Ericsson's Q3 results to fall short

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Ericsson today announced that its third quarter financial results will fall short of expectations, blaming lacklustre sales in its networks business during the period for the poor performance.

Based on a preliminary forecast, the company now expects to report sales of 43.5 billion Swedish Kronor (£3.3 billion) and operating income of 5.6 billion Swedish Kronor (£426 million) on 25 October. The figures represent a 36 per cent slump in income compared with the 8.8 billion Swedish Kronor (£670 million) reported the previous year.

"The unexpected development in the quarter is mainly due to a shortfall in sales in mobile network upgrades and expansions which resulted in an unfavorable business mix that also negatively affected group margins," said Carl-Henric Svanberg, Ericsson's president and chief executive. "All other businesses performed as expected. The effect of market dynamics is always a matter of judgment. This quarter we have underestimated the effects."

However, alongside the profits warning, the company stressed that its professional services and multimedia businesses are still doing well and expected to show strong growth during the financial period.

"In infrastructure, scale is critical for success. Our strategy to regain scale advantage through increased mobile systems market shares has been effective," Svanberg added. "The present market dynamics are however working to our disadvantage from a short-term financial perspective. Now that we have reestablished our scale advantage from the pre-industry consolidation we will shift our focus slightly and capitalise on our market share gains."

The revised results fall below both Ericsson's and analysts' expectations and were illustrated by a drop in the company's share value at the time of publication.

"We spoke to Ericsson this morning and it is clear that they were genuinely caught out by the preliminary financials delivered to senior management yesterday morning," said Ovum analysts Martin Garner and Steven Hartley in a research note.

"Q3 sales are heavily weighted towards September because of the summer holidays, so when network upgrade and software licence deals with AT&T and Hutchison were delayed Ericsson missed its profitability targets. Ericsson believes that these are not cancelled orders, merely delayed, but in the light of today's news they are being very cautious on when the deals will close and whether they are in for bumper results in Q4."

They added: "Ericsson is still in a very strong competitive position. Its major competitors are focusing their energy disproportionately on internal rather than market issues and do not yet benefit from their global scale or geographic scope.... However, judging by stock activity today investors clearly remain to be convinced, particularly in light of early Q4 guidance forecasting operating margins in the 'mid-teens' (compared to 22.7 per cent in Q4 2006), albeit on flat to 10 per cent sales growth. Ericsson must not get caught out again."

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