Ericsson results provoke cautious optimism

With the wireless infrastructure market in turmoil, analyst leapt on Ericsson's improved results as a sign that the sector could be stabilizing. The Swedish market leader beat expectations on first quarter earnings and margins and raised hopes that the networks industry had bottomed out.

Although the vendor's Q1 sales were down by 4% year-on-year, to SEK51bn - mainly because of recessionary pressures and the decline of CDMA - it reported net income up 116% to SEK8.8bn ($1.3bn). The profit figure was boosted by a SEK7.7bn gain from the sale of its 50% share in Sony Ericsson to its Japanese partner, though this was offset by an SEK1.4bn loss at its other main joint venture, ST-Ericsson. Underlying EBITDA, excluding joint ventures, topped forecasts to reach SEK2.8bn ($416m), though this was still down 56% year-on-year, partly because the figure still included restructuring charges.

Most happily for Ericsson, the important gross margin figure was well ahead of expectations, at 33.3% (up from 30.2% in the last quarter of 2011). This is significant because Ericsson has made great play of the shift of the business towards lower margin businesses like modernization and some services, but in the quarter it clawed back some weighting towards more profitable capacity expansion and 4G projects.

"Gross margins surprised positively well ahead of consensus, so the nice beat on the gross margin is the key takeaway here, as people were fearing that the low trend set in Q4 last year would continue," Alexandre Peterc, analyst at Exane BNP Paribas, told Reuters. Analysts expect to revise gross margin forecasts for the rest of the year upwards. "I think the Q1 report was kind of a relief. You don't have to expect anything worse going forward," said one.

In the last quarter of 2011, Ericsson had suffered from slowdowns in carrier spending, sparked by recession and the peaking of the Verizon contract in the US. That raised fears that, despite apparent recovery in the wireless networks space during last year, on the back of mobile data growth, the segment might be nosediving again. However, the first quarter of 2012 restored more positive sentiments as Ericsson seemed to be adapting well to some long term, and negative, shifts - continuing slow growth in world markets, and the move, even in more buoyant economies, towards cheaper kit and lower margin modernization d.

Those trends had seen Ericsson watchers bracing themselves for a prolonged doldrums for the vendor, especially with competitors like Nokia Siemens still suffering, and even the mighty Huawei reporting a 50% drop in profits for 2011. However, there are still reasons for caution. The core networks division reported an 18% fall in sales and Ericsson said operators remained cautious due to the macroeconomic environment. And the firm said its underlying business mix, with a higher share of coverage and network modernization deals rather than capacity projects, was as yet unchanged and would remain so "in the short term".

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