Ericsson Profit Plunges 70%, Weighing on Sector

Shares of Ericsson ERIC fell sharply after the Stockholm-based telecom-gear company recorded a 70% plunge in second-quarter profit, weighing on the entire sector.

Ericsson said net income fell to 1.90 billion Swedish kronor (US$318 million) from 6.41 billion kronor in the year-ago period, while revenue rose 1.9% from a year ago to 48.53 billion kronor. Analysts surveyed by Thomson Financial were looking for net income of 2.85 billion kronor on sales of 48.08 billion kronor.

Gross margin fell to 37% from 43% a year ago, and was down sequentially from 38.6%, which Ericsson said was mainly due to the business mix, which involved a high proportion of new network buildouts. Operating margin fell to 9.7% from 19.4%.

Ericsson said the continued decline in the U.S. dollar contributed negatively to sales development, and that the proportion of new-network buildouts in high-growth markets, including accelerating volumes in India, remains high and puts pressure on margins. Ericsson reiterated that Sony Ericsson, its joint venture with Sony SNE, would face challenging market conditions for at least the rest of 2008, and in particular for the third quarter.

Despite this view, Ericsson said that unchanged industry fundamentals and consumer behavior support a positive longer-term outlook. For 2008, the company said it plans for fairly flat development in the mobile infrastructure market, while the professional services market is expected to show good growth. Still, shares tumbled 7% to $11.50 in early trading.

"The overall business activity shows stable development," said Ericsson chief 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."

Among other networking companies, Motorola MOT lost 2.5%, Cisco Systems CSCO slid 2%, and Alcatel-Lucent ALU was down 1.7%.