Ericsson Sales Fall Short Amid Huawei Competition

Ericsson AB, the largest maker of wireless-network equipment, posted sales that missed estimates as competition with Huawei Technologies Co. for contracts to build and service phone systems intensified. The stock fell.

Second-quarter sales were little changed at 55.3 billion kronor ($8.4 billion), Stockholm-based Ericsson said today in a statement. Analysts predicted 56 billion kronor, the average of estimates compiled by Bloomberg. Ericsson’s gross margin, a measure of profitability, also trailed projections.

Wireless operators are investing in their networks as consumers increasingly use data-hungry tablets and smartphones to browse the Web and watch video clips. Even as the market grows, competition from China’s Huawei and Finland’s Nokia Siemens Networks is putting pressure on margins.

“Ericsson’s profitability is a disappointment,” said Hannu Rauhala, an analyst at Pohjola Bank in Helsinki who recommends buying the stock. “They said the business mix would improve, and gross margins were better than last year, but they still have a huge amount of less-profitable rollouts to work through.”

The shares fell 4.8 percent, the biggest drop since May 2012, to 75.75 kronor in Stockholm, paring the gain to 16 percent this year.

Huawei Challenge

Network sales advanced about 1 percent to 28.1 billion kronor, with gains in North and South America as well as western and central Europe, and declines in northeastern Asia. Sales at the support solutions business fell 33 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.

The Shenzen-based company, already near Ericsson in development spending, is boosting its research budget this year to improve mobile and fixed-network performance as well as audio and video transmissions, Li Yingtao, its head of R&D, said in an interview this month.

Ericsson’s net income rose to 1.47 billion kronor from 1.11 billion kronor a year earlier, when it had about 600 million kronor in restructuring charges. The latest quarter’s numbers included about 900 million kronor of such expenses.

Fundamentals ‘Attractive’

Gross margin, or the proportion of sales remaining after production costs, was 32.4 percent, compared with the 33.1 percent average projection.

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 today business has started to shift to more lucrative capacity projects.

Wireless carriers are investing more into 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 capital expenditure to rise to $21 billion this year from $19.5 billion in 2012. SoftBank Corp. plans capital spending for U.S. unit Sprint Corp. of $8 billion this year and in 2014 before dropping to $6 billion annually for the four years after that.

“While the macroeconomic situation in Europe remains challenging and the political uncertainty in parts of Region Middle East, such as Egypt, increases, the long-term fundamentals in the industry remain attractive,” Ericsson Chief Executive Officer Hans Vestberg said in the statement.

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