By Juhana Rossi 

Sweden's Ericsson AB lost about a tenth of its stock-market value on Thursday after the network equipment maker posted a sharp fall in first-quarter profit as its customers' spending shifted to lower-margin projects and a patent dispute with Apple Inc. dented its licensing income.

Ericsson's share price was down more than 10% in afternoon trading in Stockholm, wiping out some 40 billion Swedish kronor ($4.6 billion) from the company's market capitalization.

Although strong currency tailwinds boosted 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.

During the second half of 2014, however, growth in global operator spending switched from the U.S. to China where operators have been building new fourth-generation networks.

Building new network coverage is less profitable to equipment suppliers because it involves selling relatively low-margin hardware instead of more profitable software upgrades to existing networks.

Ericsson's first-quarter net profit came in at 1.32 billion Swedish kronor, 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. The unfavorable trends 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 that 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 legal row over mobile technology patents earlier this year, with the groups suing and countersuing each other in the U.S.

The dispute reduced Ericsson's intellectual property income during the first-quarter, the company said, but it didn't disclose any specific figures.

Licensing existing patent portfolio is often a high-margin business, so it usually makes a greater contribution to Ericsson's profitability than sales of ordinary equipment.

Bernstein Research estimated that the loss of income due to the dispute with Apple shaved off about one percentage point from Ericsson's gross margin, a closely watched measure of profitability, which at 35.4% missed the median analyst expectation of 37.2%.

Resolving the dispute with Apple might take a long time, 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, Ericsson's reporting currency.

Despite hedging losses in the first quarter, in the longer term "this level of strong dollar is positive for Ericsson. It's good. We like it," Mr. Vestberg said.

Ericsson is the world's largest builder and seller of wireless networks that carry voice calls and mobile data. Its closest rivals are China's Huawei Technologies Co. and Finland's Nokia Corp, which are the industry's No. 2 and No. 3, respectively.

Profits in the telecom network industry have come under increasing pressure as manufacturing hardware such as antennas and base stations has become more commoditized.

To maintain their competitiveness, the industry incumbents Ericsson and Nokia have been trying to focus more on offering software and service solutions to customers instead of simple hardware.

Earlier this month Nokia also launched an attempt to acquire its smaller French-American rival Alcatel-Lucent. If the merger succeeds, it will make Nokia the second-largest network equipment firm in the world and increase its ability to compete against Ericsson in the key U.S. market where Ericsson is the market leader.

Analysts have speculated that Ericsson could respond to Nokia's move by acquiring the American network technology supplier Juniper Networks Inc.

While Ericsson doesn't exclude big acquisitions, a potential bid for Juniper is "a very theoretical question," Mr. Vestberg said to The Wall Street Journal.

Ericsson's primary focus is on creating organic growth and executing on its plans to become more software and service-centric company, Mr. Vestberg said.

Write to Juhana Rossi at juhana.rossi@wsj.com

Access Investor Kit for Nokia Oyj

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=FI0009000681

Access Investor Kit for Alcatel-Lucent SA

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=FR0000130007

Access Investor Kit for LM Ericsson Telefon AB

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=SE0000108656

Access Investor Kit for AT&T, Inc.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US00206R1023

Access Investor Kit for Alcatel-Lucent SA

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US0139043055

Access Investor Kit for Apple, Inc.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US0378331005

Access Investor Kit for LM Ericsson Telefon AB

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US2948216088

Access Investor Kit for Nokia Oyj

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US6549022043

Access Investor Kit for Verizon Communications, Inc.

Visit http://www.companyspotlight.com/partner?cp_code=P479&isin=US92343V1044

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

Ericsson (NASDAQ:ERIC)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Ericsson Charts.
Ericsson (NASDAQ:ERIC)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Ericsson Charts.