July 24, 2009 / 6:00 AM / 10 years ago

UPDATE 4-Ericsson starts to feel pinch of economic downturn

* Adjusted Q2 operating income up 47 pct, beats forecast

* Effects of downturn seen particularly in emerging markets

* Says customers focused on cashflow and cutting spending

* Share price falls

(Adds more comments by CEO, updates share price reaction)

By Niklas Pollard and Helena Soderpalm

STOCKHOLM, July 24 (Reuters) - Ericsson (ERICb.ST), the world’s biggest supplier of cellphone network equipment, said on Friday the economic downturn was now taking a bigger toll on its market, a shift that took the gloss off a sharp rise in its headline second-quarter profit and sent its shares lower.

The company had been largely unscathed by the economic woes, sheltered by robust sales in China and strength in its services business, while growing its share of a shrinking market for mobile network gear. [ID:nLL338473]

But Chief Executive Carl-Henric Svanberg said the effects of the financial crisis were now being seen, especially in emerging markets where currency wobbles were adding to economic woes.

“The weak economy that we have now will not go away for the next several quarters anyway, so we are living in a tougher environment,” he told a news conference.

“I don’t think we can give any better indications of whether it’s going to be a little bit better or a little bit worse. It is an uncertain environment.”

Chief Financial Officer Hans Vestberg, who will take the helm after Svanberg moves to BP (BP.L), also told analysts that operators were optimising cashflows, making it tough to collect.

Vodafone (VOD.L), the world’s largest mobile phone company, said on Friday its earnings this year would be flat to lower [ID:nLN357408] while Nordic market leader TeliaSonera said it was focused on cutting costs. [ID:nLN330842]

Ericsson’s second-quarter operating earnings rose 47 percent to 6.9 billion Swedish crowns ($914 million), excluding restructuring charges and its loss-making joint ventures, while sales were up 7.4 percent at 52.1 billion crowns.

Analysts had on average forecast a profit of 6 billion crowns and sales of 52.9 billion, according to a Reuters poll.

“It’s a bit of a mix. On the negative side we have the cautious comments on the macro environment — this will get noticed and should be seen as a warning sign for the later part of the year,” West LB analyst Thomas Langer said.

Ericsson shares were down 7.0 percent at 72.10 crowns by 0855 GMT.

“They now say for the first time that the networks side is starting to be affected by the economic climate,” said Greger Johansson, analyst at Redeye. “It’s not totally unexpected, but still a small downgrade.”


Many analysts expect worse to come as operators slash capital expenditure to weather deep recessions on both sides of the Atlantic, weighing on equipment sales for manufacturers such as Ericsson and Nokia Siemens Networks [NSN.UL] NOK1V.HE (SIEGn.DE).

Earlier this week Norwegian operator Telenor (TEL.OL) cut its capital expenditure target as did Belgium’s second-biggest mobile operator, Mobistar, majority-owned by France Telecom FTE.PA, and analysts at Morgan Stanley said more spending cuts were likely to follow. [ID:nLN262634] [ID:nLM160662]

“The effects of the global economic climate on the mobile infrastructure market are now more notable, especially in markets with currencies under pressure and tougher credit environment,” Svanberg said in a statement.

Svanberg, due to step down at the turn of the year, said the firm’s cost savings target remained at 10 billion Swedish crowns ($1.32 billion), from the second half of 2010.

While Ericsson has managed to safeguard earnings in the face of the financial crisis, some of its smaller rivals are hurting.

The NSN joint venture of Nokia and Siemens, the world’s second biggest wireless network equipment maker, skidded to a second-quarter operating loss and France’s Alcatel-Lucent, due to issue its April-June report on July 30, made a loss in the first three months of the year. [ID:nL4365142]

Ericsson and China’s Huawei Technologies [HWT.UL], which shot to the No. 3 spot in the mobile networks market in the first quarter, have been winning market share this year at the expense of NSN and Alcatel-Lucent.

Ericsson reported a gross margin of 36.3 percent in April through June, above the mean forecast of 35.7 percent seen by analysts but down from the 37.0 percent posted a year ago.

For a separate round-up of analyst’s views click on [ID:nLO408151O] ($1=7.552 Swedish crowns) (Additional reporting by Sven Nordenstam, Johannes Hellstrom; Editing by Greg Mahlich)

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