Ericsson Profit Flat As Marconi Deal, Margins Weigh"

LONDON (Dow Jones) -- Ericsson, the world's largest supplier of mobile-phone network equipment, reported flat profit Friday due to the recent purchase of Marconi and receding margins.

Net income for the first quarter was steady at SEK4.6 billion ($608 million), or SEK 0.29 a share. Sales climbed 24% to SEK39.2 billion on growth in all divisions, especially in services.

Analysts had predicted a profit of SEK5.26 billion on sales of SEK39.09 billion, according to the average forecast of 37 analysts in an SME Direkt poll.

Ericsson shares fell 2.9% in Stockholm morning trading.

Ericsson said the former Marconi operations, which it bought in October for 1.2 billion pounds ($2.1 billion) after the U.K. company failed to win an important contract from BT Group, generated an operating loss of about SEK600 million.

The Swedish company now expects a delay in some of the cost savings from the integration of Marconi.

"We have postponed the timings of certain actions to safeguard the increased orders and delivery commitments" related to Marconi, Chief Executive Carl-Henric Svanberg said in a statement.

"As a consequence, the targeted cost savings will be realized slightly later than originally planned."

Still, analysts for Goldman Sachs were optimistic that the situation would improve in following quarters.

"We believe the underlying business trends remain attractive and operating results of Marconi should improve later in the year when restructuring gets fully under way," they said.

Gross margins fell to 43.3% from 48.5% a year earlier. Excluding Marconi, the gross margin would have been the same as the previous quarter's 44.2%.

Ericsson said the decline was due to the rising shares of services, where it manages operators' networks, within its business. For example, Ericsson in December agreed to run the network of 3 UK in a deal estimated to be worth as much as $3 billion.

Svanberg said profitability also suffered from the start up of new contracts.

"Our strong market position and technology leadership provide us with opportunities to organically grow our business further," he said.

"Such opportunities often include certain start-up costs and may therefore be less profitable short term, but are of obvious long-term value."

Turning to specific divisions, mobile networks sales rose 14% to SEK26.7 million and fixed-network sales jumped 174% to SEK2.9 million on the addition of the Marconi business.

Excluding Marconi, however, the performance of fixed networks was very weak, with sales of SEK400 million, according to Enskilda Securities.

The broker also noted that the market in China was weak this quarter, representing about 4% of group sales against a normal level of around 10%.

Ericsson's rival Nokia Corp. on Thursday reported first-quarter network sales growth of 19% to 1.7 billion euros.

Analysts from Nomura International said that as revenue pick ups toward the end of the year, margins should increase a bit, but likely won't return to recent highs.

"We think that Ericsson's numbers will show the effects of persistent pricing pressure in 2006 as growth will not be enough to allow operating leverage to fully compensate," the broker concluded.

Ericsson reiterated it expects moderate growth in the mobile-systems market this year. The professional services segment is still expected to show good growth.

(END) Dow Jones Newswires"

Posted to the site on 21st April 2006