Ericsson Q3 seen hit by parts shortage, slow market

Top mobile telecoms equipment maker Ericsson is seen posting flat core profit when it reports third-quarter results this week after a component shortage, competition and sluggish demand held back sales.

The telecoms equipment market has begun to show signs of life after the global downturn, but mobile and fixed line operators remain cautious and surging mobile data traffic has yet to lead to capacity-driven network upgrades.

Analysts expect a slight rebound in turnover for Ericsson as Asian markets - particularly China and India --have brightened during the quarter.

But margins will be squeezed by tough competition from the likes of China's Huawei and ZTE and an increasingly aggressive Nokia Siemens Networks.

"On the revenue side, a quarter with slight growth ... but the overall picture would be that income is coming under pressure due to sales mix and competition," said Morten Imsgard, analyst at Sydbank.

After weathering the global downturn, thanks in part to cost cuts of more than 15 billion crowns ($2.25 billion) over the last 18 months, Ericsson has struggled to regain momentum in a tough market.

For Ericsson bulls, global economic recovery, data traffic growth and continued strong demand for outsourced services should soon put Ericsson on the growth path again.

Others see reason to be cautious.

In July, Ericsson CEO Hans Vestberg said the mobile equipment market was not growing and many analysts believe a recovery will be slow in coming.

Price competition is getting fiercer and Ericsson's share of the mobile equipment market shrank in the second quarter, according to researcher Dell'Oro.

Additional problems are a strengthening crown and a shortage of components that Ericsson said sliced 3-4bn crowns off sales in the second quarter.

How quickly the parts shortage, that also hit Nokia Siemens Networks and Alcatel-Lucent, eases remains to be seen. Alcatel-Lucent said sees component shortages stretching into next year.

"If they were to sound at all positive ahead of the fourth quarter and 2011 concerning the component shortage, that would be interesting," Nordea analyst Daniel Djurberg said.

With considerable uncertainty in the outlook, Ericsson's shares have broadly tracked the market this year.

Analysts see the company's sales up 4.4 per cent on an annual basis at 48.5bn crowns in the third quarter and just ahead of the second quarter's 48bn.

Profit excluding joint ventures and restructuring is expected to be 5.5bn crowns, flat year-on-year and just ahead of the 5.3bn it made in the second quarter this year.

Ericsson trades at around 12 times earnings per share on a forward 12-month basis against 12.3 times for Nokia, 23.6 times for Alcatel Lucent and 13.1 times for Cisco Systems, according to Thomson Reuters StarMine.