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Ericsson earnings disappoint, expects 'lower margins'

Ericsson CEO Hans Vestberg presents the company results for the second quarter during a news conference in Stockholm, July 21, 2011.


Investors ditched shares in mobile phone network supplier Ericsson on Thursday after it missed earnings forecasts due to a hefty job cut charge and forecast less profitable business in the pipeline in Europe.

Ericsson chief executive Hans Vestberg said the company was still benefiting from strong data demand due to the mobile broadband boom and pointed out that second-quarter sales were close to forecast, despite a hit from the strong Swedish krona.

The share drop was in contrast to strong gains in Ericsson after its first-quarter report, when it smashed expectations.

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"We thought the first quarter was really spectacular. From then on, investors should be braced for more normal quarters, quarters with lower margins going forward," said WestLB analyst Thomas Langer.

Ericsson's second-quarter earnings before interest and tax excluding joint ventures landed at 5.0-billion krona ($738-million), falling short of a forecast for 6.3-billion krona in a Reuters poll.

Earnings were hit by a one-off charge of 1.7-billion krona, of which 1.3 billion related to job cuts. This led to operating profit margin of 9.2 per cent versus an expected 11.5 per cent.

Sales were 54.8-billion krona versus a forecast 54.9-billion. Ericsson said they had been affected by the strong Swedish krona, a theme echoed by other top Swedish companies.

"It [Ericsson earnings]was a touch light on the top line. And of course, due to restructuring measures, not least in Sweden they have missed on the operating income numbers," said Nicolas von Stackelberg at Macquarie Research.

Ericsson has been cutting back on staff at its Stockholm head office to save money over the longer term but underestimated the number of voluntary redundancies and early retirements.

It raised its forecast for the total cost of restructuring this year by 50 per cent to 3-billion krona. It said it would get the benefit to earnings from the job cuts in the fourth quarter, giving compensation for the charges after 2-1/2 years.

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"Increased guidance for restructuring charges by 50 per cent could raise some doubts about what is a one-off or what is not a one-off," added WestLB's Mr. Langer.

Although the data demand has boosted Ericsson, some of the networks business is not so profitable for the company. It saw more of this coming through later in the year.

"The network modernization projects in Europe, with their lower margins, will accelerate during the second half of 2011," the group said.

Ericsson stuck to a recent forecast for its network market to rise 6-8 per cent over the 2010-13 period.

It said it had seen a limited effect from the Japanese earthquake in the second quarter and that its supply chain had recovered quicker than expected.

The company also has to cope with problems at two loss-making joint ventures, mobile phone maker Sony Ericsson and mobile chip maker ST-Ericsson.

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Sony Ericsson is owned with Sony Corp. of Japan and ST-Ericsson with STMicroelectronics.

Ericsson said it was keeping an eye on developments on ST-Ericsson and that it could consider "additional actions" to improve performance. ST-Ericsson in June unveiled a $120-million cost-cutting program.

Mr. Vestberg told a news conference that Ericsson remained committed to both ventures. Analysts have raised the prospect that the company will need to provide further funding, though Mr. Vestberg told Reuters this was not needed for Sony Ericsson.

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