The profit warning was due to an unexpected drop in revenue from mobile network expansions, it said.
The Ericsson share price plunged by 25 percent to 19.82 kronor in early trade on the Stockholm stock exchange, with ripple effects hitting other European telecoms operators such as Nokia and Alcatel-Lucent, which fell by 3.63 and 3.48 percent respectively.
“The unexpected development in the quarter is mainly due to a shortfall in sales in mobile network upgrades and expansions which resulted in an unfavourable business mix that also negatively affected group margins,” Ericsson’s chief executive Carl Henric Svanberg said in a statement.
“All other businesses performed as expected,” he said.
The company said it now expected sales of 43.5 billion kronor ($6.76 billion), operating income of 5.6 billion kronor ($871 million) and negative cash flow of 1.6 billion kronor (249 million dollars) in the quarter.
“This is below the company’s own as well as current market expectations,” Ericsson said.
Market expectations were for sales of 45.4 billion and operating income of 9.1 billion, according to a survey by SME Direkt.
In the third quarter last year, Ericsson posted sales of 41.3 billion kronor and operating income of 8.8 billion kronor.
Ericsson, which will release its full third quarter report on October 25, said it expected sales in the fourth quarter to be in the range of 53-60 billion kronor and operating margins in the mid-teens, including its mobile phone joint venture Sony Ericsson.
For 2008, it predicted the current conditions would prevail.
Telecoms analyst Greger Johansson at Redeye said the announcement was “a very negative surprise.”
“The most serious thing is not the sales but rather that margins are so low and are going to continue to be next quarter too,” he told Swedish news agency TT.
“The company has had a series of strong quarters so this profit warning comes as a total surprise. You can see a combination of the plunging dollar and price pressure as partial causes of this collapse,” he said.
In its statement, Ericsson said its networks business continued to develop most rapidly in regions where new network rollouts and breakthrough contracts were predominant. But, it noted, “this is where competition is intense.”
Usually margin pressures from these business activities is offset by sales of higher-margin network expansions and upgrades.
However, “this quarter, sales of these higher margin offerings did not materialize as much as in previous quarters.”
“The effect of market dynamics is always a matter of judgment. This quarter we have underestimated the effects,” Svanberg said.
High margin software sales were also lower than normal, he added.