Ericsson, the world leader in mobile phone network equipment, announced a 70% collapse of net profit for the second quarter on July 22 and a two-thirds fall in operating margins. And it warned of a weak 2008 outlook, sending its stock plunging.
The group said it had been hit by the slowdown in western Europe, weakness of the dollar and restructuring charges.
Net profit fell to 1.9 billion kronor (US$ 320.6 million) from 6.4 billion kronor in the same period of last year. But sales rose by 2% to 48.5 billion kronor. The company, which has been restructuring its activities since the last quarter of last year, said that sales on a constant exchange rate basis had risen by 7%.
Ericsson's sales in its main business unit, networks, slipped by one percent while its multimedia division saw sales climb by 16% and its professional services unit rose by 7%. However, operating profit fell by 69% to 2.889 billion kronor.
"The overall business activity shows stable development," Ericsson chief executive Carl-Henric Svanberg said, noting that sales continued to pick up in the U.S. but remained weak in western Europe, its main market.
Since 2007, Ericsson has experienced rapid growth on emerging markets with new rollouts. But the group has seen lower margins on these markets, due to rising competition and because new rollouts are costlier and bring in less money than expansions of existing networks. Meanwhile, on mature markets such as western Europe, network expansions and updates are declining.
The company, one of Sweden's biggest industrial groups and employers, is therefore in the process of revamping its operations in a bid to cut expenses by 4.0 billion kronor a year with full effect in 2009. Restructuring costs came in at 1.8 billion kronor in the second quarter.
Looking ahead, Svanberg said that "with no major changes in the market environment, we still find it prudent to plan for a flattish mobile infrastructure market in 2008 and our focus on adjusting our cost base remains."
Copyright Agence France-Presse, 2008