Ericsson Flatlines in 2013, Trails Huawei
A strong fourth quarter, helped by the recent royalty payments agreement with Samsung, helped Ericsson deliver full-year 2013 results that, in many respects, matched those of 2012. As expected, though, that wasn't enough to stop Huawei taking the Swedish vendor's crown.
Helped by the Samsung Corp. payments, Ericsson AB (Nasdaq: ERIC) reported fourth-quarter revenues of 67 billion Swedish kronor (US$10.3 billion), almost exactly the same as a year earlier, but up by a whopping 27% from the tough third quarter, when the company admitted that sales volumes were under pressure. (See Ericsson Suffers Sales Pressure.)
Fourth-quarter margins and profits were also considerably better than in the third quarter, and much better than a year earlier: Ericsson's management team had long talked about how margins would improve once some major projects moved from initial rollouts to more profitable capacity upgrade cycles, and that now appears to be happening.
Table 1: Ericsson Q4 2013 Key Financials
|In SEK billions||Q4 2013||Q4 2012||Change||Q3 2013||Change|
|Gross margin||37.1%||31.1%||Up 6 percentage points||32.0%||Up 5.1 percentage points|
|Operating margin (excluding JVs)||13.5%||7.1%||Up 6.4 percentage points||8.1%||Up 5.4 percentage points|
The full-year numbers show a similar pattern, with revenues of SEK227.4 billion ($34.95 billion) pretty much identical to 2012, while margins reflected the transition through the year.
Table 2: Ericsson Full-Year 2013 Key Financials
|In SEK billions||Full year 2013||Full year 2012||Change|
|Gross margin||33.6%||31.6%||Up by 2 percentage points|
|Operating margin (excluding JVs)||7.9%||9.7%||Down by 1.8 percentage points|
Overall, the numbers were not quite as good as expected by financial analysts, but CEO Hans Vestberg (who is sticking with his current job ) is confident that margins can continue to improve, and the company announced a dividend of SEK3 ($0.46) per share, news that helped give Ericsson's share price a near 2.8% lift to SEK79.55 on the Stockholm exchange. (See Ericsson CEO Snubs Microsoft Top Job Too?.)
And the flat annual sales also means Ericsson has lost its "King of the Telecom Vendors" crown to rival Huawei Technologies Co. Ltd. , which has already announced preliminary full-year revenues for 2013 of nearly $40 billion. Ericsson had clung onto its #1 position by a hair's breadth last year. (See Huawei's Operating Profit Soars and Ericsson Retains Its Crown – Barely.)
The big question for Ericsson, though, is: what next? Is there enough business to sustain its current sales levels?
Vestberg has already talked (in the third-quarter report) about how the major US 4G network rollouts have been largely completed and that investments in Japan have scaled down. There is a great deal of mobile infrastructure activity in China, but Ericsson's slice of that pie will be minimal in terms of market share, though not insubstantial in terms of income. (See Report: Huawei, ZTE Win Big at China Mobile and Alcatel-Lucent Makes 4G Gains in China.)
Can Europe deliver new business? "Over time, we expect the telecom industry in Europe to improve, driven by macroeconomic development and a recent investment announcement made by one of the large operators," noted the CEO, referring to the plans by Vodafone Group plc (NYSE: VOD) to bolster its European infrastructure. (See Vodafone Ups 'Project Spring' Capex to $11B+.)
Of course, Ericsson isn't just a network gear play: Its Global Services division delivered nearly 43% of total revenues in 2013 and accounts for 64,000 of its total 114,340 staff, while its Networks division generated nearly 52% of full-year sales. Support Solutions, which comprises its Service Provider Information Technology (SPIT) and video/IPTV assets, accounted for the remaining 5%.
And while Support Solutions is a relatively small part of the business, Vestberg believes this is where Ericsson can generate new growth. Having splashed out on multiple acquisitions, most notably that of Telcordia in the OSS space and Mediaroom in IPTV, he believes his company can benefit from the ongoing demand for video capabilities from network operators and from the need for updated OSS and BSS systems to support 4G LTE and the shift to more virtualized networks. (See Ericsson's Network Slicing: It's Far Out, Man, Ericsson CTO Bangs SDN Drum, Say Goodbye to Telcordia, and Ericsson Buys Microsoft's IPTV Unit.)
Ray Le Maistre, Editor-in-Chief, Light Reading