October 23, 2015 / 5:53 AM / in 2 years

Ericsson profit misses forecasts, hit by China slowdown

The exterior of Ericsson's headquarters are seen in Stockholm April 30, 2009. REUTERS/Bob Strong

STOCKHOLM/FRANKFURT (Reuters) - Slowing demand for new mobile networks in China pushed third quarter sales and profit for Sweden’s Ericsson (ERICb.ST) below forecasts and reinforced concerns that another major growth market had passed its peak.

Like-for-like sales at Ericsson, the world’s biggest maker of mobile telecoms network equipment, dropped 9 percent in the third quarter, with declines in China and Europe.

Ericsson and industry rivals are in the middle of a decade-long investment cycle but initial build-outs of the latest high-speed 4G equipment are slowing in major markets such as China, Europe and the United States.

Ericsson Chief Executive Hans Vestberg said the slowdown in China was not tied to the broader economic situation there and that it was normal for the pace of network spending to fluctuate between quarters.

“I cannot speculate when it will come back, but long-term, medium-term, I think 4G will continue to grow in China,” he told reporters on a conference call. Reorganizations at Chinese operators may have contributed to lower spending, he added.

Ericsson shares were down 6.6 percent by 0551 ET and analysts were unimpressed.

“The Chinese market that has been a significant contributor to systems sales for several quarters dropped 20 percent year over year and 1 percent from the second quarter,” said Bengt Nordstrom, head of telecoms consultancy Northstream.

“That indicates the 4G roll out in China has peaked.”

Prior to Friday, the stock had dropped 6.4 percent this year, underperforming the STOXX Europe 600 Technology index .SX8P, which had gained 12 percent.

Ericsson shares have also come under pressure after rivals Nokia NOK1V.HE and Alcatel Lucent ALUA.PA agreed to merge in a 15.6 billion euro deal to create the world’s second-largest mobile gear maker after Ericsson.

SALES SUFFER

Ericsson’s like-for-like sales have been flat over the past three years and are down 7 percent so far this year, raising questions over its growth prospects.

Late last year, Ericsson cut its growth forecasts for the network equipment market in coming years and financial analysts question where the company will find fresh impetus in 2016.

Like-for-like sales at the group’s mainstay networks unit, plunged 15 percent and were down in all regions of the world except for India and South East Asia.

While revenue had stabilized for Ericsson’s mobile broadband business in North America, which accounts for 21 percent of all network sales so far this year, it remained lower than at the peak a year ago.

Operating profit was 5.1 billion Swedish crowns ($604 million) compared to 3.9 billion in the year-ago quarter and below a mean forecast of 5.4 billion crowns in a Reuters poll of analysts.

To compensate, Ericsson is investing in areas of faster growth and aims to boost the share of sales to media, Internet and corporate clients outside of its classic telecom customer base to 20-25 percent in 2020 from around 10 percent in 2013.

Overall sales at Ericsson were 59.2 billion crowns, below a forecast of 60.9 billion. The gross margin was 33.9 percent against a mean forecast of 34.9 percent.

Link to report:

($1 = 8.4446 Swedish crowns)

Additional reporting by Olof Swahnberg; Editing by Alistair Scrutton and Keith Weir

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