Ericsson's networks unit spearheads strong Q3

Ericsson CEO Hans Vesterberg gestures during a news conference in Stockholm October 20, 2011.

STOCKHOLM (Reuters) - Forecast-topping results from Ericsson (ERICb.ST) on Thursday showed the world's top mobile network gear maker can still outmuscle rivals even if global growth slows.

Smartphones and tablet computers have fueled demand for faster, more efficient networks, driving sales for Ericsson in recent quarters.

Rivals, including Juniper Networks Inc, (JNPR.N) have warned that the gloomier global economic outlook would likely make telecom operators thriftier ahead, and Ericsson was not immune to such concerns.

"If the uncertainty continues, of course there can be operators being more cautious, but it is too early to say," chief executive Hans Vestberg said on Thursday.

A cautious outlook and a gross margin well below forecasts failed to chill investors, who focused on strong sales growth and Ericsson's conviction it is taking market share from rivals.

Shares in Ericsson, which dropped sharply on Wednesday after Juniper's comments, were up 6.3 percent at 1103 GMT against a 2.5 percent rise in the S&P European technology index .SX8P.

"The result was better than consensus ... and sales were better," said Mats Nystrom, analyst at SEB Enskilda. "In that sense, there it a degree of relief that is driving the share."

Other analysts saw the falling margin as a sign Ericsson is aggressively targeting market share, giving it a better chance at longer-term growth at a time it is facing sharp competition from rivals like China's Huawei HWT.UL.

"For Ericsson, it is a short-term loss of margins against a long-term bigger share of the operators in Europe," said Morten Imsgaard, analyst at Sydbank.

"In the long run, that could be the right strategy for them, but, of course, margins will be under pressure in the fourth quarter and going into 2012."

An acceleration of network modernization projects in Europe, network rollouts and a higher share of services revenue cut the gross margin to 35 percent from an expected 37 percent.

Network modernization -- - swapping out old base-stations for new ones that handle 2G, 3G and 4G services -- is likely to make up a bigger slice of business in the fourth quarter.

These projects are low margin but give Ericsson a platform to sell more lucrative products at a later date.

STRONG NETWORK SALES

While CEO Vestberg struck a note of caution about the future, operators continued to expand capacity in the third quarter to unclog networks straining to cope with rising mobile internet use driven by smartphones and tablets.

Vestberg said the fundamentals for future growth remained sound, but added that given the economic environment, Ericsson was in close touch with clients over their spending plans.

"That can turn quickly, so we are prepared with contingency plans," he told Reuters Insider TV.

He said the North American market, Ericsson's single biggest source of revenue over the last 18 months, though slowing, remained strong.

"The underlying trends in North America are still very good," Vestberg said. "We are not losing market share."

Earnings before interest and tax excluding joint ventures were 6.3 billion Swedish crowns ($955 million), compared with a forecast for 5.75 billion in a Reuters poll.

Sales were well above forecast, with the key networks unit seeing 25 percent growth.

The operating margin for the networks unit, however, fell to 13 percent from 17 percent a year earlier.

Rival Nokia Siemens Networks NOKI.UL posted a 6 million euro profit on sales of 3.4 billion euros on Thursday.

($1 = 6.596 Swedish crowns)

(Additional reporting by Tarmo Virki, Johannes Hellstrom and Veronica Ek.Editing by Will Waterman)