Ericsson warns Q3 earnings to fall short

STOCKHOLM, Oct 16 (Reuters) Telecom equipment leader Ericsson issued a profit warning on Tuesday, saying third-quarter earnings would be less than it and the market had expected due to a shortfall in mobile network upgrades.

Ericsson, the world's biggest mobile network maker, said its preliminary operating earnings fell to 5.6 billion Swedish crowns (6 million) from a year-ago 8.8 billion.

A Reuters survey of 33 analysts had predicted 8.9 billion crowns in operating earnings, and early indications from the market were that Ericsson would open down 10 to 15 percent.

''The unexpected development in the quarter is mainly due to a shortfall in sales in mobile network upgrades and expansions which resulted in an unfavorable business mix that also negatively affected group margins,'' the firm said in a statement.

Thomas Langer, analyst at West LB, said the warning pointed to deeper trouble at Ericsson than just the past few months.

''I think it's a major disaster and unfortunately it's more than a Q3 issue,'' he said. ''My interpretation is that mix of sales in the market is likely to prevail in 2008 -- this is the big, bad news.'' SEB Enskilda analyst Mats Nystrom said the report will unsettle investors.

''I think the equities market will see this as worse than the situation after the first quarter 2006 when the operating margin went from 22 to 17 and caught everybody by surprise,'' he said, ''''Now it happens again, with even greater force.'' Ericsson finished on Monday at 26.38 crowns. The shares had been climbing from a 2007 low of 23.64 set in mid-August but they are still down from 27.7 at the start of the year.

EARLY WARNING Ericsson was due to report earnings on Oct. 25 but it issued preliminary figures ahead of time on Tuesday.

It said net sales rose 6 percent to 43.5 billion crowns, compared with market forecasts for 45.5 billion.

Gross margins fell to 35.6 percent from 38.2 percent a year earlier, far short of the 42.5 percent expected by the market.

Income after financial items fell 37 percent to 5.6 billion crowns from 8.9 billion a year earlier. The market expected net earnings of 6.2 billion crowns.

''Ericsson's networks business continues to develop most rapidly in regions where new network rollouts and break-in contracts are predominant,'' the company said. ''This is where competition is intense as it builds footprint for long-term profitable growth.'' The company said margin pressures in these areas to date were offset by higher-margin sales from network expansions and upgrades, but that those had recently dried up.

''Such expansions and upgrades have a short sales cycle and builds during the quarter. This quarter, sales of these higher margin offerings did not materialize as much as in previous quarters. High margin software sales are also lower than normal,'' the company said.

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