Ericsson profit misses views amid supply crunch

Component shortages hit Swedish vendor’s sales by 3 billion-4 billion kronor.
Shares in Telefon AB L.M. Ericsson fell sharply Friday after the world’s largest network equipment vendor missed expectations for second quarter net profit as industry component shortages hit sales and operator spending remained subdued.

The Stockholm-based company said net profit for the three months to June 30 was 1.88 billion Swedish kronor ($258 million), up from SEK831 million a year earlier when heavy restructuring charges weighed, missing expectations for SEK2.73 billion by a wide margin.

Component shortages hit second-quarter sales by some SEK3-4 billion, Ericsson said. Tight supply conditions have hit companies across the telecom gear industry; Paris-based Alcatel-Lucent in May posted a widening first-quarter net loss as component shortages hampered its ability to transform improving demand into revenue. Meanwhile, rival Nokia Siemens Networks Thursday said second-quarter sales were hit by supply shortages that it expects to continue into the third quarter.

Ericsson’s Chief Executive Hans Vestberg, in an interview with Dow Jones Newswires, said there had been a shortage of semiconductors for its base stations because suppliers didn’t invest in capacity during the economic downturn and couldn’t meet increasing demand.

He said the suppliers, which he declined to name, are now building capacity and the component shortages should ease through the second half of the year.

Base stations, commonly called masts, are sited in specific locations to create the honeycomb of connections that create a mobile network.

Along with rivals, Ericsson has also suffered from weak demand in several markets in the past year as operators cut investment during the economic downturn and from price pressure in a fiercely competitive market.

“The market conditions we saw in the second half of 2009 with mixed operator behavior prevailed also in the first half of this year,” Vestberg said Friday.

“In the quarter all regions, except North America, showed lower year-over-year sales.”

Increased smartphone and laptop usage boosted operator demand for mobile broadband but this only partly offset falling sales of older, voice-related equipment, Ericsson said.

Surging data traffic from smartphones and laptops has so far done little to boost overall operator spending. Vodafone Group PLC, the world’s biggest mobile operator, earlier Friday said capital expenditure last quarter was GBP1.04 billion, little changed from GBP1.2 billion a year ago. Vodafone said it expects capex this year of GBP6.2 billion, also little changed from GBP6.1 billion last year.

Competition has also been tough from companies like China’s Huawei Technologies Co. and Nokia Siemens Networks. The joint venture between Finland’s Nokia Corp. and Germany’s Siemens AG earlier this week agreed to buy the bulk of U.S.-based Motorola Inc’s telecom gear business, increasing pressure on Ericsson in the important North American market.

Ericsson reported a gross margin, excluding restructuring costs, of 39%, up from 36.3% a year earlier, but missing expectations for 37.1%.

Sales fell to SEK48.0 billion from SEK52.14 billion, missing expectations for SEK49.81 billion. Operating profit rose to SEK3.02 billion from SEK1.21 billion, also short of expectations for SEK4.02 billion.

Ericsson said it had completed the cost-cutting program it launched last year, leading to expected annual savings of SEK15-16 billion from the second half of 2010 and total restructuring charges of SEK15.5 billion.

The weak second quarter sales and net profit hit Ericsson’s share price Friday, but the healthy gross margin should provide a strong platform for the company once demand starts to grow, said Nomura analyst Richard Windsor.

At 1230 GMT, Ericsson’s shares were down 6.1% at SEK83.45, having gained around 30% since the start of the year.

(c) By Gustav Sandstrom, Dow Jones Newswires

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