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Ericsson Earnings Miss Expectations as Poor Profit Margins Weigh

By Gustav Sandstrom and Sven Grundberg STOCKHOLM--Swedish network equipment vendor Ericsson (ERIC) Wednesday reported a bigger-than-expected drop in second-quarter earnings as its profitability was stunted by a high number of low-margin sales, but said it expects improvement towards the end of this year. Ericsson's net profit fell to 1.11 billion Swedish kronor ($159 million) from SEK3.12 billion in the same quarter last year, with the closely watched gross margin down to 32.0% from 37.8% a year ago. Analysts polled by Dow Jones Newswires had expected net profit of SEK1.67 billion and a gross margin of 33.3%. Ericsson has managed to maintain its position as the world's biggest network equipment vendor througout the global financial crisis, helped by its strong position in the fast-growing U.S. market. Still, the company's profits have been hit in past months by a high proportion of low-margin sales, and as a result of reluctance by telecom operators in Europe to invest in new gear amid the ongoing financial crisis. Revenue from services, which typically have lower margins than sales of new network equipment, made up a larger part of Ericsson's sales mix in the second quarter. Profit also suffered as a result of a large number of low-margin contracts for network upgrades in Europe, that Ericsson has taken on to regain market share in the region. Net sales in the quarter were down to SEK55.32 billion from SEK54.77 billion the same quarter last year, against expectations for SEK54.5 billion. Ericsson's Global Services and Support Solutions businesses saw strong demand, but networks sales fell from a year earlier, mainly due to slow sales of CDMA technology equipment, lower activity in China, and slow third-generation (3G) technology sales in Russia, the company said. Ericsson's shares are down around 16% so far this year, underperforming a 3.7% rise in the wider Stockholm market amid concerns that its closely-watched gross margin will remain subdued. The shares Tuesday closed at 58.90. Write to Gustav Sandstrom at gustav.sandstrom@dowjones.com Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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