By Sven Nordenstam and Olof Swahnberg
STOCKHOLM (Reuters) - A recovery in Ericsson's <ERICb.ST> network equipment business pointed to strong results for the rest of the year, propelling its shares toward their biggest daily gain in more than three years.
In China, Ericsson is selling equipment for a massive rollout of fourth-generation mobile networks. In developed markets, it is benefiting from capacity upgrades as network operators cope with a surge in mobile data traffic.
Ericsson expects recent contract wins to boost revenue during the second half of the year.
"To us, industry fundamentals will strengthen as mobile broadband networks mature, allowing Ericsson and its peers to present higher profitability," ABG Sundal Collier said in a research note, repeating a "buy" rating on Ericsson shares.
Comparable sales in networks grew 5 percent to a forecast-beating 29 billion crowns, the fastest growth for the unit in a year, following a 10 percent drop in the first quarter.
"After a slow start of the year, we are executing on previously awarded 4G/LTE contracts in Mainland China and Taiwan," Chief Executive Hans Vestberg said on Friday.
Ericsson's figures bode well for smaller peers Nokia <NOK1V.HE> and Alcatel-Lucent <ALUA.PA>, which report earnings this month. Demand was robust in North America, where Alcatel-Lucent is particularly present.
Ericsson shares were up 8.1 percent at 0943 GMT (5.43 a.m. EDT) . Shares in Finland's Nokia were up 2.6 percent whereas Paris-based Alcatel-Lucent shares rose 4.0 percent, putting the trio among the top six performers in the European FTSEurofirst 300 index <.FTEU3>.
Operating income was 4.0 billion Swedish crowns ($585 million) compared to 2.5 billion in the year-ago quarter, beating a mean forecast of 3.7 billion in a Reuters poll of analysts.
Sales were 54.8 billion crowns against a forecast of 52.5 billion, down by 1 percent from the year-ago quarter on a comparable basis - a much smaller decline than the 7 percent fall in the first quarter.
Ericsson's gross margin, a measure of underlying profitability which is keenly watched by analysts, was 36.4 percent against a mean forecast of 35.4 percent.
Nokia reports results on July 24, and Alcatel-Lucent a week later.
(Additional reporting by Leila Abboud in Paris and Vikram Subhedar in London; editing by Tom Pfeiffer)