Ericsson, the world’s largest mobile phone network equipment company, on Friday said net profit slipped for the second successive quarter, but expressed confidence in a stronger second half performance.
The Swedish company said net profit dropped 2 per cent from SKr5.7bn ($780m) from SKr5.8bn in the same period last year, but was up 25 per cent compared to the first quarter of 2006.
The decline was attributable partly to last year’s acquisition of Marconi, the UK fixed line equipment manufacturer, which generated a SKr200m operating loss in the quarter.
The negative effects of the Marconi acquisition, combined with normal fluctuations in its operations, helped push margins down to 18.7 per cent from 21.6 per cent in the same period last year.
But Carl-Henric Svanberg, chief executive, said in an interview it was “logical to expect” the operating profit margin to return above the key 20 per cent level in the third and fourth quarters.
He said the beneficial effects of the Marconi restructuring would start to be felt in the second half. “The rationalisation measures have not taken effect yet,” he said.
These effects include the reduction of staff by 1,600 and the integration of products and facilities. It has stated it expect a SKr2bn cost benefit from Marconi in late 2006.
Shares in Ericsson have suffered as a result of the contraction in margins to below 20 per cent. Its share price had dropped 16 per cent this year ahead of Friday’s results.
Mr Svanberg emphasized Marconi represented just 8 per cent of the group’s business and expressed surprise at the amount of interest in the deal. “It’s a fixation,” he said. “[Marconi] is on the marginal side.”
The slight decline in net profitability masked strong growth in sales in most regions around the world. Net sales were SKr44.2bn compared to SKr38.4bn in 2005.
The company said sales in the Asia-Pacific region grew 55 per cent compared to the same quarter last year, driven by Australia, China, India, Indonesia and Japan.
In stark contrast, North American sales dropped 42 per cent year-over-year. “Operators’ reductions of excess inventory have short-term effects on our sales,” the firm said, referring to Cingular, the US company.
Western Europe sales were up by 26 per cent compared to the same quarter last year, driven by services sales and the added Marconi business. Central and Eastern Europe, Middle East and Africa sales grew by 24 per cent.
On June 12 Ericsson sold its defense business, Ericsson Microwave Systems, and its 40 per cent holding in Saab Ericsson Space, to Saab, for SKr3.8bn in cash
The expected capital gain of approximately SKr3bn from the sale is about the same as the restructuring costs, mainly related to the Marconi acquisition, giving a neutral effect on Ericsson’s income for 2006.
The company still has a very strong cash position, an issue that has vexed some institutional shareholders who have suffered as a result of the decline in the company’s share price over the year.
It said net cash decreased by SKr5.8bn to SKr27.9bn during the quarter. The decline was due to increased receivables and the payment of dividend of SKr7.2bn for 2005 in April.
Its Japanese joint venture, Sony Ericsson Mobile Communications, which makes mobile phones, has already reported that net profit nearly doubled to €143m ($180.8m) during the second quarter compared with €75m in the same period last year.