008 weren’t prepared for the speed of the recovery, he said.

Component Supply

The company expects the component shortages to ease gradually in the second half, he said.

In India, the government is stepping up scrutiny of imported switches and routers as phone operators plan to roll out high-speed services later this year. Phone carriers must obtain government security clearance before importing equipment, the Department of Telecommunications said this spring.

“There has been a security clearance process for all vendors and we got approval from only one vendor to ship at the end of the quarter, and after the quarter were cleared on a couple of others so we can start shipping,” Vestberg told Bloomberg Television.

The arrangements are a short-term solution and the situation for the longer term isn’t clear yet, Vestberg said. Indian operators also pulled back on spending while waiting for the outcome of 3G license auctions, Ericsson said.

Nokia Siemens cited the problems of security clearances in India and component shortages for its performance and said it sees both difficulties continuing this quarter.

Nortel Purchase

China and Northeast Asia declined by more than a third on timing of 3G spending in China. Ericsson won contracts to expand 3G networks both last year and this year as the Chinese government invested to expand broadband to more provinces to stimulate the economy.

Ericsson added wireless assets from Nortel Networks Corp. in the quarter, completing the acquisition of the Canadian carrier’s North American GSM business and a stake in a joint venture with Korea’s LG Electronics Inc. It also won managed services contracts with Telefonica SA in Brazil and Mobilicity in Canada.

North American revenue more than doubled with the integration of the Nortel assets and accounted for more than one quarter of Ericsson’s network business in the period.

The services business had flat sales as increased network management contracts balanced lower network rollouts. Ericsson has the world’s largest wireless services business, including a seven-year contract to manage Sprint Nextel Corp.’s networks.

“We have one currency exposure that is large, the U.S. dollar to the Swedish krona,” Vestberg said. “Everything else we can mitigate.” The effect was “very slight” in this quarter, compared with last year when the dollar-krona rate had “huge volatility,” he said.

Social Networking

Vestberg said the company aims to grow faster than the market. He’s eliminating 6,500 positions to cut costs and has reorganized sales into 10 geographical areas.

Nokia Siemens this week agreed to buy Motorola Inc.’s wireless network equipment business, cementing its position as the second-largest vendor worldwide ahead of Huawei Technologies Co. and setting the stage for competition with Ericsson for contracts from Verizon Wireless, Sprint Nextel Corp. and others.

Ericsson is counting on demand for data, driven by social networking and richer information via mobile devices, in the long term to overshadow operators’ efforts to cut costs by sharing network towers and other measures.

Ericsson and rivals are upgrading older networks to cope with data torrents to smartphones and netbooks, and are vying for so-called fourth-generation networks that could provide mobile broadband at fiber-optic speeds.

Sony Ericsson Mobile Communications AB, the mobile-phone venture with Sony Corp., reported second-quarter net income of 12 million euros, its second consecutive profit, as it shipped new touch-screen handsets using Google Inc.’s Android software. ST-Ericsson, the semiconductor business with STMicroelectronics NV, reported a net loss of $139 million.

To contact the reporter on this story: Diana ben-Aaron in Helsinki at dbenaaron1@bloomberg.net

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