Ericsson Misses Estimates as Carriers Curb Spending

Ericsson Misses Estimates as Carriers Curb Network Spending
Ericsson fell 1.3 percent to 58.90 kronor yesterday. The stock has declined 34 percent in the past year. Photographer: Casper Hedberg/Bloomberg

Ericsson AB, the world’s largest maker of mobile-phone networks, reported second-quarter profit that missed analysts’ estimates as carriers curbed spending to cope with a slowing economy. The stock fell to a 3 1/2-year low.

Net income declined 64 percent to 1.11 billion kronor ($158 million), Stockholm-based Ericsson said today. Analysts predicted 1.64 billion kronor, the average of estimates compiled by Bloomberg. Gross margin, the percentage of sales left after costs of goods sold, narrowed to 32 percent from 37.8 percent.

Phone operators are cutting back on network investments as Europe’s debt crisis weighs on global economic growth and consumer spending. Alcatel-Lucent SA, France’s largest phone-gear supplier, predicted yesterday it will miss a 2012 profit target. Demand slowed in China and Russia, Ericsson Chief Executive Officer Hans Vestberg said in a statement.

“I’m broadly disappointed with the report,” Andy Perkins, an analyst at Societe Generale in London, said in an interview. “It’s not a great set of numbers as their core business is still shrinking. This is a big problem. The pickup in network spending just isn’t happening.”

Ericsson slumped as much as 5.1 percent to 55.90 kronor, its lowest level since January 2009, and traded at 56.70 kronor at 11:37 a.m. Stockholm time.

The company cited less-lucrative network modernization projects for the gross-margin pressure. Analysts estimated a margin of 33.2 percent, according to data compiled by Bloomberg.

Sales climbed 0.9 percent to 55.3 billion kronor, compared with the average 54.9 billion-krona estimate.

China Slowdown

Business activity in China declined, Ericsson said, joining companies including Intel Corp. in citing a slowdown in the world’s most populous country. The world’s largest chipmaker said yesterday growth in the country has moderated. China’s economy grew in the second quarter at the slowest pace since the depths of the global financial crisis in 2009.

Carriers in general are spending less than a year earlier, and Ericsson is affected by less-profitable network-upgrade projects accounting for more of its business, Vestberg said today in an interview.

“We just need to muddle through this and execute on our strategy, while also lowering our costs as we come out of this,” Vestberg said.

Slower Growth

Modernization contracts in Europe, which require labor-intensive equipment replacement and are often less profitable, could depress margins for several years, the company told investors in November. The margin effect of such projects will start to gradually decline at the end of this year, Ericsson said today. That prediction is “encouraging,” said Alexander Peterc, an analyst at Exane BNP Paribas in London.

Ericsson’s network revenue fell 17 percent as sales of CDMA, or code-division multiple access, equipment declined. That standard is used in markets including China and the U.S. Services sales rose 26 percent and support solutions revenue increased 47 percent.

In March, Ericsson lowered its sales-growth target for the years ahead, projecting compound growth of 2 percent to 8 percent through 2014.

Ericsson said yesterday second-quarter loss at ST-Ericsson, the chipmaking joint venture with STMicroelectronics SA, widened to $318 million from $221 million a year earlier. Revenue fell 11 percent to $344 million.

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