Ericsson Shares Jump as Sales, Profit Margins Beat Estimates

Jul 18, 2014 11:46 am ET

(Updates shares starting in first paragraph.)

July 18 (Bloomberg) -- Ericsson AB, the biggest maker of wireless networks, reported sales and profit margins that topped analysts’ estimates, helped by contracts in China and the Middle East. The shares jumped the most in three years.

Second-quarter sales were 54.8 billion kronor ($8 billion), compared with the 52.5 billion-krona average estimate of 20 analysts surveyed by Bloomberg. The gross margin, a key measure of profitability, rose 4 percentage points to 36.4 percent, Stockholm-based Ericsson said in a statement today. Analysts had projected 35.5 percent.

As carriers in North America and Japan continued to spend less on expanding fourth-generation mobile networks after a surge in outlays a year earlier, Ericsson is turning to its services businesses and more lucrative contracts to increase carriers’ network capacity. Ericsson’s gross margin has rebounded from 30.2 percent in the fourth quarter of 2011, the lowest since at least 1989.

“We’re seeing the Chinese 4G rollout gaining momentum as well as the North American capacity projects continuing at a stable rate,” said Fredrik Thoresen, an analyst at DNB ASA in Oslo. He described Ericsson’s report as “solid.”

Ericsson shares rose 8.2 percent, the biggest jump since April 2011, to 86 kronor at the close of trading in Stockholm, taking the advance to 9.6 percent this year.

North America

Sales in North America, which make up more than a quarter of revenue, slipped 1 percent in the quarter, after a 23 percent tumble in the first three months of the year.

The improvement in the gross margin compared with the previous quarter was because of “lower activity on the larger projects that had been on a high pace before,” Chief Executive Officer Hans Vestberg said today. Ericsson saw more deals to increase network capacity in North America, he said, declining to forecast how this trend will develop because such contracts are difficult to predict.

Ericsson was a key supplier for AT&T Inc.’s rollout of its 4G network over the past few years. As such rollouts are completed and carriers seek to improve the quality of their wireless networks by adding capacity, Ericsson will benefit as capacity deals have a higher margin, Vestberg said. Still, more deals to expand rollouts will be made this year, adding some pressure on margins, he said.

Sales in India climbed 29 percent to 900 million kronor, while revenue from the Middle East jumped 13 percent to 2.5 billion kronor. Increased revenue from the sale of fourth- generation wireless networks in China also helped to lift revenue.

Second-quarter net income was 2.58 billion kronor, beating analysts’ average estimate of 2.13 billion kronor.