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Ericsson Profit Beats Forecasts, But Charges Rise

Telecom equipment maker Ericsson reported better-than-expected second-quarter earnings on Tuesday in a mixed report that analysts said offered tentative signs that the firm is turning a corner.

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Ericsson, the world's No. 1 mobile network maker, beat forecasts for the second consecutive quarter with earnings before interest and tax of 4.7 billion Swedish crowns ($789 million) excluding restructuring costs, against forecasts for 4.3 billion.

"If you look at the underlying result it was better than we had expected. This is true even if you clean for the 200 million crown profit for the sale of business exchanges," said David Hallden, analyst at Cheuvreux, referring to the sale of the firm's PBX enterprise operations.

The firm, which earlier this year announced a plan to chop 4 billion crowns off annual costs, said restructuring costs in the second quarter came in at 1.8 billion crowns.

That was nearly four times the expected amount of 502 million.

"The interesting thing is that when you take out the restructuring charge the operating profit is about 10 percent ahead of expectations, which is okay," said Richard Windsor, analyst at Nomura Securities. "The worry that margins in Q1 were overstated has now been somewhat relieved."

Networks Improvement

"The overall business activity shows stable development," said Ericsson Chief Executive Officer Carl-Henric Svanberg. "With no major changes in the market environment, we still find it prudent to plan for a flattish mobile infrastructure market in 2008 and our focus on adjusting our cost base remains."

Svanberg said the decline of the dollar had hit sales growth and margins in the second quarter.

The executive said network margins improved versus the first quarter despite a high proportion of new network rollouts in high-growth markets, including India.

A high share of new networks -- as opposed to the more lucrative business of expanding or upgrading existing networks -- was given as the main reason for a collapse in third-quarter earnings last year, which led to massive share price falls.

"I think they have demonstrated that networks is really back on track showing margin expansion," said Thomas Langer, analyst at WestLB. "The one tricky part remaining is now Sony Ericsson. So there are two conflicting trends."

Sony Ericsson, the firm's joint venture with Sony, last week posted a small operating loss in the second quarter and warned of a challenging market for at least the rest of the year.

It has issued profit warnings for two quarters in a row as consumers have scaled back purchases of expensive phones.

Ericsson shares have performed well in the run-up to Tuesday's results, clawing back 23 percent in the past four weeks.

That left them 43 percent down from October, when the firm shocked the market with its third-quarter earnings drop.