Ericsson Profitability Beats Estimates on More Lucrative Orders

Jan 30, 2014 3:45 am ET

Jan. 30 (Bloomberg) -- Ericsson AB, the world’s largest maker of wireless networks, reported profit margins that beat analysts’ projections after cutting jobs and focusing on more lucrative contracts. The stock rose the most in five months.

Gross margin, a key measure of profitability, expanded to 37.1 percent of sales in the fourth quarter from 31.1 percent a year earlier, Stockholm-based Ericsson said today. Analysts predicted 36.7 percent on average, according to an SME Direkt survey. Revenue and net income trailed analysts’ estimates.

Carrier spending in the U.S. and Japan is cooling after a wave of investments in speedier, fourth-generation networks, leaving Ericsson and rivals Nokia Oyj, Alcatel-Lucent SA and Huawei Technologies Co. to compete for fewer deals. To respond, Ericsson is concentrating on more profitable network contracts while expanding its services business and cutting jobs.

The company benefited from a shift toward more profitable work and a patent-licensing agreement with Samsung Electronics Co., said Mikko Ervasti, an analyst at Evli Bank Oyj in Helsinki. Ericsson’s report “did not have many positive news, with the exception of gross margin,” Ervasti said in a note.

Ericsson shares rose as much as 5.4 percent, the most since Sept. 3, and added 2.7 percent to 79.45 kronor at 9:38 a.m. in Stockholm, giving the manufacturer a market value of about $40 billion. The stock gained 21 percent last year.

Chief Executive Officer Hans Vestberg, 48, told directors yesterday he has no plans to step down following reports that he is among candidates to succeed Microsoft Corp.’s Steve Ballmer, according to a person familiar with the matter.

‘Under Pressure’

Fourth-quarter net income was 6.41 billion kronor ($990 million), after a loss a year earlier. Analysts predicted 7.22 billion kronor. Sales were little changed at 67 billion kronor, trailing the average estimate of 69.2 billion kronor. Ericsson plans to pay a dividend of 3 kronor a share.

Revenue from North America declined 19 percent and sales in northeastern Asia fell 16 percent. Sales rose in northern Europe and central Asia, while dropping 4 percent in western Europe.

“Sales came under some pressure during the quarter,” Vestberg said in a statement. “The major reason behind this development is the two large mobile broadband coverage projects, which peaked in North America in the first half of 2013, and the impact from reduced activity in Japan.”

The European market meanwhile is set to pick up “over time” as the region’s economy improves, Vestberg said. Phone companies such as Vodafone Group Plc are ramping up spending to cope with rising demand for mobile video, music and data.

Ericsson said about 12,000 employees left the manufacturer last year, “reflecting company transformation.”

Huawei Growth

Networks revenue, which makes up about half of Ericsson’s sales, fell 1.4 percent to 34.8 billion kronor. Support solutions sales jumped 41 percent to 5.1 billion kronor, and sales from global services slipped 2.9 percent to 27.2 billion kronor.

Huawei, China’s biggest phone-equipment maker, posted an 8 percent increase in sales last year as the company sold more mobile devices and benefited from the nation’s push to faster wireless infrastructure. It projected that sales will grow about 10 percent annually including this year.

Sales at Nokia’s networks unit plummeted for the fourth consecutive quarter, sliding 22 percent in the last three months of the year, partly because it exited some contracts and made divestments.

The licensing pact with Samsung added 4.2 billion kronor to Ericsson’s sales and 3.3 billion kronor to net income in the fourth quarter. The loss a year earlier was 6.46 billion kronor as Ericsson wrote off the value of a wireless-chip alliance.

--Editors: Ville Heiskanen, David Risser