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Ericsson Profit Rises as Handset Disposal Helps Margins

Ericsson AB’s first-quarter profit more than doubled on the sale of a stake in its mobile handset venture while the company increased its profit margins from the previous period amid cautious spending from European operators.

The net income of 8.95 billion kronor ($1.3 billion) included 7.7 billion kronor in one-time gains from the sale of half of Sony Ericsson Mobile Communications, the world’s largest maker of wireless networks said. Gross profit margin, the percentage of sales left after costs of goods sold, climbed to 33.3 percent from 30.2 percent in the previous period, Ericsson said, topping the average estimate in a Bloomberg survey of 12 analysts of 31.4 percent.

“The competition is out there but nobody has really gained anything behind us, basically I see it’s flat behind us,” Chief Executive Officer Hans Vestberg said today in an interview.

As phone-equipment spending slows, Stockholm-based Ericsson is relying on wireless operators in the U.S., its largest market, to invest in faster fourth-generation networks as they seek to add smartphone customers. Revenue fell 4 percent to 51 billion kronor. Vestberg said the pattern with some European operators “cautious” to spend amid the region’s debt crisis “hasn’t deteriorated.”

Market Share

Ericsson closed little changed at 63.65 kronor at 5:30 p.m. in Stockholm. The stock had lost 10 percent this year through yesterday, while Alcatel-Lucent SA gained more than 15 percent so far this year and was up 5.7 percent in Paris.

Ericsson’s mobile infrastructure market share gained to 38 percent in the quarter from 32 percent in 2011 on contracts to replace aging mobile phone networks, mostly in Europe, and presence in growth markets, Vestberg said in the interview.

“The underlying result is fine thanks to the gross margin, which should be reassuring,” said Alexander Peterc, a London- based analyst with Exane BNP Paribas. “Networks sales were light because of the decline in CDMA and macro factors in regions like southern Europe,” he said, referring to the code division multiple access wireless standard.

Profit adjusted for the sale of Sony Ericsson and the loss in joint venture ST-Ericsson was 2.47 billion kronor, according to data compiled by Bloonberg, compared with the average estimate of 2.04 billion kronor in the Bloomberg survey.

Reduce Funding Need

ST-Ericsson said this week it will cut 1,700 jobs and transfer applications processor development to STMicroelectronics to concentrate on integrated mode and application chips.

“With this new plan we believe we can get profitability and our loans back,” Vestberg said on a conference call with analysts. “That’s why we have done this restructuring, and we are trying to reduce the need for funding by having the focus on modems and combination modem-applications chips. It will hurt for some more time.”

Last quarter, Ericsson expanded its stake in a joint venture with LG Electronics Inc. (066570) to capture growth in Korea, where it is building 4G networks for all the major carriers.

Modernization contracts in Europe, which produce smaller margins because of tough competition for them, could depress margins for several years, the company said today, reiterating comments it made in November. Its latest mid-term sales target is 2 percent to 8 percent through 2014, two percentage points below the previous three-year target.

Financial Impact

“Modernization is important for us with the footprint,” said Chief Financial Officer Jan Frykhammar. “We took the decision to improve our position in Europe and we have to live with the financial impact, which on average will be with us for 18 to 24 months,” he said.

The company doesn’t see any more major modernization projects coming up in Europe and all the contracts it has won are now underway, Vestberg said in a Bloomberg Television interview.

Nokia Siemens Networks, the joint venture of Nokia Oyj (NOK1V) and Siemens AG (SIE), last week reported a loss of 147 million euros as revenue declined 7 percent. The company is cutting units and staff to focus on mobile broadband and services.

ST-Ericsson, the unprofitable chipmaking joint venture with STMicroelectronics SA, said April 23 that its first-quarter loss widened to $312 million from $178 million. Revenue fell 35 percent to $290 million in the period.

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

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

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