Stars Align for Ericsson's Q3

Ericsson AB (Nasdaq: ERIC) saw its share price ramp by more than 5 percent Friday morning after it reported third-quarter profits that increased by 360 percent year-on-year and 75 percent quarter-on-quarter. (See Ericsson Reports Q3.)

In addition, the company's CEO highlighted some key growth opportunities in Europe and Far-East Asia that might help boost the company's top line in 2011.

Ericsson reported revenues of 47.5 billion Swedish kronor (US$7.1 billion) and net income of SEK3.6 billion ($539 million). While the revenues were roughly in line with expectations, the vendor's profits were better than expected as Ericsson sold more high-margin network products, benefited from its long-running cost-cutting program (and lower restructuring costs), and enjoyed improved trading conditions at its joint ventures. (See ST-Ericsson Reports Q3, Sony Ericsson's Mixed Bag, and Sony Ericsson Rises & Falls.)

The company's share price increased by 5.2 percent to SEK75.65 on the Stockholm exchange Friday morning.

Overall sales volumes were helped by continued growing demand for professional services (including managed services), the contribution of the GSM and CDMA businesses Ericsson acquired from Nortel, increased demand for mobile broadband infrastructure from Japan and the US, the return of 2G network rollouts in China, and a resumption of near-normal service in India, where the security clearance holdups (now resolved) had been delaying orders. Revenues in India were up by 58 percent compared with the second quarter. (See Ericsson CFO: India Bottleneck Easing and Ericsson Scores German Managed Services Deal.)

Table 1: Ericsson Q3 2010 Key Financials
In billions of Swedish kronor Q3 2009 Q3 2010 Y/Y change Q2 2010 Q/Q change
Revenues 46.4 47.5 2% 48 -1%
Gross margin 36% 39% Increase of 3 percentage points 39% Flat
Operating margin excluding joint ventures 12% 13% Increase of 1 percentage point 11% Increase of 2 percentage points
Net income 0.8 3.6 360% 2 75%

And, like rival Nokia Networks , it noted an improvement in its supply chain, though some components, especially for mobile broadband systems, are still hard to come by. CEO Hans Vestberg said on today's earnings conference call that Ericsson had seen a "gradual improvement" in parts availability, but also that the vendor had missed out on SEK2-3 billion ($299-449 million) in reported revenues in the third quarter because of equipment it had been unable to ship because of supply chain constraints.

The CEO also noted that the exchange rate between the Swedish kronor and other currencies, which had helped boost Ericsson's reported figures throughout 2009 and into this year, had a "negative impact" in this quarter, particularly on the Global Services division.

Despite the exchange rate and supply chain issues, the positive trends in Ericsson's business meant that the normally seasonally-weak third quarter almost matched the second quarter in terms of revenues, while net income was up significantly both year-on-year and sequentially. This time last year, Ericsson reported a quarter-on-quarter decline in revenues of 11 percent, but this year the sequential dip was just 1 percent.

Table 2: Ericsson Q3 2010 Revenues By Division
In billions of Swedish kronor Q3 2009 Q3 2010 Y/Y change Q2 2010 Q/Q change
Networks division revenues 24.5 26.1 6% 25.5 2%
Global Services division revenues 18.6 19.1 3% 20.1 -5%
-- of which Professional Services 12.8 13.7 7% 14.8 -7%
-- of which Managed Services 3.6 5.2 46% 5.6 -7%
-- of which Network Rollout Services 5.8 5.3 -8% 5.2 2%
Multimedia division revenues 3.4 2.3 -31% 2.4 -4%
Total Revenues 46.4 47.5 2% 48 -1%

Now Vestberg is looking forward to two further potentially positive trends. In Europe, mobile operators are still to undertake massive modernization programs that will see many of the region's 1 million base stations upgraded. "There have been no announcements yet, but let's say we feel good about how things are going," said the CEO.

He also said that LTE decisions were about to be made in South Korea. "We will find out soon -- we are well positioned with our joint venture there," said Vestberg. (See SK Telecom Unveils Innovative Measures, Ericsson Snaps Up LG-Nortel Stake, Ericsson Completes LG-Nortel Buy, and Ericsson Touts LTE for Korea's Green Economy.)

— Ray Le Maistre, International Managing Editor, Light Reading

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