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Ericsson Delivers in Q1

Ray Le Maistre
4/26/2007
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Ericsson AB (Nasdaq: ERIC) showed its peers how it's done today, reporting a rise in first-quarter revenues and profits, and reiterating its growth forecasts for the year. (See Ericsson Reports 1Q07.)

Revenues were up 8 percent compared with a year earlier, to 42.2 billion Swedish Kroner (US$6.27 billion), and net income leapt 27 percent to SEK5.8 billion ($862 million). For a more complete view of the overall financial performance, check out this table.

CEO Carl-Henric Svanberg, currently one of Light Reading's Top 10 Movers & Shakers, noted that Ericsson's "solid performance and market share gains" were in part down to the company's scale and its ability to provide a complete service, from planning and deploying networks to running them for carriers.

That solid performance was most notable in the company's operating margins, which were the same as a year ago for the networks and professional services divisions -- 17 percent and 15 percent, respectively, from revenues of SEK29.3 billion and SEK9.5 billion ($4.35 billion and $1.4 billion) -- while Multimedia, by far the smallest of the three business units, with revenues of SEK3.4 billion ($505 million), increased its operating margin to 8 percent from 3 percent.

That's noteworthy, because all of the major vendors have been experiencing increasing competition and price erosion, especially in the emerging markets such as India and China where the biggest deals are to be won at present.

Analysts at Dresdner Kleinwort noted that with "solid market share gains" and "gross and operating margin resilience," Ericsson is displaying "unsurpassed profitability compared with any of its peers."

The first-quarter gross margin was 43 percent, which, according to the research note from the Dresdner team, "signifies a superior market position with pricing powers second to none." They noted that gross margins in Nokia's Networks division "hovers around 34 percent."

Svanberg also said that mobile systems revenues were up 6 percent year-on-year to SEK28.4 billion ($4.22 billion). (That revenue number comes from extracting the mobile-related business from each of Ericsson's three business units -- networks, professional services, and multimedia.) "It's quite clear we are gaining market share in GSM" and 3G, he said. (See Ericsson Revamps.)

And the CEO expects to see continued growth from mobile systems in 2007. Ericsson believes the GSM and WCDMA (3G) market will deliver mid-single-digit growth, while the professional services market will show "good growth." Svanberg noted, "We are well positioned to take advantage of these market opportunities."

Prudential Equity Group LLC analyst Inder Singh opined in a research note issued today that Ericsson will experience higher growth than the market, "helped by market share against its merging rivals," Alcatel-Lucent (NYSE: ALU) and Nokia Networks .

And all those strong messages came in the wake of disappointing quarterly reports from that very duo. (See Alcatel-Lucent Suffers Q1 Slump, Mobile Weakness Marks AlcaLu Malaise, and Nokia's Network Margins Take a Hit.)

And Svanberg is ready to turn up the heat in the North American fixed-line market, too. With Redback and Entrisphere already part of the group, and jointly delivering revenues of SEK400 million ($59.5 million) in the first quarter, he said the acquisition of video equipment and applications vendor Tandberg Television had been completed Wednesday, giving Ericsson "a new setup in the U.S." (See Ericsson: Tandberg Is Key to IPTV, Ericsson Buys Entrisphere, and IPTV Drives Ericsson to Redback.)

"There's a big focus on triple play, with GPON coming" in the U.S. market, noted the CEO, who said Ericsson's new arsenal of Ethernet, broadband access, and IPTV capabilities "has been noted by our competitors." (See Ericsson Spells Defense G-P-O-N and Ericsson: Hungry for PON.)

— Ray Le Maistre, International News Editor, Light Reading

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