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Promising profit signs in Ericsson's flat quarter

Currency factors and restructuring costs weigh on the vendor, but it sees shift to higher margin capacity and LTE projects


Published: 18 July, 2013

READ MORE: Financial | Ericsson | Infrastructure | LTE

There were some promising signs for Ericsson on the profits front, though it reported flat second quarter revenues because of negative currency exchange. The Swedish giant is starting to see the benefits of its cost cutting program and a slight shift away from low margin coverage and modernization projects. However, it suffered from weakness in east Asian markets and the continuing challenge from Huawei everywhere except the US.

Huawei executives spoke last week about the negative impact of effectively being barred from major infrastructure contracts in the US, because of government security restrictions. This is a major boost for Ericsson, which turned north America into its largest market when it acquired many assets of bankrupt Nortel. In the most recent quarter, strong mobile broadband demand in the region, and also in Latin America, was a key highlight.

Ericsson's sales were unchanged year-on-year at SEK55.3bn ($8.4bn), but would have been up 7% without the effects of foreign exchange rates. Operating profit was up SEK 2.5bn from SEK 2.1bn a year earlier, and margins rose from 2.8% to 4.5%. Net profit increased from SEK1.2bn to SEK1.5bn ($180.7m), even though the year-ago figure was inflated by a one-time gain of SEK7.7bn from the sale of the 50% stake in Sony Ericsson. This time's result also included SEK900m in losses from offloading Applied Communications Sciences, and exiting the power cable business. The company also took a one-time charge of SEK1.4bn to eliminate 919 jobs in Sweden, about 5% of its domestic workforce. Operating cashflow was a significant positive, reaching SEK4.3bn compared to negative SEK1.4bn last year.

The vendor said it was starting to see a gradual but encouraging shift away from mobile network projects focused on coverage and modernization, which carry low margins and high labor costs, but have dominated recent operator investments, especially in Ericsson's European heartland. Earlier this year the firm blamed this pattern for pressure on its profits, notably for driving its gross margins down to their lowest level, 30%, in fiscal 2011.

Now it is seeing more carrier focus on higher margin capacity projects, and said its success in European network upgrades, despite the low profit potential, was now leading to follow-on capacity and LTE orders. Europe (including Russia) was up 6.3% to SEK11.9bn.

"While the macroeconomic situation in Europe remains challenging and the political uncertainty in parts of Region Middle East, such as Egypt, increases, the long term fundamentals in the industry remain attractive," CEO Hans Vestberg said in his statement.

Overall, the networks division revenue rose by 1% year-on-year to SEK28.1bn. Regionally, Ericsson saw north east Asia being weaker than in recent quarters, with a 34% decline in sales in China, Japan and Korea, but it said business was picking up in China thanks to China Mobile's TD-LTE plans, and also in another key BRIC market, Russia. South East Asia was strong too, up 22%. But in Latin America, sales fell 9%, to SEK4.4bn, as operators postponed building new networks amid delays in spectrum auction, though Ericsson said orders were picking up in the region.

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