Ericsson Sales Trail Estimates on Growth in Competition

Ericsson AB, the largest maker of wireless networks, reported first-quarter revenue that trailed analysts’ estimates amid competition from Huawei Technologies Co. for contracts to build and service faster systems.

Sales rose 2 percent to 52 billion kronor ($7.8 billion), Stockholm-based Ericsson said today in a statement. Analysts predicted 52.9 billion kronor, the average of estimates compiled by Bloomberg. Profit margins also missed projections.

China’s Huawei is outpacing Ericsson’s growth as the companies vie for deals from operators who are investing in infrastructure to meet the surging data demand. Ericsson said its services business slowed in Northeast Asia and delays in deployment of speedier networks hurt sales in Latin America.

“The report was a bit weak and while the network side of the business held up, the services side was soft,” said Erik Paulsson, an analyst at Pareto Securities in Stockholm with a hold rating on Ericsson’s shares.

Ericsson shares fell 0.6 percent to 76.50 kronor at 9:10 a.m. in Stockholm. It had gained 18 percent this year through yesterday.

Revenue at the global services business rose 4 percent to 21.5 billion kronor, trailing the 21.8 billion kronor Paulsson had predicted. The division’s operating profit as percentage of sales shrank by half to 3 percent, missing Paulsson estimate of 6.5 percent.

Huawei’s Expansion

Network sales rose 2.9 percent to 28.1 billion kronor and the unit’s operating margin was little changed at 6 percent.

Huawei, China’s largest maker of phone equipment, said in February it is targeting a 9 percent increase in revenue this year for its division that designs and builds wireless networks. The unit had sales of $25.7 billion in 2012.

Last week, the Shenzen-based company said it will hire 5,500 people in Europe in the next four to five years, bringing its workforce in the region to 13,000, even as competitors such as Ericsson make reductions.

Ericsson’s net income fell to 1.21 billion kronor from 8.95 billion kronor a year earlier when Ericsson reported a 7.7 billion-krona gain from divesting its Sony Ericsson venture. The latest quarter’s numbers included 1.8 billion kronor of restructuring costs, most of which was related to job reductions in Sweden. Analysts predicted 1.78 billion kronor.

Gross margin, or the proportion of sales remaining after production costs, was 32 percent, compared with the 32.9 percent average projection.

Capacity Projects

Network-modernization deals in Europe, which demand more labor hours and are often less profitable, led to the gross margin slumping to 30.2 percent in 2011, the lowest since at least 1989. Ericsson said business will probably shift to more lucrative capacity projects in the second half of this year. It said the long-term fundamentals in the industry are attractive.

Wireless carriers are pushing more money into expanding and improving the data connections as consumers buy more smart devices. AT&T Inc., the largest U.S. phone company, said in January it is slowing the pace of share buybacks as it expects its capital expenditures to rise to $21 billion this year from $19.5 billion in 2012. Deutsche Telekom AG, Germany’s largest phone company, is increasing its investment by 18 percent to 9.8 billion euros for 2013 to tap demand for data services.

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