From: Reuters
Published April 25, 2008 06:35 AM

Ericsson shares rocket as Q1 tops forecasts

By Jerker Hellstrom and Adam Cox

STOCKHOLM (Reuters) - Shares in telecom equipment maker Ericsson rocketed more than 20 percent on Friday, their biggest gain in nearly five years, after the company unveiled surprisingly strong first-quarter profits.

The earnings were still a far cry from where they were a year earlier, but they beat a set of gloomy forecasts as the market had come to expect negative news from the world's largest mobile network builder since a dismal third quarter.

"I'm very happy with the numbers. They're better than my forecasts and better than consensus," said Nicolas von Stackelberg at Sal. Oppenheim.

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Ericsson made an operating profit of 4.3 billion Swedish crowns ($729 million) in the quarter, a sharp drop from 8.2 billion a year earlier but better than the 3.95 billion average forecast when stripping out assumptions for restructuring costs.

Ericsson, which announced plans in February for sweeping cost savings, said it was taking an 800 million crown charge for restructuring cuts made during the quarter, but that was not included in the main profit and margin figures.

The company's shares, which had seen 50 percent of their value stripped away since Ericsson announced an earnings shortfall in October, were up 23.5 percent at 15.40 crowns at 5:00 a.m. EDT, buoying the broader Stockholm index.

It was the stock's biggest intraday rise since July 2003.

Shares in Franco-American rival Alcatel-Lucent rose as much as 8 percent and the news lifted Europe's technology index 4.3 percent.

Investors have been worried about the direction of Ericsson's main market, mobile network infrastructure, as telecoms operators have been holding back on capital spending.

And even though Ericsson stuck to a view that the infrastructure market would be flat this year, strong sales numbers signaled conditions may not be as weak as feared.

"I think the big issue, considering what has happened in the last six to nine months, is that you can see at least from Ericsson's perspective that it's a little more stable," said Greger Johansson, analyst at Redeye, adding the market had perhaps grown too negative after two tough quarters.

MARGIN RELIEF

Group gross margin was 38.6 percent excluding the restructuring charges, compared with 43 percent a year earlier.

"It was a great quarter. The gross margin was especially better than I had forecast," said Hannu Rauhala, analyst at Pohjola. "Even in this very difficult environment for network sales, the figures were quite good."

Carl-Henric Svanberg, Ericsson's chief executive, said the company was sticking to its 2008 market outlook.

"Our business developed well in the quarter, considering the present market environment and the declining dollar," Svanberg said in the statement.

"We still find it prudent to plan for a flattish mobile infrastructure market in 2008. The ongoing cost reductions as we adjust to such a scenario are running according to plan."

Ericsson said in February it would cut its cost base by 4 billion crowns a year, axing 1,000 jobs in Sweden and potentially about 4,000 worldwide.

HIGHER SALES ACROSS THE BOARD

Ericsson said its key network division logged 30 billion crowns in sales, up 2 percent from a year earlier and exceeding forecasts for 28.1 billion.

Networks had an operating margin of 9 percent excluding restructuring costs, although Svanberg said the proportion of new network rollouts was putting pressure on margins.

A higher share of network rollouts -- which have slimmer margins than the more lucrative upgrades and network expansions -- was the main culprit behind the third-quarter shortfall.

In addition to its 50 percent interest in handset maker Sony Ericsson, which also has had profit troubles of late, Ericsson has divisions in professional services and multimedia.

Professional services revenues grew 20 percent to 10.3 billion crowns. Multimedia climbed 16 percent to 3.9 billion.

Ericsson repeated it expected good growth in the professional services market in 2008, while it has long touted multimedia as a potential future growth engine.

Pohjola's Rauhala said: "Ericsson has quite a good product portfolio, they have a wider product offering for fixed-line networks and the products are quite good. I believe that when they tune in their cost structure, they will have a good base ground for better profit in the coming year."

Credit default swaps on Ericsson, which reflect market expectations on the risk of a debt restructuring or default, narrowed 30 basis points to 180, traders said.

(Additional reporting by Georgina Prodhan in Frankfurt, Tarmo Virki in Helsinki, Jerker Hellstrom, Sven Nordenstam, Anna Ringstrom and Sarah Edmonds in Stockholm; Editing by Quentin Bryar)

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