Ericsson shares fall following drop in first-quarter profits

Shares in Ericsson fell sharply after the Swedish telecoms equipment maker revealed a drop in profits owing to a slowdown in US sales and lower margins in high-growth Asian markets.

Shares dropped 8 per cent on Thursday morning to Skr101.60. The group faces intense competition to sell equipment and services to global telecoms operators, which is likely to be become even fiercer in future given the proposed acquisition of Alcatel-Lucent by Nokia to create a stronger European rival.

Operating profits in the first quarter fell further than analysts had expected. The decline was partly because Ericsson needed to offer cheaper deals to secure new contracts, in particular in China, which led to a decline in margins.

Operating profit dropped to Skr2.1bn from Skr2.6bn in the same period in the previous year, which was also lower than had been anticipated. Gross margin was reported at 35.4 per cent, compared with 36.5 per cent last year.

Revenues during the first three months of the year were also worse than analysts' forecasts. Revenues rose by 13 per cent to Skr53.5bn owing to the effect of the strong dollar but sales on a like-for-like basis dropped 6 per cent. Like-for-like sales at the core networks equipment business fell 9 per cent.

Hans Vestberg, chief executive, warned that Ericsson expected "North American mobile broadband business to remain slow in the short term". He added that "the fast pace of 4G deployments in Mainland China [would] continue".

Mr Vestberg said that the merger of Ericsson's two main European rivals would not affect its own strategy. He declined to say whether the deal was positive or negative for Ericsson, but added that it was a "logical" step for the two companies.

Ericsson will remain the largest telecoms equipment maker by sales even after the two rivals have merged.

An ongoing legal battle over the right to use Ericsson's patented technology with Apple - one of its largest licensing partners - also weighed on revenues in the quarter.

Analysts at Bernstein said that "the magnitude of the gross margin impact of this change in mix is surprising", but that the fundamental strengths of Ericsson as the market leader gave it confidence for a recovery.

"We believe the ongoing dispute with Apple accounts for at least 100 basis points of the gross margin disappointment," said Bernstein. "Most of the gross margin disappointment is driven by mix shift with US network sales down 20 per cent year on year and South East Asia and India network sales up 30 per cent and 137 per cent respectively."

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