Ericsson turnaround hopes hit by weaker US, Japanese demand

Ericsson’s turnaround drive was thrown into doubt on Thursday as the world’s biggest mobile networks maker missed third-quarter profit forecasts and said sales were coming under pressure in the United States and Japan.

Shares in the Swedish group dropped 7 percent, the biggest fall by a European blue-chip stock, and dragged down rivals Nokia and Alcatel-Lucent. A decade-long price war in Ericsson’s industry, launched by Chinese vendors Huawei and ZTE, has already forced suppliers like Nortel and Motorola out of the market. In a do-or-die effort, struggling Alcatel-Lucent this month announced it was slashing 10,000 jobs - one seventh of its workforce - its sixth restructuring plan since 2006.

Slowdown in demand

Ericsson has had some success recently in winning business from the swathe of telecoms firms looking to invest in faster fourth-generation networks. Vodafone , for example, has said it will boost spending by 6 billion pounds over three years, and analysts expect others to follow. But the Swedish group said on Thursday that while business in Europe was picking up and profitability there improving, activity was slower in the United States and Japan, where big projects were coming to completion. “We are currently seeing sales coming under some pressure,” Ericsson chief executive Hans Vestberg said.

Analysts also pointed to a lower gross margin than expected, which fell compared to the second quarter. “This trend in particular should cause pressure to consensus profit expectations today, more so than the miss at the top line,” Barclays said in a research note. Earnings before interest and tax were 4.2 billion Swedish crowns in the third quarter, up from 3.1 billion a year earlier, including joint ventures, but missing a forecast of 4.5 billion in a Reuters poll of analysts.

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Sales were 53.0 billion crowns, well short of the forecast 55.1 billion, and down on last year’s 54.6 billion. Sales at Ericsson’s key Networks unit, which accounts for just over half of revenue, rose 4 percent year-on-year, adjusted for currency swings. That was the lowest growth in a year and well below the 7-9 percent in the three previous quarters.

“The report raises a lot of questions about the future,” said Bengt Nordstrom, head of telecoms consultancy Northstream. He also pointed to signs the competitive environment for Ericsson could get tougher. Finland’s Nokia has this year turned into more streamlined rival by fully taking over its previous network joint venture with Germany’s Siemens - Nokia Siemens Networks (NSN) - and selling its handset business to Microsoft .

That move echoed Ericsson’s own disposal of its handset joint venture to partner Sony in 2011 and has given Nokia a clearer focus and better finances to support an aggressive campaign to grab market share new generation networks. “When it comes to the general market, it should be noted that one of Ericsson’s competitors, NSN, with new owners and capital, are very active in many markets resulting in continued tough pricing pressure going forward,” Nordstrom said.

The need for scale has led to speculation that Nokia and Alcatel-Lucent will merge and sources have told Reuters the Finnish company has looked at the possibility. Ericsson shares were down 7.1 percent at 78.30 crowns at 1130 GMT, on track for their biggest single-day fall in 21 months. Nokia shares were down 3.2 percent while Alcatel-Lucent’s fell 3.0 percent. Both firms report earnings next week.

“We see a rather negative readacross for Alcatel-Lucent, as Ericsson’s sales were down materially in North America, a region to which Alcatel-Lucent is overexposed,” Bernstein analysts said in a research note.

Reuters