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Ericsson profit gross margin rises

Cost cuts boosted first quarter gross margin at Ericsson above its own forecasts, the Swedish telecoms equipment maker said on Thursday, sending its shares sharply higher.
/ Source: Reuters

Cost cuts boosted first quarter gross margin at Ericsson above its own forecasts, the Swedish telecoms equipment maker said on Thursday, sending its shares sharply higher.

The world’s biggest maker of wireless network components said the margin, the widest measures of how a company manages costs in relation to sales, would be higher than the 41.6 percent seen in the fourth quarter, despite a slowdown in sales.

Sales traditionally drop at the start of the year compared with the usually strong fourth quarter when telecoms operators spend leftovers from their annual budgets.

“The main reason for the improvement is better than anticipated benefits of cost of sales reduction activities,” Ericsson said in a statement.

In February Ericsson had said the margin could deteriorate slightly.

The company reiterated in the statement that revenues would rise moderately year-on-year but decline against the seasonally strong October-December period. In February Ericsson quantified the moderate year-on-year growth as a 5-10 percent increase.

“The sales outlook for the first quarter remains unchanged,” the statement said.

The news sent shares in Ericsson up nearly 10 percent percent on a positive Stockholm market and by 1010 GMT they were quoted at 22.40 Swedish crowns, a rise of 7.2 percent. It boosted French competitor Alcatel, which has also undergone extensive restructuring, by 3.3 percent.

Since the start of the year Ericsson has outperformed the DJ Stoxx Technology index by 48 percent.

Shares in Nokia, the world’s biggest producer of mobile phones, marginally in the red before the news, rose to trade two percent firmer. Only 20 percent of the Finnish firm’s revenues are generated by mobile networks, competing with Ericsson’s core business.

Investors welcomed the news.

“We have some Ericsson, so I can’t complain. It’s very encouraging,” said fund manager Anders Jarheim at Ohman Kapitalforvalting AB, which manages $2 billion.

“I don’t think it’s so very strange if you look at what has been happening, if you look at the industry which has been in an upward trend for a while,” he said.

British mobile phone retailer Carphone Warehouse gave more evidence of the wireless communications industry’s health when it forecast stronger than expected full-year profit on Thursday and predicted 15 percent more people would get a handset this year.

Worldwide, over 1.3 billion people use a mobile phone, and operators are starting to invest more to build the networks needed for the two billion mobile callers expected by 2008 and the imaging and music services that are at last taking off.

Ericsson, which will report first quarter results on April 23, has been cutting costs and shedding staff to adjust to a shrinking market since 2001 and only returned to profit in the third quarter of 2003 after nearly three years of losses.

By the third quarter of this year it will have cut its staff to 47,000 from 107,000 in 2001 and cut its expenses to make a profit even if its sales were around 100 billion Swedish crowns annually -- a far cry from the 273 billion in peak year 2000.

Analysts said it was surprising but also encouraging that Ericsson mentioned better cost savings after saying that most of expense reductions had been taken last quarter.