Ericsson Sets the Pace in Q3

Ericsson AB (Nasdaq: ERIC) displayed its strength in depth during the third quarter, reporting a 17 percent year-on-year increase in revenues to 55.5 billion Swedish kronor (US$8.4 billion) and a 6 percent increase in net income to SEK 3.8 billion ($573 million).

Without the impact of exchange rate changes the figures would have been even better: The company noted that at a constant exchange rate its revenues would have been up by 24 percent compared with the same quarter a year ago.

Table 1: Ericsson Q3 2011 Key Financials
In billions of Swedish kronor Q3 2010 Q3 2011 Y/Y change Q2 2011 Q/Q change
Revenues 47.5 55.5 17% 54.8 1%
Gross margin 39% 35% Decrease of 4 percentage points 37.8% Decrease of 2.8 percentage points
Operating margin excluding joint ventures 13% 11.3% Decrease of 1.7 percentage points 9.2% Increase of 2.1 percentage points
Net income 3.6 3.8 6% 3.2 18%
Source: Ericsson

Investors liked the news as Ericsson's share price added 5.3 percent to SEK 68.95 in morning trading on the Stockholm exchange.

Divisional growth
Each of the vendor's major business units reported growth. The Networks division generated revenues of SEK 32.5 billion ($4.9 billion), up 25 percent from a year ago. In his Thursday morning presentation to analysts, investors and the media, CEO Hans Vestberg said that while mobile broadband demand was fuelling that growth, the company was generating increasing revenues from packet core, IP routing and microwave backhaul products as well as radio access network (RAN) equipment.

One network segment did shrink, though. The CDMA network equipment market in North America is weaker, noted Vestberg, but he sees this as a short-term trend. In time the market, as expected, will shrink, but there are still new CDMA handsets being launched to stimulate services and network demand, said the CEO. He added that the acquisition of Nortel's CDMA assets had been "very positive," and that Ericsson was already talking to its CDMA customers about how they might ultimately migrate to LTE.

The Global Services division reported a 7 percent increase in revenues to SEK 20.4 billion ($3.1 billion), with Vestberg highlighting an uptick in systems integration contracts involving Service Provider Information Technology (SPIT) projects (OSS/BSS, service delivery platforms and data center builds). Ericsson now has 53,000 staff in Global Services.

The Multimedia division's revenues were up by 11 percent year-on-year to SEK 2.6 billion ($392 million), "fuelled by revenue management wins … and we are winning a lot of IPTV deals around the world," stated the CEO.

Regional trends
In terms of regional sales, only two markets showed a decline in revenues, namely North America and South-East Asia & Oceania. Vestberg noted that the underlying trends in North America are "still positive," and stressed that the company was not losing market share there. Elsewhere, the CEO noted that Sub-Saharan Africa is now growing as 3G networks are being built there, while the China and North-East Asia region continues to be very strong, fuelled by demand from Japan and South Korea as well as China. Sales growth in India has slowed down in recent months as the first wave of 3G network rollout investments have now been completed.

Table 2: Ericsson Q3 2011 Revenues by Region
Revenues in billions of Swedish kronor Q3 2010 Q3 2011 Change
North America 12.9 12.1 -6%
Latin America 3.7 6.0 64%
Northern Europe and Central Asia 2.4 3.5 49%
Western and Central Europe 4.3 4.6 7%
Mediterranean 5.0 5.2 4%
Middle East 2.7 3.7 34%
Sub-Saharan Africa 1.8 2.5 40%
India 2.1 2.3 7%
China and North-East Asia 6.9 9.7 39%
South-East Asia and Oceania 3.8 3.7 -3%
Other 1.9 2.2 19%
Total 47.5 55.5 17%
Source: Ericsson

Margins, joint ventures and investments
The main area of concern for Ericsson is the pressure on its gross margin, which dipped to 35 percent in the third quarter, down year-on-year and sequentially (see table above).

CFO Jan Frykhammar stressed during today's presentation that this dip is due to the greater proportion of new network rollouts that Ericsson is engaged in currently, and that those projects involve the delivery of more low-margin hardware than high-margin software. Later in the sales cycle, network expansion projects are less hardware-based and generate higher margins.

In addition, Global Services business also comes with lower margins, so an increase in that business puts pressure on the overall margins. "But it's important to be growing the services business," noted the CFO.

Overall, then, the CFO said that the gross margin largely reflected the "business mix" of sales and that Ericsson was currently in a period where sales are more dominated by lower-margin business.

The other area of concern is the vendor's joint-venture activity. Sony Ericsson Mobile Communications managed to break even in the third quarter but chip player ST-Ericsson reported a net loss of $221 million for the quarter. The latter's financial woes hit Ericsson's third-quarter operating income by SEK 700 million ($106 million). (See Euronews: Sony Ericsson Breaks Even.)

As for investments, the company continues to pump R&D money into areas where it believes it can make particular gains in the coming years -- namely IP routing, Long Term Evolution Time Division Duplex (LTE TDD) capabilities and multi-standard radio.

And Vestberg noted there are ongoing investments in Ericsson's "areas of portfolio momentum" -- mobile broadband, managed services and OSS/BSS. The CEO claimed market leadership in the first two and said he believes Ericsson will also be the lead player in OSS/BSS once the acquisition of Telcordia Technologies Inc. is completed.

— Ray Le Maistre, International Managing Editor, Light Reading

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