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Analysts were underwhelmed by Ericsson's performance, partly due to the decline in gross margin as reported by President and CEO Carl-Henric Svanberg in a call with analysts (full transcript here):

If we just finish off with a few words on the financial highlights. Sales reached SEK45.7b [$6.01b]. And the quarter came in slightly above normal seasonality, I would say. We were up 16% year over year in the quarter, and some 15% for the full year. The gross margin came down another percent from the third quarter, which is a dilution effect from, a mathematical dilution effect with a 29% growing service business.

That brings the gross margin down, but not necessarily the operating margin. We continue our work on operational excellence in all aspects of our business. And we could see encouragingly here that where our business was growing 15%, our operating expenses grew by some 5%, and continue to come down as a percentage of sales. And that is, of course, an important work that needs to continue.

Analyst Response:

Mark Sue, RBC: Downgraded from "outperform" to "sector perform." The target price has been reduced from $38 to $37 due to competitive pressures on margins and concern regarding wireless infrastructure growth in the second half of 2006.

Wojtek Uzdelewicz, Bear Stearns: Maintained "outperform" rating and increased target price to $38 due to strong sales, and noting expected additional decline in margins.

Inder M. Singh, Prudential Financial
: Reiterated his "neutral weight" rating and sets target price to $37. Earnings upside was driven by low tax rate, and expects declining margins going forward.

T. Michael Walkley, Piper Jaffray: Maintained "market perform" rating, while raising his estimates for the company.

Source: Ericsson Performance Underwhelms Analysts (ERICY)