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Ericsson seeks more cost cuts as slowdown bites

By Simon Johnson and Olof Swahnberg

STOCKHOLM (Reuters) - Telecoms equipment maker Ericsson reported a 42 percent drop in core profit and promised more cost cuts to protect itself from tough competition and slowing orders.

Telecom gear makers are under stress from price pressures and slower spending by the operators that are their clients, factors that Ericsson - the world's number one mobile network equipment maker - said would continue in the short term.

Its shares were down 4.4 percent at 57.85 crowns at 0927 GMT (0527 EDT) against a 0.8 percent decline in the STOXX Europe 600 Technology Index. The stock has plummeted since early 2011 and hit a 3-1/2 year low of 55.9 crowns in July.

"Network sales continue to be very slow and ... continue to weigh on gross margin," said Pierre Ferragu, analyst at brokerage Sanford Bernstein. "To me it is just a question of waiting for a better economic environment."

Ericsson said sales in its key networks unit fell 17 percent year-on-year, reflecting lower sales in parts of Europe, a continued decline in older standard networks in the United States and China and lower 3G sales in Russia.

It said the global economic slowdown and political unrest had led to more cautious operator spending and added that profitability was not satisfactory, despite already having made unspecified savings over the last year, signaled by a 7 percent drop in operating expenses.

Ericsson has seen margins shrink having taken more low-value contracts in Europe that have helped it gain market share but hurt profitability.

"We will continue proactively to work with the cost and efficiency," Chief Executive Hans Vestberg said. He gave no details on planned cost-cutting measures.

Vestberg, however, remained upbeat about Ericsson's long- term prospects, noting 1 billion smartphones such as Apple Inc's iPhone had been sold and new 4G handsets were being launched that would drive data traffic and network demand.

"We see ... mobility, broadband and cloud services ... definitely going to be used in an big way and transform not only us as users, but also industries and our society for years to come," he said.

Ericsson has forecast that there will be more than 50 billion devices connected by the Internet by 2020.

COST SAVINGS

Near-term trends however are less positive.

Sprint Nextel Corp this week lowered its capital spending forecast for the full year, echoing measures by rivals Verizon and AT&T.

Equipment suppliers like Ericsson and rivals Nokia Siemens Networks and Alcatel-Lucent have been forced to find savings. Alcatel-Lucent plans to axe 5,490 jobs worldwide as part of a cost-saving program.

Nokia Siemens is restructuring - including cutting around a quarter of its staff - to find 1 billion euros in cost savings by the end of next year.

The slowdown has also hit Chinese equipment firms.

China's ZTE Corp reported a $310 million quarterly net loss this week, its first since listing in Hong Kong in 2004, and arch-rival Huawei Technologies Co Ltd, the world's second-largest telecom gear maker, is also grappling with weakening sales.

ZTE and Huawei also took a knock when a U.S. congressional report urged American firms to stop doing business with them due to potential security concerns.

"It reflects the situation in the sector well when (Ericsson) the market leader has an operating margin of 6.7 percent," said Bengt Nordstrom, chief executive of Nordic telecoms consultancy Northstream.

In 2006, the operating margin was about 20 percent.

"Even if price competition has eased somewhat, the development for infrastructure suppliers will not be favorable until the market has consolidated," Nordstrom said.

Ericsson's third-quarter earnings before interest and tax, excluding loss-making joint ventures but including restructuring charges, fell 42 percent to 3.7 billion crowns ($552 million) versus 6.3 billion in the same quarter last year and a mean forecast of 3.4 billion in a Reuters poll.

Restructuring charges were lower than expected during the quarter, accounting for the profit overshoot.

The gross margin fell again to 30.4 percent from 35 percent a year earlier and a forecast of 31.7 percent. Sales were 54.6 billion crowns against a forecast 55.3 billion. ($1 = 6.6998 Swedish crowns)

(Editing by David Cowell and David Holmes)

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