EARNINGS PREVIEW: Ericsson 4Q Net Profit Seen Down 42% at SEK5.6 Billion

Published on: 30th January 2008

STOCKHOLM -(Dow Jones)- Ericsson is forecast to post a steep drop in net profit for the fourth quarter ended Dec. 31, as a slowdown in operator spending and low-margin network rollouts continue to prevail.

According to a Dow Jones Newswires poll of six analysts, net profit is expected to plunge 42% to SEK5.60 billion ($877 million) from SEK9.73 billion, while fourth-quarter sales are set to be relatively flat at SEK53.62 billion compared with SEK53.68 the year earlier.

Ericsson said late in 2007 that it saw the first quarter of 2008 as a possible low-point after an October profit warning which it attributed to a poor business mix. The Swedish company had previously been the pick of the European network sector, as rivals Alcatel-Lucent and Nokia Siemens Networks grappled with integration and restructuring.

Ericsson said in November that its operating profit margin is expected to be in the mid-teens in 2008, well down from last year's market-leading 22.7%, and since then there has been a deterioration in macro-economic conditions that may also impact the company going forward.

Margins will get some support from its Sony Ericsson handset joint venture with Sony, which for full-year 2007 saw a 12% increase in net profit and 18% increase in revenue. But Ericsson's network performance will be the key focus.

"When it comes to Q4, our expectations would be that we would see not the same extreme situation as we had in Q3," said Chief Executive Carl-Henric Svanberg late last year, while he cautioned that high-capital-expenditure network rollouts would continue in the fourth quarter and in 2008.

Svanberg said in October he saw some 5% revenue growth for mobile infrastructure in 2008.

"It will be interesting to see if Ericsson sees any downturn in the business conditions for 2008 since they said before that they expected conditions similar to 2007 to continue this year," said Society Generale analyst Andy Perkins. "The economic picture has changed quite a bit since then, so we'll see what they say about guidance," he said, reiterating his hold rating on the stock.

"I want to know about their outlook for '08, and I want to know if they see the macro economic situation affecting business," said WestLB analyst Thomas Langer. "It'll also be interesting to see if they make comments on the business mix and whether they plan to focus more on supporting their margins."

JP Morgan analyst Rod Hall said if the company fails to beat the 8% margin posted by its network business in the third quarter - which is expected due to invoicing of its Chinese operations - 2008 consensus margin expectations will have to be revised lower.

Ericsson shocked the market in October with a profit warning, which it attributed to a large proportion of lower-margin rollout deals compared with fewer than expected lucrative expansions and software upgrades.

In addition, operators are saving money on network infrastructure by teaming up with rivals and sharing expensive mobile base stations. A recently announced partnership between Deutsche Telekom's T-Mobile UK unit and Hutchison Whampoa's 3 network will deliver estimated cost savings of GBP2 billion over 10 years on third-generation networks. Similar deals are in place between Vodafone Group and Telecom Italia in Italy, and with France Telecom's wireless unit Orange in the UK.

Ericsson's shares have taken a beating over the past year, falling 49% and wiping nearly $30 billion of the company's value, while the Dow Jones European Telecommunication index rose 20% in the same period.

Ericsson is set to report Friday at 0630 GMT.

At 1540 GMT Wednesday, Ericsson shares traded SEK0.02 lower, or 0.14% down, at SEK14.38, underperforming a lower Stockholm market. At the same time, the European Stoxx telecoms index was broadly flat.

-By Adam Ewing, Dow Jones Newswires; +46 8 545 130 95; adam.ewing@dowjones.com

(END) Dow Jones Newswires

 

Tags: [sony ericsson]  [deutsche telekom]  [alcatel-lucent]  [t-mobile uk]  [telecom italia]  [nokia siemens networks]  [hutchison]  [vodafone group]  [stockholm]