Ericsson AB, the largest maker of wireless networks, reported profit that missed analysts’ estimates on slower services growth and bigger-than-anticipated job-cut costs, sending the stock to its biggest drop since 2009.
Second-quarter net income was 3.12 billion kronor ($488 million), missing the 3.88 billion-krona average estimate of analysts. Ericsson had costs of 1.3 billion kronor to eliminate jobs in Sweden. Gross profit margin dropped 1.2 percentage points to 37.8 percent, the Stockholm-based company said today.
Wireless vendors are competing to control base stations used by third-generation, or 3G, mobile-broadband networks to prepare for fourth-generation technology coming into use in the U.S. and Europe. Sales in North America, Ericsson’s biggest market, fell 6 percent, while revenue in India and northeast Asia including China doubled on mobile broadband rollouts.
“These results suggest that gross margins are peaking for Ericsson,” Goldman Sachs Group Inc. analyst led by Tim Boddy wrote in a note. “We see earnings growth and earnings momentum slowing sharply” in the second half.
Ericsson shares fell as much as 7.6 kronor to 84.30 kronor, the biggest decline since October 2009, and traded at 84.60 kronor as of 9:20 a.m. in Stockholm.
Revenue rose 14 percent to 54.7 billion kronor in the period. Analysts had predicted sales of 54.5 billion kronor.
“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 a statement. “The U.S. maintained its high business activity although sequentially the networks business was somewhat slower.”
Ericsson said today its full-year restructuring expenses will be about 3 billion kronor, compared with previous guidance of 2 billion kronor.
Ericsson bolstered its U.S. sales when it bought Nortel’s North American wireless unit in 2009 as the Canadian former rival started to break up. That made the U.S. the company’s biggest market, ahead of China and India.
The U.S. market is important for Ericsson as AT&T Inc. (T) and Verizon Wireless add capacity to keep up with data demand from smartphone and tablet customers.
Huawei Technologies Co. and ZTE Corp. (000063), Chinese manufacturers that have driven down prices and grabbed market share in other regions as they expanded, don’t win contracts in the U.S. because of security concerns.
Ericsson announced orders in the quarter for fourth- generation networks for Rogers Communications Inc. in Canada, LG Uplus Corp. in South Korea and the Australian government’s NBN Co. broadband-network developer.
The Swedish company generated about 39 percent of revenue last year from services, including outsourcing contracts to manage entire telephone networks. It agreed in June to buy Telcordia Technologies Inc., adding software and services for clients who choose not to outsource their network management.
Ericsson led the wireless-equipment industry with a 34.5 percent market share in the first quarter, according to Redwood Shores, California-based researcher Dell’Oro Group. Nokia Siemens followed with 20.3 percent, about tying with Huawei at 20.3 percent. Alcatel-Lucent’s share was 13.7 percent.
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