Ericsson Feels US Capex Squeeze in Q4

Ericsson's global scale helped it cushion the blow of an ongoing capex squeeze in North America, its largest geographic market by sales, in the fourth quarter and full year 2014.

While US operators spent less on their networks -- focusing investments instead on bidding for additional spectrum and participating in industry consolidation -- mobile broadband investments in much of Europe, the Middle East and pockets of Asia-Pacific helped Ericsson AB (Nasdaq: ERIC) report revenues for the fourth quarter and full year that were roughly in line with a year earlier. (See AT&T to Buy Nextel Mexico for $1.9B and FCC Mid-Band Auction Nears $45B in Bids.)

Table 1: Ericsson Q4 and Full-Year 2014 Key Financials

In SEK billions Q4 2014 Q4 2013 YoY Change Q3 2014 QoQ Change Full Year 2014 Full Year 2013
Revenues 68.0 67.0 1% 57.6 18% 228.0 227.4
- Of which Networks 34.1 34.8 -2% 30.0 4% 117.5 117.7
- Of which Global Services 29.8 27.2 10% 24.5 6% 97.7 97.4
- Of which Support Solutions 4.0 5.1 -21% 3.1 8% 12.7 12.2
- Of which Modems 0.1 0.0 NA 0.1 1% 0.2 0.0
Gross margin 36.6% 37.1% Decrease of 0.5 percentage points 35.2% Increase of 1.4 percentage points 36.2% 33.6%
Operating margin 9.3% 13.5% Decrease of 4.2 percentage points 6.7% Increase of 2.6 percentage points 7.4% 7.8%
Net income 4.2 6.4 -35% 2.6 59% 11.1 12.2
Source: Ericsson

During a webcast earnings presentation Tuesday morning, Ericsson CEO Hans Vestberg noted that US operators had continued with the "cashflow optimization" strategies that resulted in a spending slowdown during the third quarter of 2014: The operators are currently focusing their investments on spectrum and industry consolidation, noted the CEO. (See Global Reach Helps Ericsson Grow in Q3.)

"We are not losing market share in the US … In the long-term there is no change in the US market. Demand for mobile broadband will continue and our position there is strong," he noted, though he added that there is no sign that the capex trend in the US is set to change any time soon.

As a result of those infrastructure spending constraints in the US, Ericsson reported a 7% year-on-year decrease in revenues from North America during the fourth quarter to 13.1 billion Swedish kronor (US$1.6 billion). Even so, North America still accounted for 19.3% of the fourth quarter's total revenues of SEK68 billion ($8.23 billion).

Fortunately for Ericsson, sales in most other regions are increasing. Vestberg highlighted the dramatic investments in 4G in China and the resulting subscriber uptake -- China Mobile Ltd. (NYSE: CHL) alone signed up more than 90 million LTE customers during 2014. Ericsson has a relatively small slice of the pie in terms of Chinese 4G capex (with local vendors picking up the majority of the business) but it has been enough to help the Swedish firm boost its sales in North-East Asia.

Table 2: Ericsson Q4 and Full-Year 2014 Revenues by Geography

In SEK billions Q4 2014 Year-on-Year Change Quarter-on-Quarter Change Full Year 2014 Change
North America 13.1 -5% -7% 54.5 -8%
Latin America 6.6 -3% 12% 22.6 3%
Northern Europe and Central Asia 4.1 11% 29% 12.4 6%
Western and Central Europe 6.1 17% 31% 19.7 7%
Mediterranean 7.5 6% 44% 23.0 -5%
Middle East 6.9 16% 14% 21.3 22%
Sub-Saharan Africa 2.6 1% 6% 8.7 -13%
India 2.4 20% 18% 7.7 25%
North East Asia 9.2 7% 31% 27.6 1%
South East Asia and Oceania 5.0 16% 31% 15.9 0%
Other* 4.7 -35% 37% 14.7 -2%
Total 68.0 1% 18% 228.0 0%
* Other includes licensing revenues, broadcast services, power modules, mobile broadband modules, Ericsson-LG Enterprise and other businesses.
Source: Ericsson

Ericsson's stock took a minor beating on the Stockholm exchange shortly after its results were published, as financial analysts had been expecting slightly higher revenues, but the vendor's margins were better than expected and by mid-morning the share price was unchanged from Monday's close at SEK102.9.

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Further growth in China and anticipated demand for 3G and 4G services in Africa, the Middle East and multiple markets across the broader Asia-Pacific region are expected to drive the mobile broadband market in the coming years, with the number of global connections expected to rise from about 2.9 billion currently to about 8 billion in 2020.

But competition is tough in the mobile network infrastructure space, so Ericsson is striving to diversify its business as much as possible. It has long been a major force in the professional services sector and that part of its operation continues to generate about 43% of total revenues. In addition, the company identified a number of "targeted areas" that it has identified for sales growth in the coming years, including IP networks, cloud-related systems, OSS and BSS, TV and media platforms and a number of selected industry verticals: In 2014 revenues from those "areas" grew by an aggregate 10% compared with 2013 sales of about SEK30 billion ($3.63 billion), noted the CEO.

That ongoing shift in focus means Ericsson has been changing its mix of employees. During 2014 it waved goodbye to 15,000 employees but hired 19,000 staff for a net gain of about 4,000, taking its global total headcount to 116,000 at the end of 2014.

All in all, Ericsson is maintaining an even performance in an ever-changing and challenging market. While it's tempting to compare the Swedish vendor's flat sales and single-digit operating margin to the rampant growth reported by Huawei Technologies Co. Ltd. , their businesses are somewhat different, though the Chinese vendor did report a 15% increase in (unaudited) sales by its carrier division for 2014. (See Huawei Boosts Operating Income by 17%, Huawei Puts Its Rivals to Shame and Huawei Expects 2015 Revenues of $56B.)

Nokia Corp. (NYSE: NOK) and Alcatel-Lucent (NYSE: ALU) offer a closer comparison: Those vendors report their fourth-quarter and full-year financials on January 29 and February 6 respectively.

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

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