Shares in telecoms equipment maker Ericsson plunged more than 29 percent on Tuesday, their biggest intraday fall on record, after the firm said third-quarter earnings were well short of expectations.
Ericsson, the world's biggest mobile network maker, said in a preliminary report its operating earnings dropped 36 percent to 5.6 billion Swedish crowns ($876 million) from a year-ago 8.8 billion, on disappointing sales of upgrades and expansions.
A Reuters survey of 33 analysts had forecast 8.9 billion crowns in operating earnings. The news landed hard on shares in rivals such as Nokia and Alcatel-Lucent and dragged the entire Swedish stock market down nearly 4 percent.
I think it's a major disaster and unfortunately it's more than a Q3 issue, said Thomas Langer, analyst at West LB, which cut Ericsson to reduce from buy.
He said the warning pointed to deeper trouble at Ericsson than just the past few months.
My interpretation is that mix of sales in the market is likely to prevail in 2008 -- this is the big, bad news.
The company blamed its woes on an unfavorable business mix.
The unexpected development in the quarter is mainly due to a shortfall in sales in mobile network upgrades and expansions which resulted in an unfavorable business mix that also negatively affected group margins, it said in a statement.
Only last month, Ericsson executives painted a rosy picture at an investors' conference in London, saying the company was poised to grab an even bigger slice of the markets it targets.
This represents a significant change in tone from management, contrasting with the recent commentary of last month's investor day, Cazenove said in a note to clients. It said it was retaining an underperform rating on the stock.
Ericsson Chief Executive Officer Carl-Henric Svanberg told a hastily called news conference there had been more business than usual in network rollouts, which have lower margins.
We could have elaborated more on the dynamics and understood the consequences ourselves a bit better, Svanberg said.
He said the company had only received preliminary results internally a day earlier. Ericsson had been slated to release results on October 25. It said it will issue a final report then.
Ericsson shares at 0946 GMT were down 29.1 percent at 18.70 crowns. The previous intraday record fall was 27.8 percent on October 20, 2000 after the bursting of the tech stocks bubble.
Tuesday's collapse wiped out all the gains from a modest rally since mid-August and sent them to a new low for the year. They started 2007 at 27.70 crowns.
Ericsson said net sales rose 6 percent to 43.5 billion crowns, compared with market forecasts for 45.5 billion.
Gross margins fell to 35.6 percent from 38.2 percent a year earlier, far short of the 42.5 percent expected by the market.
Income after financial items fell 37 percent to 5.6 billion crowns from 8.9 billion a year earlier.
Ericsson's networks business continues to develop most rapidly in regions where new network rollouts and break-in contracts are predominant, the company said. This is where competition is intense as it builds footprint for long-term profitable growth.
The company said margin pressures in these areas to date were offset by higher-margin sales from network expansions and upgrades, but that those had recently dried up.
Asia Pacific showed a serious deterioration with sales down 28 percent to 12 billion crowns from 16.6 billion in the prior three months. They were up 3 percent from a year earlier.
Western Europe, narrowly the biggest source of revenue, reported 12.3 billion crowns in sales, down 1 percent from the second quarter and up 7 percent from a year before.
Ericsson's networks division represents the lion's share of its business and this accounted for the earnings slippage.
The company said its multimedia business grew 31 percent from a year earlier and operating income was slightly above the breakeven level. Its professional services division grew 26 percent from a year earlier and was outpacing the market.
(Additional reporting by Niklas Pollard and Helena Soderpalm)