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Ericsson: Reduced demand for cell phones

Despite announcing record third-quarter profits Ericsson, the world's biggest producer of mobile phone networks, announced market growth would slow next year.
/ Source: Reuters

Ericsson, the world's biggest producer of mobile phone networks, said on Friday market growth would slow next year, sending its share price down sharply despite reporting a big jump in third-quarter profits.

Lower than expected orders in the quarter only added to concerns for future sales, analysts said.

"Orders were on the weak side and the 2005 outlook was not so good either because analysts have pencilled in quite strong growth," said Claes Folkmar, fund manager at Folksam who said he had sold down his Ericsson shares to a short position.

Orders in the three months rose 3 percent to 29 billion Swedish crowns ($4.03 billion) from a year ago, but fell 13 percent compared with the second quarter, because of lower demand from China where the authorities are cooling off capital spending in the fast-growing economy.

The merger of two big U.S. mobile operators Cingular and AT&T Wireless also reduced demand from North America, Ericsson said.

Investors had hoped orders would be on a par with sales, which totalled 31.8 billion crowns, in line with forecasts and up 14 percent on 2003 but 2 percent down on the second quarter.

Chief Executive Carl-Henric Svanberg played down the disappointing orders: "Don't read too much into it.  Orders fluctuate from quarter to quarter," he told a news conference.

Pre-tax profits for the three months rose to 7.0 billion Swedish crowns ($973 million), more than six times up on a year ago, and marginally above the average of analysts' forecasts.

The surge in profits comes from years of savage cost-cutting and a jump in demand now that telecoms operators can no longer put off spending on the new third generation (3G) networks for which they incurred huge debts in buying operating licences.

Market to slow down
Booming mobile subscriber growth, which will see a third of the world's six billion people using a mobile phone in 2006, has forced operators this year to start spending again.

Some have spent more than usual because of overdue network upgrades after years of underinvestment, but Ericsson said this effect was already tapering off.

Svanberg told a news conference that up to half of the 2004 market growth could stem from this extra spending effect.

"Therefore, compared with total growth in 2004, we expect the global market for mobile systems to show slight growth in 2005.  Excluding this catch-up effect in 2004 we estimate a moderate underlying market growth in 2005," Ericsson said.

Folkmar said the size of the catch-up effect was another setback as it meant a deeper market slowdown in 2005.  "I would not be surprised if growth were down to GDP next year," he said.

Analysts polled by Reuters had on average expected Ericsson's sales to grow 9 percent next year, while the company has previously quantified a "slight" growth forecast as being between 2 and 5 percent in dollar terms.

Gaining market share
For 2004, Ericsson repeated its view that the mobile networks market would show slight to moderate growth, earlier quantified as up to 9 percent, plus the catch-up spending.

Rival Nokia, which last week reported a 21-percent jump in third-quarter network sales in euros, raised its mobile networks market forecast to "slight to moderate" growth in euros this year from only "slight" growth.

Ericsson reported a 20-percent annual rise in third-quarter mobile network sales in terms of Swedish crowns.  "We believe we are steadily taking market share, step by step," Svanberg said.

Ericsson's gross margin eased to 47.1 percent in the third quarter from 47.8 percent in the second due to the seasonal dip in sales, but above analysts' expectations of 46.2 percent.

The operating margin, which hit all-time highs of 23.7 percent in the second quarter, also eased to 22.7 percent, but beat expectations of 21.2 percent.