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Ericsson Flatlines in 2013, Trails Huawei

Ray Le Maistre
1/30/2014
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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
Revenues 67 66.9 0% 53 27%
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
Net income 6.4 -6.3 -- 3 114%

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
Revenues 227.4 227.8 0%
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
Net income 12.2 5.9 105%

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

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R Clark
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R Clark,
User Rank: Blogger
1/31/2014 | 10:03:38 AM
Re: Ericsson's still top
Innovation could be an interesting challenge for Huawei. Its R&D budget now has to support three lines of business. 
Ray@LR
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Ray@LR,
User Rank: Blogger
1/31/2014 | 4:22:20 AM
Re: Ericsson's still top
Indeed there are many ways to look at this, and each is only a guideline of relative strengths and industry clout -- to what extent, for example, should (or can!?) we extract Ericsson's revenues from the broadcast industry?

Ultimately the key thing to consider is whether a company is profitable, growing and involved in key areas of innovation, whether a $40 billion, $4 billion or $40 million turnover company. 
R Clark
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R Clark,
User Rank: Blogger
1/30/2014 | 11:28:19 PM
Ericsson's still top
Huawei is still quite a way behind Ericsson. Its guidance for 2013 FY is around $39.5bn. In the previous two years the share held by carrier, enterprise & device respectively has been stable at 73%, 5%, & 22%.

At that rate, it did around $29bn in carrier revenue in '13.

But its handset group had a massive year, with unit sales up 68%, so  likely its share of total revenue also went up. Even with the China 4G rollouts peaking this year and next, it's hard to see Huawei overtaking Ericsson in  the foreseeable.





 

 
Carol Wilson
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Carol Wilson,
User Rank: Blogger
1/30/2014 | 11:44:30 AM
Re: Global Services buffer but how long will that be enough?
I think Ericsson is counting on doing a fair amount of business helping service providers get to SDN/NFV. But then, so is Huawei. 
Sarah Thomas
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Sarah Thomas,
User Rank: Blogger
1/30/2014 | 10:45:40 AM
Re: Global Services buffer but how long will that be enough?
Just spoke with Johan Wiberg, Ericsson's small cell lead, and he reiterated how happy Ericsson is with its Q4 results. He says:

"Our core businesses are getting more and more solid in terms of profitability. We have one-time expenses related to Samsung, but put that back into the numbers, and they are extremely strong...

We feel extremely strong in our range of business and in our traditional core network business. We are investing in new areas, IP and SDN...We are really encouraged by big customers who are telling us Ericsson can be disruptive in the IP space. And SDN will restructure the networks. We are reallocating more funds in R&D to SDN."
pjbclarke
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pjbclarke,
User Rank: Lightning
1/30/2014 | 9:36:59 AM
Huawei Ericsson sales comparison
One thing to note is that Huawei's results announced so far include enterprise and handsets. Ericsson divested its handsets last year so will be interesting to compare Huawei's real telco infrastructure numbers with ericssons in a few months
Ray@LR
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Ray@LR,
User Rank: Blogger
1/30/2014 | 9:09:38 AM
Global Services buffer but how long will that be enough?
As we've discussed before, Ericsson does not have to rely on selling gear to make its living - the long-time commitment to supporting services has really paid off, as it has for NSN too.

So for the time being, a combo of network gear + support services is fine.

What all of the big vendors need to consider is -- when will their current portfolios be insufficient for a going concern? What will the impact of virtualization/SDN/NFV be on all their product sets and strategies - and staff.

Telco companies need people with IT smarts and they need 'data scientists' -- hiring them might be another matter. 
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