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Ericsson Q1 profit surges on mobile broadband demand

Wed, 04/27/2011 - 7:08am
Simon Johnson, Reuters
Telecoms gear maker Ericsson blasted past first-quarter core profit expectations thanks to surging mobile broadband sales and said it would take until the third quarter to resolve Japan quake supply problems.

Ericsson's shares jumped almost 9 percent to their highest since last July, as sales soared on the back of a recovering tech gear market and cost cuts offset currency headwinds and margin pressure from competition.

Ericsson said growth had been particularly strong in the United States, India, Japan, Korea, Russia and China.

The only area of concern was the effect of March's earthquake in Japan. While it had no impact on the first quarter, Ericsson said it would be toward the end of September before supply chain problems had been fully dealt with.

"It was an extremely strong report. The network side is coming through fantastically and the whole of Ericsson is getting (sales) growth of 17 percent now," said Greger Johansson, analyst at Redeye.

"Even the gross margin and, as a consequence, the profit is better than expected."

Ericsson's shares were up 9.0 percent to 87.65 crowns at 0849 GMT, easily outpacing a flat Stockholm blue-chip market and a small fall in European tech stocks.

In the short term, the company said it had taken measures to meet an expected shortfall in components following March's earthquake in Japan, including buying on the spot market in the days after the disaster, finding alternative suppliers and redesigning some products.

Nevertheless, there will be effects going forward on some products, CEO Hans Vestberg said. "Our best estimate today is that we will deliver the majority of those products when the third quarter is over," he said.

He would not say which products were affected nor what the impact on the second quarter would be.

Nokia, 50 percent parent to Ericsson rival Nokia Siemens Networks said last week it expected the worst effects from supply chain problems in the second quarter.

After slumping in the global downturn, the tech gear market began to pick up in the second half of last year as operators boosted spending to meet skyrocketing data traffic from smartphones, tablet computers and mobile Internet users.

For Ericsson, growth accelerated in the first three months of 2011 with sales up 35 percent at Ericsson's key network unit.

Volume effects, a favorable business mix and efficiency gains helped boost the margins in networks -- which accounted for more than 60 percent of sales in the quarter. This helped keep the group's gross margin flat at 38.5 percent.

"The business mix from second half of 2010, with expansions and upgrades, has prevailed in the quarter," the company said.

"This, in combination with strong sales in segment Networks and continued efficiency gains, have impacted gross margin positively."

The world's biggest mobile network gear maker posted earnings before interest and tax excluding joint ventures of 6.3 billion crowns ($1.03 billion) versus a forecast of 5.0 billion. Group sales were 53 billion crowns, versus a forecast of 49 billion in a Reuters poll.

"The increase in group sales was driven by segment Networks where revenues grew 35 percent year-over-year with an EBITA margin of 20 percent," the company said.

Prospects look encouraging too.

While Ericsson does not give guidance, its 2011 executive bonus plan has targets of 4-10 percent annual net sales growth and 5-15 percent in operating income up to 2013.

(Additional reporting by Sandra Jansson, Tarmo Virki, Adam Cox, Olof Swahnberg, Christofer Jungstedt, Johan Ahlander and Elinor Schang)

($1=6.102 Swedish Crown)

(Editing by Louise Heavens, Erica Billingham and Jane Merriman)

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