Ericsson's struggle continues as operators hold back orders

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Operator cutbacks have hurt Ericsson's second-quarter results as the company reported lower than expected gross margins and net profit.

Vestberg

The Swedish group blamed network modernization projects in Europe, slowing demand in China and Russia together with a collapse in its CDMA sales for a 32 per cent plunge in gross margins, according to the Financial Times. Margins were down from 37.8 per cent in the same period a year ago and 33.3 per cent in the company's first quarter.

Ericsson reported net income of €141 million, down 63 per cent, compared with a year ago.

"I'm broadly disappointed with the [second quarter] report," Andy Perkins, an analyst at Societe Generale in London, told Bloomberg. "It's not a great set of numbers as their core business is still shrinking. This is a big problem. The pickup in network spending just isn't happening."

Ericsson CEO Hans Vestberg said that operators were spending less than a year earlier, and the company's results had been impacted by less-profitable network-upgrade projects accounting for more of its business.

"We just need to muddle through this and execute on our strategy, while also lowering our costs as we come out of this," Vestberg told Bloomberg.

The company said that it had seen a shift in business mix to lower-value contracts and in recent quarters has focused on gaining market share at the expense of profitability, which again weighed on earnings in the April-June period.

However, Ericsson said that the negative impact on the gross margin from hardware-intensive network upgrade projects in Europe would gradually start to decline toward the end of 2012.

Commenting on the broader picture, Vestberg declared that Ericsson's long-term prospects were rosy. "We can actually extend our leadership, as we see a very tough environment for many of our competitors," he told Reuters.

For more:
- see this release
- see this Financial Times article (reg. req.)
- see this Bloomberg article
- see this Reuters article

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