Ericsson Q1 core profit weak, recession yet to bite

The exterior of Ericsson's headquarters are seen in Stockholm in this April 30, 2009 file photo.

Simon Johnson

STOCKHOLM (Reuters) - Telecom gear maker Ericsson posted weaker-than-expected underlying earnings on Thursday but said the effect of the global downturn on the mobile network market remained limited.

The world's top mobile equipment maker reported quarterly net earnings above forecasts, due to financial items, but core operating profit lagged at 1.8 billion Swedish crowns ($222.8 million) versus 2.0 billion seen by analysts in a Reuters poll.

Sales were 49.6 billion crowns against an expected 50.2 billion.

"The underlying result is worse than expected with slightly weaker margins and growth if you adjust for currency," Michael Andersson, analyst at Evli said.

He said expectations had been high after a strong fourth quarter.

"It's not a disaster-report -- overall it looks stable -- but I do think the market will want more information on Ericsson's view of the markets and where growth is heading."

The global recession has slammed most industries although the telecoms sector has been less affected.

Ericsson remained relatively upbeat.

"The effects of the global economic recession on the global mobile network market are so far limited," Chief Executive Carl-Henric Svanberg said.

He said it was difficult to predict how operators would react to the current downturn, but that most have healthy finances and needed to boost network capacity.

COST CUTS

While Ericsson remains cautiously optimistic, the downturn has already hit some.

Rival Nokia Siemens Networks fell to its first ever quarterly loss in the January-March period and warned the market would shrink 10 percent this year.

Telecoms operators are also cutting outlooks and investments.

This week, Dutch telecoms group Royal KPN NV cut its 2010 revenue outlook as the pace of economic downturn quickened in the first quarter. [nLR596074]

Last week, Deutsche Telekom slashed its outlook for 2009, mainly due to tough market conditions in the United States and Britain.

"I am struggling to see what the positives are in this (Ericsson's) report on expectations that were extremely high," said Patrick Standaert, analyst at Morgan Stanley,

"And things are probably getting worse going forward when you see that the operators are actually starting to cut capex a bit more agressively."

Ericsson said its cost cuts, aimed at delivering 10 billion in savings from the second half of 2010, were on track.

It reported a gross margin, excluding restructuring charges, of 36.3 percent against 38.6 percent a year early.

"The year-over-year decline is mainly due to large initial rollouts of 3G in China, higher sales in India, higher proportion of services sales and the transfer of Ericsson Mobile Platforms," the company said.