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Ericsson keeps network turnaround hopes alive

By Simon Johnson

STOCKHOLM (Reuters) - U.S. investment in superfast 4G infrastructure helped Ericsson's main network equipment business grow in the first quarter, supporting hopes the market for mobile equipment is expanding again after a lean 2012.

The Sweden-based group's networks unit, which accounts for more than half of total sales, has been under pressure and last year saw sales drop 12 percent because of the economic downturn and competition from China.

But the fourth quarter showed signs of an improvement which has carried through into this year.

Headline results at the world's biggest mobile equipment maker undershot expectations due to heavy - but unprofitable -network rollout activity, restructuring costs and delays to building high-capacity 4G networks in Latin America.

But sales in the network unit grew for a second straight three-month period and Ericsson stuck to its forecast that low-margin business there would gradually disappear through this year, boosting profitability.

"I would still be a buyer of the share going into the second-half margin improvement," said Alexandre Peterc, analyst at brokerage Exane BNP Paribas.

North America, where operators are ahead of the curve in 4G investment and where arch Chinese rival Huawei is excluded over security concerns, drove 7 percent currency-adjusted sales growth for the network unit.

Ericsson's shares are up 17 percent this year, outperforming the Stockholm blue chip index's 5 percent increase on the back of expectations investments in super-fast, high- capacity 4G services will boost profits.

Sales in North America of older-style systems based on legacy technology known as CDMA continued to decline, while sales of older equipment also declined in China, where Ericsson has a limited presence in 3G and where 4G has yet to be launched.

QUITE SEVERE

"We had yet another quarter of growth and that includes the CDMA decline, which was quite severe," CEO Hans Vestberg said. "We had high business activity ... geared to meeting the increased data and video (traffic) in the networks."

The market for mobile equipment shrank around 7 percent in 2012, but some analysts see a return to growth this year. Forecasts have ranged from a bullish 13 percent by Infonetics Research to just 2.3 percent by Gartner.

Ericsson's continued growth in networks contrasted with rival Nokia Siemens Networks, which saw sales down 5 percent in the first quarter.

Alcatel Lucent reports on Friday.

Operating profit excluding joint ventures and one-offs fell to 2.1 billion crowns from 2.8 billion a year ago, lagging a mean forecast of 3.0 billion in a Reuters poll.

Its shares were down 0.5 percent at 1025 GMT.

Sales grew 2 percent to 52 billion crowns against a forecast 53.5 billion. Global services - the group's second-biggest unit - came in below expectations, which Ericsson said was due to a delay in the roll-out of 4G networks in Latin America.

That unit's operating margin was half that of a year earlier, while a high level of loss-making network rollouts weighed on the company's overall gross margin, which was also hit by restructuring charges as the company slims down its networks unit.

The gross margin was 32 percent in the quarter against a forecast of 32.2 percent, but Ericsson said margin pressure should ease later this year. ($1 = 6.6191 Swedish crowns)

(Additional reporting by Johannes Hellstrom; Editing by Alistair Scrutton and David Holmes)

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