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Ericsson looks to Europe and China for growth

By Sven Nordenstam and Simon Johnson

STOCKHOLM (Reuters) - A completion of large projects in the United States weighed on Ericsson's earnings in the fourth quarter, but the world's biggest maker of mobile networks said demand was picking up in Europe and China.

Ericsson shares rose 3 percent as the company reported improving underlying profitability and looked ahead to strong investment this year in 4G LTE networks that can cope with increasing data traffic from smartphones and tablets.

The drive for faster networks is brightening prospects for an industry that has suffered a decade-long price war started by Chinese firms Huawei and ZTE.

Sweden's Ericsson made a push for more business in Europe a couple of years ago that weighed on its results. But the projects it secured at the time are nearing completion and it is securing more lucrative business building network capacity.

Increasing the data power of existing networks using newer software tends to be more profitable than building radio masts and transmitters to extend geographical network coverage.

"We have gained market share (in Europe), which was the whole point and now we can upsell on that," Chief Executive Hans Vestberg told a conference call.

"We have had some larger projects in the U.S. which are a little bit slower, as well as some coverage projects. On the other hand there are new markets coming up. China is coming up, Russia has (also) been."

Ericsson shares, which have underperformed those of its sector peers in the past six months, were up 3.4 percent at 80 crowns at 1319 GMT.

The company has far to go to rediscover the profitability it once enjoyed. In 2005 and 2006, Ericsson's operating margins were above 20 percent. In 2013, the margin was 6.2 percent.

"There is still margin rebuilding going on throughout 2014, so I think that is the main positive for the share," said Exane BNP Paribas analyst Alexandre Peterc.

Peterc said he was unlikely to change his "outperform" rating and 95 crown price target for Ericsson stock.

OPERATING PROFIT MISSES FORECAST

Ericsson's earnings before interest and tax jumped to 9.1 billion Swedish crowns ($1.4 billion) in the fourth quarter from 4.8 billion in the year-ago quarter, excluding the company's joint ventures. The figure missed a mean forecast of 9.9 billion in a Reuters poll of analysts.

Its gross profit margin was 32.9 percent, excluding a patent deal with Samsung, against a mean analyst forecast of 32.7 percent and a margin of 32 percent in the third quarter. The increase in underlying profitability was due to a higher proportion of more lucrative contracts and the near-completion of low-margin European projects.

Ericsson's Networks unit has gradually recovered from the global economic downturn. But the end of large projects in the United States and Japan hit revenue in the fourth quarter.

Networks sales fell 1 percent despite a boost from the patent deal with Korea's Samsung.

The division's operating margin was a worse than expected 9 percent, compared to 10 percent in the third quarter.

This year, the boundless appetite of smartphone users for faster data is likely to underpin the Networks business.

Vodafone, the world's second-largest mobile operator and a big Ericsson client, has said it will spend 7 billion pounds ($11.6 billion) to boost coverage and accelerate its networks through March 2016.

Ericsson will also benefit from a massive rollout of 4G in China, but to a lesser extent than Huawei and ZTE. Total spending on 4G LTE networks in the country may reach $16 billion in 2014 [ID:nL3N0K61OP].

Fourth-quarter sales at Ericsson were 67.0 billion crowns, against a forecast of 69.3 billion. Sales and profits were boosted by a 4.2 billion crown patent deal with Samsung.

Ericsson proposed a dividend of 3.00 crowns per share, higher than the median forecast of 2.95 crowns per share.

(This story was corrected to fix spelling of Huawei in third paragraph)

(Additional reporting by Helena Soderpalm; editing by Tom Pfeiffer)

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