Ericsson Earnings Hurt by Lower Spending by U.S. Network Operators -- Update

By Juhana Rossi 

Sweden's Ericsson AB on Thursday reported a sharp fall in first-quarter profit as spending by its customers shifted to lower-margin projects and a patent dispute with Apple Inc. dented its licensing income.

The telecom-equipment maker's weaker-than-expected earnings disappointed investors, prompting the company's shares to fall more than 8% in morning trading in Stockholm.

Although favorable currency movements led to a sharp rise in Ericsson's revenue during the three months to March 31, the company's profitability fell as more of its quarterly revenue came from lower-margin projects in China and less from lucrative work in the U.S.

This pattern is likely to persist as long as U.S. network operators, such as AT&T Inc. and Verizon Communications Inc., spend more on spectrum auctions and deals instead of upgrading network equipment, Ericsson Chief Executive Hans Vestberg said at a news conference.

North America has been Ericsson's biggest market in recent years, with the company benefiting as U.S. operators upgraded their wireless infrastructure to the latest-generation standard to accommodate ever greater data traffic coming from on-demand video and mobile Internet use. However, such spending has slowed in recent quarters.

Ericsson's first-quarter net profit came in at 1.32 billion Swedish kronor ($151.1 million), or 0.40 kronor a share, below a median forecast of 2.23 billion kronor, or 0.68 kronor a share, according to an analyst poll by Reuters. In the prior-year period the company reported a profit of 2.12 billion kronor, or 0.65 kronor a share.

Profitability at Ericsson's network unit, which accounts for about half of the company's revenue, was particularly weak. Unfavorable shifts in customer spending, a currency-linked hedging loss of 1.1 billion kronor and restructuring costs pushed the operating margin down to 2%, compared with the company's target of 10%.

However, Mr. Vestberg said the low operating margin "should not be seen as trend," with the company expecting profitability to rise again as it recovers from restructuring costs and currency-driven losses.

Ericsson's bottom line was also hurt by a patent dispute with iPhone maker Apple. The companies got embroiled in a dispute over mobile technology patents earlier this year, with the groups suing and countersuing each other in the U.S.

The dispute dented Ericsson's intellectual property income during the first-quarter, the company said. This drop in income also had an impact on Ericsson's profitability because licensing patents is a high-margin business, said Mikko Ervasti, an analyst with Evli Bank.

Resolving the dispute with Apple might take a long time, Ericsson CEO Mr. Vestberg said. "Our ambition is to settle outside court as soon as possible," he added.

Ericsson said net sales in the three months to March 31 rose 13% to 53.52 billion kronor, from 47.51 billion kronor in the year-earlier period, beating analysts' forecasts of 53.49 billion kronor.

The rise in revenue was largely driven by the dollar's appreciation against the Swedish krona. Despite hedging losses, in the longer term "this level of strong dollar is positive for Ericsson. It's good. We like it," Mr. Vestberg said.

Write to Juhana Rossi at [e-mail]

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