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Ericsson Warns Sharply on Profit; Shares Plunge

Shares in telecommunications equipment maker Ericsson lost more than a quarter of their value Tuesday, after the company issued a drastic profit warning, saying third-quarter earnings would be well below expectations.

Junji Kurokawa

The stock closed lower by 23.8 percent on the Swedish OMX.

Ericsson said that third-quarter profit and margins would be sharply lower than anticipated because of the reluctance of consumer to upgrade their mobile phones.

"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," Ericsson President and CEO Carl-Henric Svanberg said in a press release.

The company said it expects third-quarter operating of 5.6 billion Swedish crowns (866 million), down from 8.8 billion crowns in 2006. That's far below the initial estimate of 8.9 billion Swedish crowns of analysts surveyed by Reuters.

"We deserve I think criticism more for the fact whether we have well enough understood and talked about and communicated the dynamics of the industry, how things may vary between quarters," Svanberg told CNBC in an interview.

Third-quarter gross margins are now expected to drop to 35.6 percent from 38.2 percent last year. Operating margins will decrease to 12.9 percent from 21.2 percent from the previous year.

"If you go to the bottom end of the range it actually comes to the point where we would have a performance similar to Q3," Svanberg told CNBC. "We still believe in a bit of recovery."

The company said in the statement that "Ericsson's networks business continues to develop most rapidly in regions where new network rollouts and break-in contracts are predominant. This is where competition is intense as it builds footprint for long-term profitable growth."

The company said margin pressures in these areas to date were offset by higher-margin sales from network expansions and upgrades, but that those had recently dried up.

Not a Short-Term Problem?

Ericsson forecasts sales of 43.5 billion Swedish crowns for the three months ended September, from 41.3 billion in the year-ago period.

"I think it's a major disaster and unfortunately it's more than a Q3 issue," Thomas Langer, analyst at West LB, which cut Ericsson to "reduce" from "buy", told Reuters.

Ericsson was due to report earnings on Oct. 25 but it issued preliminary figures ahead of trading Tuesday.

Analysts told Reuters the news was unsettling for what it said not only about the company's earnings but also about management.

Only last month, Ericsson executives painted a rosy picture at an investors' conference in London, saying the company was poised to grab an even bigger slice of the markets it targets.

This represents a significant change in tone from management, contrasting with the recent commentary of last month's investor day," investment firm Cazenove said in a note to clients. It said it was retaining an "underperform" rating on the stock.