The world's biggest maker of mobile phone networks, Ericsson, beat expectations with first-quarter profits on Friday and said the wireless infrastructure could rebound with nine percent growth in 2004.
The Swedish company's adjusted pre-tax profit of 4.3 billion crowns ($558.2 million) beat forecasts for 3.47 billion thanks to deep cost cuts and a recovering market as telecoms operators increased investment after almost three years of declines.
Ericsson reported 3.5 billion crown loss a year earlier. "It looks really strong with an amazing profitability. The gross margin is better than I could have expected. At first glance it looks like a flawless report," Urban Ekelund, analyst at Redeye research house.
Ericsson shares dropped two percent to 23.80 euros in early trading, underperforming a 0.3 percent gain for the Dow Jones European technology index.
Since the start of the year Ericsson shares have rocketed 85 percent, beating the tech index by 81 percent. Analysts had warned that the company needed to forecast strong market growth to support its current share value and some were advising clients to sell the stock and profit from the recent gains.
Chief Executive Carl-Henric Svanberg deepened cost cuts when he took over early last year, reducing Ericsson's workforce by more than half to 47,000, and growing profits since the third quarter even as revenues have grown only modestly.
"The margins are very important and are going up, which shows the company is on the right path," Anders Jarheim, fund manager at Ohman Kapitalforvaltning, which has Ericsson shares and funds under management of $2 billion.
Sales rose nine percent to 28.1 billion crowns, in line with expectations and the gross margin was 44.7 percent, above expectations of 42.8 percent. Svanberg told journalists he expected the first-quarter margin could be maintained throughout the year. Orders exceeded sales.
"We estimate that the global mobile systems market in 2004, measured in dollars, will show slight to moderate growth compared to 2003," Ericsson said in a statement. The company, which previously expected a flat or slightly growing market, specified that growth could be between three and nine percent.
Mobile operators are increasing spending on their networks after several years of underinvestments when they were ridding their balance sheets of huge debts left over from expensive takeovers and acquiring licenses to run fast third generation (3G) networks for mobile multimedia services.
"(The) improved outlook is mainly driven by growing traffic, network expansions and continued 3G rollout. There is also an element of operators catching up on previous years' limited investments," Ericsson said.
Worldwide around 1.3 billion consumers use a mobile phone and that number is expected to rise to two billion within three to four years. Consumers in mature markets such as Europe, Japan and North America are beginning to demand faster networks for their picture phones and wireless computers.
Top competitors Nokia and Motorola also showed strong first quarter growth in mobile network business but Nokia kept its outlook of only "slight" growth in euros.
Ericsson said its annualised operating expense rate fell to 35 billion crowns in the quarter from 37 billion in the fourth quarter, and versus a 33 billion target for the third quarter of this year.
