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Ericsson Q4 Sales Surge, Margins Shrink

Ericsson AB (Nasdaq: ERIC) kicked off the earnings season for telecom equipment suppliers with fourth-quarter results that showed strong sales growth and increased profitability, but also a dip in gross margins. (See Ericsson Reports Q4.)

The Swedish giant's fourth-quarter revenue was up 8 percent to SEK 62.8 billion (US$9.6 billion), compared with SEK 58.3 billion ($8.9 billion) in the same period last year. Compared to the third quarter, revenue was up 32 percent sequentially, which the vendor says was driven by strong mobile broadband demand.

Net income was also up in the fourth quarter to SEK 4.4 billion ($672 million), compared with SEK 0.7 billion ($107 million) in the year-ago quarter, and compared with SEK 3.6 billion ($550 million) in the third quarter.

But the company's gross margins came under pressure in the quarter due to an influx of less profitable projects such as network upgrades and 3G rollouts in India. Gross margin in the fourth quarter was 37 percent, compared to 39 percent in the third quarter.

"Although network modernization projects, along with the 3G rollouts in India, puts initial pressure on gross margin, these projects are important parts of our efforts to strengthen our platform for continued long-term growth and profitability," said CEO Hans Vestberg in a statement.

Vestberg also noted that while the components supply for its network equipment had "normalized" in the quarter, the company was "still not fully meeting the increased demand" for some mobile broadband products. (See Parts Problems Hurt Ericsson's Q2.)

For the full year, Ericsson reported revenues of SEK 203.3 billion ($31.3 billion) and net income of SEK 11.2 billion ($1.73 billion), down 1.6 percent and up 172 percent respectively.

Why this matters
Ericsson is the first among the large equipment suppliers to report fourth-quarter and full-year financial results for 2010, so it has set the standard for others to meet or beat.

Sales growth, which actually returned for Ericsson in the second half of 2010, continued in the fourth quarter. That's a positive development that could indicate a growth trend across the industry and for other suppliers.

Ericsson's net income was helped by better earnings at Sony Ericsson Mobile Communications and lower restructuring charges. (See Sony Ericsson's Ups & Downs.)

But Ericsson's gross margins, although improved from 2009, will be closely scrutinized: Investors will want to see how the Swedish vendor can sustain its sales growth and whether the dip in margins marks the beginning of a trend for 2011.

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