By Juhana Rossi
Sweden's Ericsson AB on Thursday reported a sharp fall in
first-quarter profit as spending by its customers shifted to
lower-margin projects and a patent dispute with Apple Inc. dented
its licensing income.
The telecom-equipment maker's weaker-than-expected earnings
disappointed investors, prompting the company's shares to fall more
than 8% in morning trading in Stockholm.
Although favorable currency movements led to a sharp rise in
Ericsson's revenue during the three months to March 31, the
company's profitability fell as more of its quarterly revenue came
from lower-margin projects in China and less from lucrative work in
the U.S.
This pattern is likely to persist as long as U.S. network
operators, such as AT&T Inc. and Verizon Communications Inc.,
spend more on spectrum auctions and deals instead of upgrading
network equipment, Ericsson Chief Executive Hans Vestberg said at a
news conference.
North America has been Ericsson's biggest market in recent
years, with the company benefiting as U.S. operators upgraded their
wireless infrastructure to the latest-generation standard to
accommodate ever greater data traffic coming from on-demand video
and mobile Internet use. However, such spending has slowed in
recent quarters.
Ericsson's first-quarter net profit came in at 1.32 billion
Swedish kronor ($151.1 million), or 0.40 kronor a share, below a
median forecast of 2.23 billion kronor, or 0.68 kronor a share,
according to an analyst poll by Reuters. In the prior-year period
the company reported a profit of 2.12 billion kronor, or 0.65
kronor a share.
Profitability at Ericsson's network unit, which accounts for
about half of the company's revenue, was particularly weak.
Unfavorable shifts in customer spending, a currency-linked hedging
loss of 1.1 billion kronor and restructuring costs pushed the
operating margin down to 2%, compared with the company's target of
10%.
However, Mr. Vestberg said the low operating margin "should not
be seen as trend," with the company expecting profitability to rise
again as it recovers from restructuring costs and currency-driven
losses.
Ericsson's bottom line was also hurt by a patent dispute with
iPhone maker Apple. The companies got embroiled in a dispute over
mobile technology patents earlier this year, with the groups suing
and countersuing each other in the U.S.
The dispute dented Ericsson's intellectual property income
during the first-quarter, the company said. This drop in income
also had an impact on Ericsson's profitability because licensing
patents is a high-margin business, said Mikko Ervasti, an analyst
with Evli Bank.
Resolving the dispute with Apple might take a long time,
Ericsson CEO Mr. Vestberg said. "Our ambition is to settle outside
court as soon as possible," he added.
Ericsson said net sales in the three months to March 31 rose 13%
to 53.52 billion kronor, from 47.51 billion kronor in the
year-earlier period, beating analysts' forecasts of 53.49 billion
kronor.
The rise in revenue was largely driven by the dollar's
appreciation against the Swedish krona. Despite hedging losses, in
the longer term "this level of strong dollar is positive for
Ericsson. It's good. We like it," Mr. Vestberg said.
Write to Juhana Rossi at juhana.rossi@wsj.com
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