Ericsson disappointed with second-quarter profits significantly below expectations, underlining how there has been little let-up in the brutal competition in the telecoms equipment sector.
The Swedish group, the world’s biggest seller of telecoms gear, improved operating profit from SKr2.1bn a year earlier to SKr2.5bn. But that was more than 40 per cent below analysts’ average forecast of SKr4.3bn, dragging its shares down 5 per cent in early trading on Thursday to SKr75.85.
Ericsson has performed better than European rivals such as Alcatel-Lucent and Nokia Siemens Network in the face of sustained competition from Chinese groups such as Huawei but there is little sign of an improvement in profitability hoped for by some investors.
Profits were weighed down by charges related to selling various businesses and revaluing currency hedges. But sales and the company’s gross margin also disappointed, albeit by less than the operating profit.
Sales in the second quarter were SKr55.3bn, flat compared with a year earlier and below the SKr56.3bn consensus forecast. Ericsson said adjusted for currency effects sales would have risen 7 per cent year-on-year. The gross margin – a closely-observed measure of profitability – rose slightly to 32.4 per cent, but was below the 33 per cent expected by analysts.
“While the macroeconomic situation in Europe remains challenging and the political uncertainty in parts of [the] Middle East such as Egypt increases, the long-term fundamentals in the industry remain attractive and we are well positioned to continue to support our customers in a transforming ICT market,” Hans Vestberg, chief executive, said in a statement.
Ericsson’s biggest business, which builds mobile networks for telecoms operators and accounts for slightly more than half of sales, was far weaker than analysts expected delivering an adjusted operating margin of 5.9 per cent against a forecast of 10.5 per cent. The Swedish company blamed big declines in the sale of older network technology in the US and China as well as a weaker performance in South Korea due to spectrum delays.
Ericsson has focused in recent times on providing equipment to help operators get better geographical coverage, a less profitable business than increasing network capacity. But it said the mix of projects “started to shift slightly” towards capacity during the second quarter.
Its services business, in which it helps telecoms operators manage their networks, recorded both sales and profits ahead of expectations.
Telecoms operators have been stepping up their investments in new networks as customers increasingly stream and download videos and TV shows over the internet. Ericsson in turn has been making a number of acquisitions in the TV and media market to help with video distribution, buying Microsoft’s internet TV arm earlier this year.