By Simon Johnson
STOCKHOLM (Reuters) - World No. 1 mobile network gear maker Ericsson posted second quarter operating profit well below expectations on Thursday, bruising hopes of a quick recovery at its core network unit.
In a quarter hit by a large one-off charge, sales and margins at Ericsson's networks unit were well below expectations, underlining competition from Chinese equipment vendors like Huawei as well as global economic gloom and currency headwinds.
"It is still a transitional quarter, it is still weak, networks' margins in particular," said Alexandre Peterc, analyst at Exane BNP Paribas.
"Obviously, expectations will have to be adjusted slightly downwards for weak margins in networks. But we will have to see how much of the pressure in the second quarter will carry through."
Ericsson's second-quarter earnings before interest and tax were 2.5 billion crowns ($380 million) compared to 2.1 billion in the year-ago quarter, including joint ventures, well short of a mean forecast of 4.3 billion in a Reuters poll of analysts.
Results were hit by a 0.9 billion crown one-off charge for divestments and higher than expected restructuring costs.
Ericsson shares were down 3.8 percent at 0534 GMT, underperforming the STOXX Europe 600 technology index.
After a decade of fierce competition from Chinese equipment vendors compounded by the long global economic slump, analysts had hoped more spending by operators on high-speed networks would push up Ericsson's profits this year.
The effects of Ericsson taking low margin contracts to win back customers in Europe in recent years, which further undermined margins, was also expected to fade out.
SECOND HALF PROMISE
The turnaround looks like taking longer than expected.
The networks unit posted sales growth, but the operating margin at the unit - which accounts for over 50 percent of sales - was flat year-on-year at 5 percent and down slightly from the first quarter.
"Our ambition is to get to 10 percent," Ericsson CEO Hans Vestberg said, without saying when the company would achieve this target.
Nokia's NSN network unit reports its second quarter results later in the day. Alcatel-Lucent reports on July 31. Sales Ericsson were flat year-on-year at 55.3 billion crowns against a forecast of 56.3 billion with the company blaming currency headwinds. Excluding the currency effect, sales rose 7 percent.
Ericsson pointed to an easing in pressure on margins in the second half.
"The business mix, with a higher share of coverage projects than capacity projects, started to shift slightly towards more capacity during the quarter," the company said.
Capacity projects, with a heavy software content, have higher margins than coverage projects - building networks in new places - where hardware predominates.
The gross margin was 32.4 percent versus a forecast 32.6 percent, up both sequentially and year on year.
"They reiterate the fact that gross margins will continue to gradually improve in the second half," said Exane BNP's Peterc. "That's the main buy story for Ericsson and that remains in place."
(editing by Niklas Pollard and Jon Boyle)