Ericsson's Q2 profit drops 63% on weaker network sales

Ericsson (NASDAQ:ERIC) reported weaker sales and a sharper than expected drop in second-quarter profit as carriers cut back on networks sales.

In the second quarter Ericsson said its net income fell 63 percent to around $172.9 million, from around $461 million in the year-ago period. Analysts polled by Dow Jones Newswires expected a net profit of $240.6 million. 

Overall, the company's net sales inched up only 1 percent in the quarter, to $7.97 billion. Sales in the company's networks business slumped 17 percent year-over-year to $4 billion, while sales in Ericsson's services business shot up 26 percent to $3.47 billion. The company's closely watched gross margins slipped to 32 percent, down from 37.8 percent in the year-ago period.

Ericsson's results came a day after Alcatel-Lucent (NASDAQ: ALU) said it will post an operating loss in the second quarter of around $48.8 million on revenue of $4.27 billion, and said it will miss its profit target for 2012. ZTE also announced a profit warning for the first half of the year.

Ericsson, the world's largest infrastructure vendor, said CDMA sales declined 50 percent in the second quarter, and it said it expects this rapid decline to continue in the second half. As it has noted over the past several quarters as CDMA sales have declined, particularly in North America, Ericsson said it plans on migrating CDMA customers to LTE solutions.

In Europe, Ericsson said that its network sales were hurt by cautious operator spending and lower investment in Russia compared with a year ago. However, the company said that the decline in its gross margin caused by network modernization projects in Europe--rather than sales of new equipment for LTE deployments--will ease toward the end of the year. Ericsson said European LTE deployments have been hampered by spectrum licensing issues, especially in France and the United Kingdom. 

In North America, Ericsson's sales were up 5 percent year-over-year to $1.87 billion. Ericsson said network sales were hurt by the decline in CDMA sales, but were partly offset by the continued transition to LTE. Projects like Sprint Nextel's (NYSE:S) Network Vision network modernization also likely helped. Ericsson also said its acquisition of Telcordia has generated momentum in the OSS/BSS market.

In an interview with FierceWireless, Ericsson CFO Jan Frykhammar said that while the network infrastructure market faces challenges, Ericsson is well positioned to handle them. From a broader perspective, he said "we need to make sure that mobile broadband becomes a profitable growth case" for carriers so that vendors can make money. "Both operators and vendors need to make money," he said.

During the quarter T-Mobile USA picked Ericsson and Nokia Siemens Networks as its primary vendors for its LTE deployment, which will begin next year. Frykhammar said that the project, coupled with Sprint's Network Vision, will hopefully bring in revenue from North America to offset CDMA declines, but that it will depend on the pace of the network deployments.

For more:
- see this release
- see this WSJ article (sub. req.)
- see this Reuters article
- see this Bloomberg article

Special Report: Wireless in the second quarter of 2012

Related Articles:
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Ericsson's Q1 profits jump on sale of handset stake, N. America strength
Ericsson's Q4 profit plunges 66% as North American CDMA sales decline
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Article updated July 19 to reflect that Ericsson did not give guidance for the second half of the year.

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