Ericsson Q4 profit halves as slowdown bites

STOCKHOLM Wed Jan 25, 2012 8:47am EST

Hans Vestberg, president and chief executive of the Ericsson Group, holds a ST-Ericsson 4G LTE chip during his keynote address at the 2012 International Consumer Electronics Show (CES) in Las Vegas, Nevada, January 11, 2012.  REUTERS/Steve Marcus

Hans Vestberg, president and chief executive of the Ericsson Group, holds a ST-Ericsson 4G LTE chip during his keynote address at the 2012 International Consumer Electronics Show (CES) in Las Vegas, Nevada, January 11, 2012.

Credit: Reuters/Steve Marcus

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STOCKHOLM (Reuters) - Ericsson, the world's biggest maker of equipment for mobile phone networks, stunned markets with a 50 percent drop in quarterly profit, adding to signs from the corporate world that economic growth may be grinding to a halt.

Shares in the Swedish company dropped 15 percent to a three-year low after it reported fourth-quarter profits below even the gloomiest forecasts and warned telecoms operators were likely to remain cautious on spending in the months ahead.

"It is hard to find anything positive," said Jyske Bank analyst Robert Jakobsen. "The company has indicated there would be a slowdown, but this is much worse than expected."

The gloomy news from Ericsson adds to signs from the latest round of quarterly company results that the euro zone debt crisis has triggered a marked slowdown in economic activity.

On Tuesday, Europe's top engineering conglomerate Siemens posted a steep fall in core profit, while Swiss drugmaker Novartis said on Wednesday it was braced for lower profitability this year.

Telecoms operators invested heavily through most of 2011 to upgrade networks to cope with surging data traffic from smartphones and tablets and some slowdown had been anticipated, particularly in the United States.

But sales in Ericsson's key networks unit fell 9 percent year-on-year and profitability was half the level it was a year ago as operators economized and low margin business took a greater share of sales.

"If you look out in 2012 a little bit, you will probably see some more cautious operators," Ericsson chief executive Hans Vestberg said, adding margins would remain under pressure.

But he also said the underlying drivers of growth remained.

"Consumers are calling equally as much ... they are using even more services on their iPads or their smartphones in the mobile networks...that has not changed," he said.

At 1140 GMT, Ericsson shares were down 14.5 percent at 58.55 Swedish crowns, the biggest fall by a European blue-chip stock.

Ericsson's results also pushed down shares in smaller rival Alcatel-Lucent around 10 percent while Germany's Siemens, owner of half of network firm Nokia Siemens Networks, was down nearly 5 percent.

WINNING STRATEGY?

Earnings before interest and tax, excluding Ericsson's loss-making joint ventures but including restructuring charges, were 4.1 billion Swedish crowns ($605 million), missing all forecasts in a Reuters poll, which ranged from 5.8 billion to 9.4 billion.

Sales, at 63.7 billion crowns, were also well below the forecast of 67.2 billion, as was Ericsson's gross margin which came in at 30.2 percent against the projected 33.7 percent.

The results follow a pattern set by some smaller equipment vendors, such as Juniper Networks Inc and Acme Packet Inc, which issued profit warnings in recent weeks, blaming slower spending at big U.S. carriers like Verizon Communications Inc and AT&T.

In the short term, it is hard to see things improving.

Ericsson said the impact of hardware heavy projects in Europe, which have low margins, would continue in the coming quarters. It also said that its very profitable CDMA business in the United States was starting to decline.

Operators spending tends to follow economic output and much of the world is looking at slower growth in 2012 than last year.

But longer-term, Ericsson remains the strongest player in the sector where rivals Alcatel-Lucent and Nokia Siemens Networks are fighting just to survive against tough competition from Chinese firms Huawei and ZTE.

Should either Nokia Siemens Networks or Alcatel Lucent disappear from the market -- as many expect to happen in the next couple of years -- price pressure should ease.

"This industry is screaming for consolidation," said John Strand, founder of Danish telecoms consultancy Strand Consult.

A bigger footprint in Europe should put Ericsson first in line for lucrative network upgrades in the coming years and some analysts see spending in the United States, where economic recovery is outpacing Europe, recovering in the near future.

And with pressure on capacity from smartphone use and data traffic growing, operators can only put off spending, not avoid it for ever.

"We maintain a positive 12 months view on the name, but recognize the stock is likely to correct significantly today and in the next couple of month, most likely offering better entry points later this year," Pierre Ferragu, analysts at Sanford Bernstein said in a note.

Nokia Siemens will report results on Thursday. ($1 = 6.7810 Swedish crowns)

(Additional reporting by Olof Swahnberg, Christopher Jungstedt, Veronica Ek, Johannes Hellstrom and Tarmo Virki; Editing by Mark Potter)

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