Ericsson Q2 undershoots, parts shortages hurt

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Ericsson , the world’s number one mobile network gear maker, missed expectations for second-quarter core profit as operators stayed wary about investing and parts shortages again hit sales.

Ericsson shares were down 5.6 percent at 0947 GMT, the leading decliners in an 0.7 percent easier STOXX 600 European technology sector, following a run of outperformance.

Highlighting a problem that rivals Nokia Siemens Networks and Alcatel-Lucent have also cited this year, Ericsson said an industry-wide scarcity of components and supply chain bottlenecks were weighing on turnover.

A general economic rebound has touched off a scramble for common parts that pits network equipment makers against a range of manufacturers in the automotive and consumer electronics sectors.

Ericsson estimated the problem sliced 3 billion to 4 billion Swedish crowns ($411-548 million) from sales in the quarter.

“Given the best assumptions we have, there is going to be a gradual improvement in the second half of 2010,” Chief Executive Hans Vestberg told reporters and analysts after the results.

Despite the profit miss, Sanford Bernstein analyst Pierre Ferragu was upbeat. Without the component shortage, sales would have been in line and profit higher than expected, he said.

With growth in mobile broadband in North America, Japan and parts of Western Europe strong and India set to improve after a weak quarter, he saw upside for Ericsson.

“In the next two quarters, if the component shortage vanishes away, you will have a bit of a catch-up.”

Ericsson trades at around 16 times earnings per share for this fiscal year versus 12.6 times for Nokia and 14 for Cisco Systems .

RECOVERY?

The telecoms equipment market has begun to show signs of life, but customers’ spending is well below pre-crisis levels.

Ericsson, which has slashed billions of crowns from its cost base to offset falling demand, said on Friday cost-cutting would remain a priority while market conditions remain tough.

Some analysts had hoped the second quarter would provide clear evidence markets were rebounding after the downturn.

But Vestberg said the effects of the crisis were lingering.

“We don’t believe that the market is growing, actually,” he said, adding that Ericsson was keeping or adding market share.

Sales at Ericsson’s network unit — its biggest earner — slid as operators in some developing markets stayed cautious.

Nokia Siemens Networks reported on Thursday quarterly sales fell 5 percent and forecast a flat equipment market this year.

Many analysts concur with NSN’s outlook for this year and see the market staying stagnant even further out. In addition, competition from Chinese firms Huawei and ZTE is fierce while NSN is hungry for market share.

NSN announced this month it would buy Motorola’s telecom network equipment business, putting more pressure on Ericsson in the U.S. market.

Just days after annoucing the Motorola deal, NSN said it had won a $7 billion order from operator LightSquared to build and operate a high-speed wireless network.

Ericsson’s operating profit excluding joint ventures and restructuring costs came in at 5.3 billion Swedish crowns ($715 million), below the average estimate of 5.8 billion in a Reuters poll of analysts and 6.1 billion a year ago.

Ericsson’s group sales fell 8 percent year-on-year to 48 billion crowns versus a poll forecast of 50.5 billion.

The gross margin of 39 percent was well above forecasts thanks to cost cutting and a favourable business mix.

(Additional reporting by Victoria Klesty, Patrick Lannin, Adam Cox, Sven Nordenstam and Oskar Von Bahr; Editing by Michael Shields)

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