Ericsson forecast strong demand for mobile broadband equipment in 2011 after a surge in fourth-quarter sales on the back of consumer demand for smartphones boosted growth for the first time in two years.

Shares in the world's biggest mobile network gear maker rose 4 percent to their highest level since September 2010 as sales topped all expectations.

Ericsson has long forecast that telecom operators would need to invest in networks to support an explosion in data traffic as tech-savvy customers surf the Internet on the go from their iPhone and or Galaxy Tab.

But the market has been slow to recover from the downturn with operators more focused on cost cuts than spending.

Maybe people in the market didn't believe growth would return to the sector, said Greger Johansson, analyst at Redeye. They finally showed some growth.

The positive outlook offset worries that the company's gross margin was under pressure from an increase in less profitable business in India and Europe.

There is still a bit of uncertainty about the gross margin and where the gross margin is going to land in 2011, but what you see is that the company is now witnessing a good return of traction with mobile broadband and growth is back, said Pierre Ferragu, analyst at Sandford Bernstein.

Ericsson saw its revenues rise 7 percent for comparable units and excluding currency effects in the fourth quarter. This was the first increase since the Jan-March period in 2009.

We expect the strong uptake for mobile broadband to continue in 2011, with number of mobile broadband subscriptions expected to double and hit one billion already this year, Ericsson Chief Executive Hans Vestberg said in a statement.

Sales totaled 62.8 billion crowns beating all forecasts in the poll. Ericsson's key Networks unit, its biggest revenue generator, reported sales growth of 14 percent year-on-year.

Ericsson shares were up 3.1 percent at 79.50 at 6:19 a.m. EST, outperforming the wider telecoms sector which was down 0.4 percent.

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Operating profit excluding joint ventures and restructuring in the seasonally strong quarter was 8.4 billion crowns ($1.28 billion), against analysts' 8.

It said the effects of a component shortage that hit sales in the second and third quarters last year had eased, but its gross margin was hurt by an increasing proportion of network rollout projects such as 3G networks in India and modernization work in Europe, which include more hardware and less high-margin software.

The gross margin slipped to 37 percent from 39 percent in the July-Sept period and its operating margin was unchanged at 13 percent.

Chief Financial Officer Jan Frykhammar said modernization projects and the 3G rollouts were important platforms for winning future business and that the company would continue to protect margins.

We work hard with efficiencies and mitigating actions, he said.

Rivals Nokia Siemens Networks, a joint venture between Finland's Nokia and Germany's Siemens report on Jan 27 and Alcatel Lucent on Feb 10.

(Additional reporting by Mia Shanley, Johannes Hellstrom, Niklas Pollard, Olof Swahnberg, Patrick Lannin and Helena Soderpalm; editing by Sophie Walker)

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