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Ericsson posts weak Q2 results, but looks to China and Europe for growth

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Ericsson (NASDAQ:ERIC) reported weaker than expected profits, sales and margins for the second quarter, as it was hit by one-time charges and strong headwinds in Asia. While North America continued to be a bright spot for the vendor, CEO Hans Vestberg said he is looking to China and Europe as engines for growth in the years ahead.

Ericsson said overall sales were flat year-over-year at $8.4 billion, below the $8.5 billion analysts had predicted, according to Bloomberg. However, Ericsson said that adjusted for foreign currency exchange rate changes, sales grew 7 percent year-over-year. The company's net income came in at $222 million, up from around $168 million in the year-ago period; the figures for the second quarter of 2013 were impacted by $136 million in one-time charges. The company's operating income was $380 million, well below the $652 million analyst had expected, according to a Reuters poll.

The vendor's closely watched gross margin was 32.4 percent, up from 32 percent in the year-ago period but below the 33.1 percent average projection of analysts, according to Bloomberg.

Ericsson's said network sales were basically flat, with strong growth in North America and Latin America as well as Western and Central Europe, offset by continued declines in North East Asia. The company said South Korean business activity dropped off and Chinese investments in GSM also fell.

"The growth in [Chinese] GSM isn't coming back, and China's investment volume is low when you take that out," Vestberg told the Wall Street Journal.

However, China is moving toward LTE--China Mobile, the world's largest operator by subscribers, is moving ahead with a massive TD-LTE deployment and tender that vendors, including Ericsson, want a piece of. "We have participated in all large scale field trials for [4G technology] TD-LTE and we focus a lot on technology and presence," Vestberg said. "We have a strong position in China and aim to keep it when we move towards 4G."

Additionally, Ericsson said its long-term strategy to focus on low-margin coverage deployments in Europe, with the aim of moving to more profitable capacity and LTE projects over time, is starting to pay off. "We have initiated discussions about capacity build-outs on the footprint we have built, so things are beginning to happen," Vestberg said. "Europe is getting more important for us as we now have a leading position there."

In North America, total sales grew 18 percent year-over-year to around $2.32 billion, but were down 3 percent from the first quarter. The company noted that while CDMA equipment sales continued to decline, the move toward LTE will drive growth in the market.

Verizon Wireless (NYSE:VZ), a major Ericsson customer, recently completed in its initial LTE deployment, and is moving to fill in capacity later this year with its AWS spectrum. Meantime, Sprint (NYSE:S), T-Mobile US (NYSE:TMUS) and AT&T Mobility (NYSE:T) are all in various stages of working to build out their own respective LTE networks.

For more:
- see this release
- see this Ericsson report (PDF)
- see this Dow Jones Newswires article (sub. req.)
- see this Bloomberg article
- see this Reuters article

Special Report: Wireless in the second quarter of 2013

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