Ericsson shines despite $1b Q4 loss

Caroline Gabriel/Wireless Watch
04 Feb 2013
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Revenue was up 5% year-on-year to 66.9 billion kronor ($10.5 billion), ahead of analyst forecasts of 65.8 billion. The net loss was 6.3 billion kronor ($990 million) because of one-off charges, notably an 8 billion kronor writedown on the ST-Ericsson joint venture and a tax charge of 500 million kronor.

But sales grew at the fastest pace for more than a year, driven by carriers‘ race to upgrade network capacity to handle the mobile data explosion and the rise of greedy devices like tablets. Demand was led by the North American carriers with their rapid LTE and 3G+ deployments. Ericsson has a key position in most of the major 4G projects in the region. Chinese 3G was also a significant factor.

CEO Hans Vestberg said in his statement: “During the year profitability was negatively impacted by operating losses in ST-Ericsson, the ongoing network modernization projects in Europe as well as the underlying business mix, with a higher share of coverage projects than capacity projects.”

Projects to boost network capacity are more profitable for Ericsson than other key revenue streams like network modernization and coverage roll-outs, or managed services, and the capacity deals will play a bigger role in the business mix this year, especially in the second half, said the firm. Those factors are already improving its gross margins, which beat estimates at 31.1%, but the prevalence of modernization deals in 2012 hit profits.

The shift in the business mix pleased analysts. Erik Paulsson of Pareto Securities in Stockholm told Bloomberg: “The report was very good. The big positive is the improving underlying business mix later this year. This will help lift gross margins further.” Ericsson shares were up by as much as 12% to 76.95 kronor, the biggest one-day leap since April 2011. In 2011, gross margin dropped to 30.2% because revenues were dominated by European modernization contracts, which are labor-intensive and so less profitable.

Ericsson also continues to increase its focus on managed services, multimedia platforms and hosted offerings in areas like M2M and payments, to broaden the roles it plays for wireless and converged carriers, and differentiate itself from rivals like Huawei, while reducing its reliance on the profit-squeezed equipment space.

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