Ericsson showed how scale and geographic spread are important to its relative financial stability as it reported largely positive third-quarter financials, despite a dip in activity in North America, which accounts for about a quarter of its sales.
Ericsson AB (Nasdaq: ERIC) reported third-quarter revenues of 57.6 billion Swedish kronor (US$7.93 billion), an increase of 9% year-on-year, though that was helped significantly by favorable exchange rate movements between the kronor and US dollar. However, even once the impact of currency changes and acquisitions is taken into account, Ericsson's revenues were still 3% better than a year ago.
Gross margins increased to 35.2% from 32.0% a year ago, due to a higher portion of network capacity sales (rather than lower-margin infrastructure rollout sales), improving revenues from the company's patent portfolio, and lower restructuring costs. Operating income was down following a re-evaluation of long-term contracts (a negative impact due to the currency exchange rate shifts). The value of those deals could improve again, or be further devalued, if exchange rates change again.
Table 1: Ericsson Q3 2014 Key Financials
|In SEK billions||Q3 2014||Q3 2013||Change||Q2 2014||Change|
|-- Of which Networks||30.0||26.7||13%||29.0||4%|
|-- Of which Global Services||24.5||24.0||2%||23.1||6%|
|-- Of which Support Solutions||3.1||2.4||30%||2.8||8%|
|-- Of which Modems||0.1||0||NA||0||NA|
|Gross margin||35.2%||32.0%||Increase of 3.2 percentage points||36.4%||Decrease of 1.2 percentage points|
|Operating margin||6.7%||8.0%||Decrease of 1.3 percentage points||7.3%||Increase of 0.6 percentage points|
What is particularly impressive is that these numbers were achieved despite a slowdown in spending in North America, by far Ericsson's largest market, accounting for about a quarter of revenues. CEO Hans Vestberg noted on Friday morning's earnings call/webcast that some major US operators are currently focusing on "cash flow optimization" (which basically means they've cut spending, a trend that has hit other vendors recently -- see Juniper Pummeled by Weak Carrier Demand.)
There are always exceptions to the rule, though: Ericsson rival Nokia Networks just reported a significant boost in year-on-year revenues in North America due to its involvement in Sprint Corp. (NYSE: S)'s 4G rollout, for example. (See Eurobites: Born-Again Nokia Blooms in Q3, Nokia Reports Improved Sales, Margins in Q3 , Sprint Sparks Up Vendors for Faster 4G LTE and Infinera Beats Sector Blues With Revenue Jump, Bright Outlook.)
The saving grace for Ericsson, which does business in 180 countries, is that investment levels in some other regions are on the rise: In China the almost unprecedented pace of 4G network rollouts has not abated, and that has pumped up revenues in the North-East Asia market; investments in the Middle East are booming; while sales in India are picking up again now that the investment environment is more stable, noted Vestberg.
Table 2: Ericsson Q3 2014 Regional Revenues
|In SEK billions||Q3 2014 Revenues||Year-on-Year Change||Quarter-on-Quarter Change|
|Northern Europe and Central Asia||3.2||7%||16%|
|Western and Central Europe||4.6||6%||1%|
|North East Asia||7.0||16%||10%|
|South East Asia and Oceania||3.8||5%||4%|
|* Other includes licensing revenues, broadcast services, power modules, mobile broadband modules, Ericsson-LG Enterprise and other businesses.|
The CEO did, though, point out that he believes North America will remain a strong market: Capex might be constrained currently, but the drivers (increasing data service usage by enterprises and consumers) that require network operators to invest in network capacity and expansion are still very strong.
Other market trends are playing a part too. Vestberg noted that the deployment of public access small cells to improve network "densification" is starting to take off and IMS-related sales are improving as VoLTE deployments reach commercial launch, while more transformation projects that require intensive professional services (particularly systems integration) and OSS/BSS capabilities are emerging.
As ever during its quarterly earnings reports, much of the commentary and many of the questions relate to financial metrics (foreign currency exchange rates, operating cost management, and so on), with less focus on the big industry buzzwords, such as SDN and NFV.
Ericsson is heavily engaged in those emerging areas, though, and a detailed update on the vendor's strategy as it relates to the evolution of IP networking, cloud capabilities, telco data centers and virtualization can be expected when Ericsson holds its annual capital markets day on November 13 in Sweden.
That's not to say these topics didn't get any airtime at all. Vestberg highlighted that the company's most recent acquisitions -- Apcera, Fabrix and MetraTech -- are all related to software and the cloud. (See PaaS It On: Ericsson Buys Into Cloud Startup Apcera, Ericsson Buys Cloud Video Firm for $95M and Ericsson Goes Beyond Telecom with MetraTech Acquisition.)
In addition, he noted that the SSR portfolio of routers now has 134 customers -- though whether that is a great return for a product line that has been in the company since the $2.1 billion acquisition of Redback Networks more than seven years ago is open to question. (See Ericsson Offers $2.1B for Redback.)
— Ray Le Maistre, , Editor-in-Chief, Light Reading