Ericsson's shares sank on Tuesday, as a set of solid quarterly results from the Swedish network operator failed to dispel fears over future profitability.

The company's 'B'-class shares sank 11.1%, to 66.80 Swedish kronor ($11.56), on Tuesday, in Stockholm. Sentiment in the stock was hurt by Vodafone's bleak outlook for the year, which sent shares in the network operator down 13.6%, in London.

"Sales were weaker than our forecast, but network operating margins were higher," said Janardan Menon, analyst with Dresdner Kleinwort. "We do not expect this margin upside to be sustainable due to a weaker revenue outlook in Europe and the U.S. vs. stronger revenues in India and other emerging markets."

Ericsson said quarterly profits had fallen 70.3% over the year, to 1.9 billion Swedish kronor ($320.1 million), while sales rose 1.9%; the results were positive overall, though not as surprising as in the previous quarter.

"With no major changes in the market environment, we still find it prudent to plan for a flattish mobile infrastructure market in 2008," said Ericsson Chief Executive Carl-Henric Svanberg, "and our focus on adjusting our cost base remains."

Although Ericsson said there was a lot of business activity and demand in emerging markets, with strong growth in India and "stable" development in China, the company is suffering from tough competition in these markets over products that have relatively low margins. Franco-American rival Alcatel-Lucent, the joint venture between Nokia and Siemens, even China's own Huawei are all competing with Ericsson and bringing down prices.

Western Europe, however, is thriving on cutting-edge third-generation (3G) mobile networks, with mobile users and operators chasing after the possibilities of data transmission and Internet access. These higher-margin products will bring Ericsson lucrative returns, but only when operators start spending on upgrades and expansions; analysts believe this will happen in 2009, when network capacity starts to burst at the seams.

"Bottlenecks will start occurring in wideband CDMA, in broadband traffic," said Per Ekstrand, analyst with Kaupthing, referring to a type of 3G network. "We already see that in the Nordic countries."

Ericsson's handset-making joint venture with Sony said last week that it would cut 2,000 jobs over the next 12 months, in a bid to cut costs and attempt to turn around its struggling business. The unit said its quarterly profits had fallen 97.3% over the year.

Source:forbes.com