The world's leading mobile telecoms equipment manufacturer Ericsson was hit by a sharp drop in sales of networks in the second quarter as carriers cut spending in the face of a global slowdown.
Makers of network hardware, such as radio base stations, face lean times as major economies weaken, hitting telecoms operators' revenues, and a decade-long price war continues to rage. Ericsson (Stockholm, Sweden) rivals Alcatel-Lucent (Paris) and Chinese group ZTE (Shenzhen, P.R.C.) have both issued profit warnings in the past week.
Ericsson has also 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.
"The underlying business mix, with a higher share of coverage projects than capacity projects, was unchanged in the quarter and is expected to prevail short-term," the company said in a statement.
Ericsson added that the negative impact on the gross margin from hardware-heavy network modernization projects in Europe would gradually start to decline towards the end of 2012.
Earnings before interest and tax, excluding joint ventures but including restructuring charges, were 3.3 billion Swedish crowns ($470.9 million), against a mean forecast of 3.5 billion crowns in a Reuters poll. A year ago it made 5 billion crowns in core profit.
"What was weak was Networks: both sales and result were clearly worse than expected," Redeye analyst Gregor Johansson said.
Ericsson cited an expected slowdown in sales of outdated CDMA equipment in North America and lower business activity in China, Russia and India for the drop in network sales, which fell 17% year on year to 27.8 billion crowns, against a forecast of 30 billion crowns.
China's economic chill has lasted six quarters, while the euro zone is still mired in crisis and recovery in the U.S. is stuttering.
The lower proportion of network sales and the growth in lower-value service contracts hit the company's gross margin, which fell to 32% in the quarter from 37.8% a year ago, against a forecast of 32.5%.
Pressure from regulators, competition and the weakening global economy have squeezed telecoms operators, who have yet to enjoy a boost in revenues from surging data traffic on smartphones and tablet computers.
Nordic telecoms operator TeliaSonera cut its outlook for the year on Wednesday, saying that it expected flat sales this year and slightly lower profitability than 2011. Many operators are looking to cut capital expenditure even though they need to boost capacity and network speed in the longer term.
However, Ericsson Chief Executive Hans Vestberg declared that his company'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 said.
Ericsson holds about 38% of the mobile network equipment market, roughly double its nearest rivals, China's Huawei Technologies and Nokia Siemens Networks.
(Reporting by Simon Johnson; Editing by David Goodman)