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Ericsson Tumbles as U.S. Spending Cuts Hit Net: Stockholm Mover

Ericsson AB Chief Executive Officer Hans Vestberg
Ericsson AB Chief Executive Officer Hans Vestberg holds a mobile handset whilst speaking during a news conference to announce earnings in Stockholm. Photographer: Linus Hook/Bloomberg

Ericsson AB, the world’s largest maker of wireless networks, fell the most in more than four years in Stockholm as fourth-quarter profit missed analyst estimates on slower spending from North American customers.

Net income declined to 1.15 billion kronor ($168 million) from 4.32 billion kronor a year earlier, Stockholm-based Ericsson said today. Analysts in a SME Direkt survey predicted profit of 4.24 billion kronor, the average of 40 estimates.

Ericsson said today sales of equipment on the CDMA standard, used by Verizon Wireless and Sprint Nextel Corp., declined in the quarter as operators built up fourth-generation networks. The company lost money on global network rollouts as it started projects to replace equipment at European carriers. These modernization contracts will deliver smaller margins than ongoing contracts for at least two years, Chief Financial Officer Jan Frykhammar said at an investor meeting Nov. 9.

“The trends were expected, but the magnitude of the drop in U.S. sales and margins was bigger than expected,” said Haakan Wranne, a Stockholm-based analyst at Swedbank. “There are few clues for investors to pick up exactly when a shift is going to happen, so it’s a rational share price reaction and we will see dramatic revisions downward for earnings per share.”

Ericsson shares plummeted as much as 15 percent in Stockholm, the biggest fall since Oct. 16 2007, and were down 14 percent at 58.85 kronor at the 5:30 p.m. close, the largest decliner on the Stoxx 600 Technology Index, which was down 0.4 percent. Alcatel-Lucent, France’s largest telecommunications equipment supplier, fell as much as 11 percent in Paris to 1.33 euros, the most in two months.

‘No Guidance’

The results are “spectacularly dreadful, even with low expectations,” said Neil Campling, an analyst at Aviate Global LLP in London. “A further problem for the investment community going forward is Ericsson’s continued insistence of giving no guidance. We’d expect a plethora of downgrades to follow.”

Ericsson has no plans to give more detailed financial guidance, Chief Executive Officer Hans Vestberg said in an interview. He was appointed chief financial officer, a stepping stone to the top job, in October 2007, nine days after the company said it missed its own third-quarter forecasts, sending stock down 30 percent to a three-year low. Ericsson stopped giving guidance after that.

“We think it’s better that we are assessed on our performance rather than our forecasts,” Vestberg said. “We are not happy with the result but the factors in the report are the factors we’ve talked about for quite a while.”

Gross Margin Narrowed

Gross margin narrowed to 30.2 percent from 36.6 percent a year earlier owing to the “business mix” including more rollout work and modernization, the company said. The mix is expected to persist “for the next few quarters,” Vestberg said.

Quarterly revenue at Ericsson gained 1 percent to 63.7 billion kronor, missing all of the 28 estimates in a Bloomberg survey, which had an average of 67.4 billion kronor. Ericsson said it took 0.7 billion kronor in restructuring charges in the quarter.

“All the major numbers were disappointing,” Robert Jakobsen, an analyst with Jyske Bank in Silkeborg, Denmark, said by telephone. “Operator spending is clearly reduced especially in areas that have been very good for Ericsson in the last couple of years. And they already indicated a slowdown, so the estimates reflected that, and still it was worse.”

Credit-default swaps on Ericsson jumped 31 basis points to 149, according to CMA, the highest since Oct. 4 and the biggest daily increase in more than three years.

Revised Spending Plans

AT&T Inc. revised its spending plans while it mounted a bid for T-Mobile USA that collapsed in December, and T-Mobile put its plans for fourth-generation network on hold. Verizon slowed capital expenditure compared with last few years, according to its guidance.

Worldwide spending on wireless infrastructure equipment may have grown 9.1 percent last year to $42.5 billion, marking its first expansion since 2008 according to Englewood, Colorado-based market researcher IHS iSuppli. So-called fourth-generation systems are expected to overtake third-generation systems in 2013, IHS iSuppli said.

Swedbank’s Wranne said long-term prospects for Ericsson are still good. “It’s getting increasingly clear that Ericsson and Huawei are winners in this business and the other guys are subscale.”

Base-Station Control

Nokia Siemens Networks and Huawei Technologies Co. compete with Ericsson to control base stations used by third-generation, or 3G, mobile-broadband networks and win contracts for fourth-generation networks, which increase speed of data transfer. Sales of older second-generation networks, which cater to voice and text message users, are declining.

Joint ventures pared 1.9 billion kronor from Ericsson’s pretax income. Chipmaking venture ST-Ericsson Jan. 23 reported a fourth-quarter loss of $231 million, while Sony Ericsson Mobile Communications AB reported a fourth-quarter net loss of 207 million euros ($266 million). Sony Corp. is expected to complete its purchase of Ericsson’s half of the venture for 1.05 billion euros by the end of February.

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