Ericsson misses forecasts amid restructuring costs

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Ericsson misses forecasts amid restructuring costs

Growth in revenue and profit seen slowing for rest of the year, though sales in China and India doubled

By CAROLINE GABRIEL

Published: 21 July, 2011

READ MORE: Financial | Sweden | Ericsson

A cautionary tale for the investors urging Nokia Siemens to ramp up its job cuts - arch-rival Ericsson blamed the costs of its own payroll reduction program for missing market estimates with its second quarter profit.

The figure was SKr3.12bn ($488m), lower than the Skr3.88bn forecast by analysts, largely because the cost of layoffs, at SKr1.3bn, was greater than anticipated. Ericsson said its entire restructuring program would cost Skr3bn, 50% more than it had originally indicated. Gross margin was down by 1.2 percentage points to 37.8%, and in a more worrying detail for future quarters, the Swedish giant said growth in the services business had slowed. That division, especially its carrier outsourcing activities, is the most important driver of growth at Ericsson amid the pressures on its core equipment products, and accounts for about 40% of revenues.

The disappointing profit figure sent the Swedish firm's stock into its biggest drop since 2009, though this partly reflected the resilience of the shares through the recession - in contrast to those of many rivals - as Ericsson has displayed strong performance through the downturn. And revenue for the quarter was up 14% year-on-year to SKr54.7bn, slightly ahead of market forecasts.

Some of the impact of the acquisition of Nortel's wireless infrastructure assets is wearing off - the purchase delivered a huge boost to north American fortunes, making the region Ericsson's biggest market overnight, but in this quarter sales in the area were down 6% year-on-year. However, this was more than balanced by growth in India and greater China, where 3G roll-outs more than doubled Ericsson's revenues compared to last year.

"In the quarter we saw a change in market mix where Brazil, China, Germany, Korea, and Russia showed especially strong growth both year-over-year and sequentially," said CEO Hans Vestberg in a statement. "The US maintained its high business activity although sequentially the networks business was somewhat slower."

Despite these signs of strength, many analysts were gloomy, seeing slowdown in key areas like services and 3G; only slight revenue impact from the early beginnings of the LTE market; and revived competiveness from rivals like Alcatel-Lucent and Huawei. "These results suggest that gross margins are peaking for Ericsson," Goldman Sachs analyst Tim Boddy wrote in a research note quoted by Bloomberg. "We see earnings growth and earnings momentum slowing sharply" in the second half.