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Share price leaps as further customer investments in mobile network capacity helped Ericsson boost its margins in the second quarter.

Ericsson Leaps on Q2 Margin Boost

Ray Le Maistre
7/18/2014
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Swedish giant Ericsson reported solid second-quarter financials Friday morning, the highlight of which was the consistent margin improvement driven by capacity (rather than coverage) investments by its operator customers.

Ericsson AB (Nasdaq: ERIC) spent much of 2012 and 2013 talking about how it was helping operators roll out new networks, a long-term and lower-margin exercise, but the company always said that would be followed by higher-margin capacity investments. And that's how it has turned out: The unknown, of course, is the duration and scale of those capacity investments, and not even Ericsson can predict that. (See Ericsson Flatlines in 2013, Trails Huawei and Ericsson Looks to Future as Q1 Sales Slump.)

Second-quarter revenues dipped slightly year-on-year to 54.8 billion Swedish kronor (US$8 billion), but gross and operating margins, as well as net income, all improved, as the table below shows.

Table 1: Ericsson Q2 2014 Key Financials

In SEK billions Q2 2014 Q2 2013 Change Q1 2014 Change
Revenues 54.8 55.3 -1% 47.5 15%
-- Of which Networks 29.0 28.1 3% 24.4 19%
-- Of which Global Services 23.1 24.9 -7% 20.4 13%
-- Of which Support Solutions 2.8 2.3 21% 2.8 2%
Gross margin 36.4% 32.4% Increase of 4 percentage points 36.5% Decrease of 0.1 percentage points
Operating margin 7.3% 4.5% Increase of 2.8 percentage points 5.5% Increase of 1.8 percentage points
Net income 2.7 1.5 76% 1.7 57%
Source: Ericsson

Investors liked what they saw, as Ericsson's share price jumped by 8% to SEK 85.85 in morning trading on the Stockholm exchange.

CEO Hans Vestberg, who earlier this year tipped Brazil to win the FIFA World Cup (close call!), noted that the company has continued to win new managed services deals -- 21 in the second quarter -- and is executing on 4G rollouts in China and Taiwan. (See APAC Fuels 4G Action.)

He also cited the vendor's BSS deal at T-Mobile US Inc. as "one of the largest transformation deals we have ever done," and pointed to ongoing growth for the company's IP router platform business, which now has 120 customers and its own operating division. (See T-Mobile Swaps Out Amdocs BSS for Ericsson , Ericsson Creates Cloud & IP Unit, and Ericsson CEO's New Business Logic.)

Both Vestberg and CFO Jan Frykhammar cited the vendor's OSS/BSS and TV/media assets (part of the Support Solutions unit) as critical parts of the business for the future, and promised that further R&D investments will be pumped into these areas, along with the ongoing virtualization of the vendor's product portfolio. (See Ericsson Launches Cloud OSS, Ericsson Balances 'Open' Future, Legacy Past, Ericsson Shares its Media Vision 2020, Ericsson Bags Azuki Systems, and Euronews: Ericsson Buys Media Services Firm.)

Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

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Ray@LR
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Ray@LR,
User Rank: Blogger
7/18/2014 | 7:36:16 AM
Looking long term
The management team is keeping its faith in OSS, BSS< video, IP, cloud/virtualization, and Global Services as drivers for the future -- it's hard to pick holes in that approach.

Of course, that doesn't mean Ericsson will execute, but it's vision seems solid.
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