Shares in mobile telecom gear maker Ericsson rose sharply on Friday, defying weak first-quarter results, as investors took heart from falling costs and prospects for a recovery.
Ericsson shares were up 5.6 percent at 5:11 a.m. ET, making them the best performers in the European technology sector <.SX8P>.
The market is buying the bottom of the cycle, said Pierre Ferragu, analyst at Sanford Bernstein.
What the quarter said is that Ericsson has pricing power, can increase its gross margin, Ferragu said. The cost cutting is paying off... and you buy on that.
The telecom equipment market contracted sharply in 2009 as the global downturn forced phone companies to keep a tight rein on costs. Ericsson said little had changed in the first three months of the year.
Its sales fell 9 percent year-on-year, the same pace as rival Nokia Siemens Networks, which reported on Thursday.
The majority of analyst forecasts are for meager market growth at best in 2010 and competition -- especially from Chinese vendors -- is also set to remain fierce.
However, Ericsson has dramatically reduced its cost base to drive up margins and analysts said the first quarter could mark the low point for the sector.
The gross margin was excellent, and the comments they made at the press conference suggest that a lot of that was sustainable, Stuart Jeffrey, analyst at Nomura Securities.
High gross margins as and when a cyclical recovery comes through do give you more scope to drive earnings, even if their revenue in Q1 suggests the turnaround is taking longer than hoped for.
Ericsson saw its gross margin rise to 39 percent, up from 36 percent a year earlier.
Operating profit, excluding joint ventures and restructuring costs, was 4.5 billion Swedish crowns ($625 million) against a forecast of 4.8 billion in a Reuters poll of analysts and 4.7 billion in the year-ago period.
Sales were 45.1 billion crowns, 7 percent less than the market expected. Sales in the key network unit were down 14 percent year-on-year, hit particularly in emerging markets.
Sales were down 15 percent in China and North East Asia and 43 percent in India. China was Ericsson's second biggest market in 2009 after the United States with India in third place.
You know that emerging markets are coming back sooner or later, the only question is when emerging markets are coming back, what is the margin doing? said Sanford Bernstein's Ferragu.
He said that including joint ventures, he expected Ericsson's operating margin to rise to around 13 percent toward the end of the year from around 9.5 percent in the first quarter, boosted by a seasonal improvement in core business and better results at Sony Ericsson and ST-Ericsson.
Rival Nokia Siemens Networks repeated on Thursday it expected no growth in the equipment market this year in euro terms. Cost cuts helped it swing to a small, but unexpected, profit in the first quarter.
(Additional reporting by Helena Soderpalm, Mia Shanley and Bjorn Rundstrom; Editing by Mike Nesbit)