Ericsson Profit Margin Falls Short as Rivals Weigh on Sales

Ericsson AB, the largest maker of wireless-network equipment, reported a profit margin that missed analysts’ estimates as competition intensified and carriers slowed investments. The stock slumped.

Third-quarter gross margin, a key measure of profitability, was 32 percent, Stockholm-based Ericsson said today. Analysts predicted 33.4 percent, the average of estimates compiled by Bloomberg. Sales fell 2.9 percent to 53 billion kronor ($8.3 billion), trailing the average projection of 54.3 billion kronor, and were also hurt by currency swings.

Business slowed in the U.S. and Japan where projects to make wireless carriers’ networks speedier are nearing completion. Margins are under pressure as the company tries to fend off competition from China’s Huawei Technologies Co. and Finnish Nokia Oyj’s networks business.

“The projects that peaked in the first half in North America are starting to have an effect,” said Fredrik Thoresen, an analyst at DNB ASA in Oslo with a hold rating on the stock. Slowing sales in North America, a high-margin region for Ericsson, bring down its profitability, he said.

Ericsson fell as much as 8.1 percent, the biggest intraday decline in almost two years, and dropped 7.2 percent to 78.2 kronor at 1:10 p.m. in Stockholm, wiping out $3.1 billion in value. The stock had gained 29 percent this year through yesterday.

Sales ‘Pressure’

Third-quarter net income of 2.92 billion kronor missed the

3.07 billion kronor average analyst estimate. Profit rose 34 percent from the year-earlier period, helped by lower costs and the company exiting an unprofitable chip venture with STMicroelectronics NV.

Alcatel-Lucent SA is estimated to report a third-quarter net loss widening to 233 million euros from 146 million euros a year earlier, according to eight analysts surveyed by Bloomberg. Alcatel is scheduled to report earnings Oct. 31.

Michel Combes, the Paris-based competitor’s chief executive officer, is accelerating plans to scale down, including selling assets. While Nokia Oyj is said to be considering buying Alcatel’s wireless network-equipment business, Ericsson CEO Hans Vestberg said today in an interview he’s not interested.

Network revenue, which makes up half of Ericsson’s sales, fell less than 1 percent to 26.7 billion kronor. Sales from global services declined about 1.3 percent to 24 billion kronor.

Projects Peaked

“We are currently seeing sales coming under some pressure,” Vestberg said in a statement. Two large projects in North America peaked in the first half, and a major project in Japan is close to completion, he said.

In Europe, business is picking up with investments in faster networks, Vestberg said. Ericsson sees growth in several European markets and margins are also improving as network-modernization deals, which demand more labor hours and are often less profitable, are ending and business shifts toward more lucrative capacity projects, he said.

Modernization contracts led to Ericsson’s gross margin falling to 30.2 percent in 2011, the lowest since at least 1989.

Rising Competition

Wireless carriers are improving their networks to accommodate the rapid rise of smartphones and tablets. Ericsson has 36 percent of the world’s wireless-infrastructure market, ahead of Huawei’s 22 percent, based on data from Barclays Plc.

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 a July interview.

“There’s a tremendous shift in technology and services,” Vestberg said in the interview. “It’s crucial to have a high level of R&D and to be efficient. We need to be the most innovative.”

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