Ericsson (NASDAQ:ERIC) reported that its net profit declined 43 percent in the third quarter as weaker network sales and cautious operator spending weighed down its results. Slimmer profits from large-scale network modernization projects weakened the company's margins, and weaker sales in key regions depressed earnings, but the Swedish vendor got a boost from strong North American sales.
The vendor said net profit in the quarter fell to $324 million, down from around $568 million in the year-ago period. Total sales slipped 1.7 percent to $8.11 billion. Ericsson's highly watched gross margin dropped to 30.4 percent, down from 35 percent in the year-ago period. Analysts polled by both Dow Jones Newswires and Bloomberg had expected a gross margin of around 32 percent for the period.
"The introduction of new devices and applications put higher consumer demands on network performance and quality," Ericsson CEO Hans Vestberg said in a statement. "This drives demand for our technology, software and services capabilities. However, at the same time, we see a continued macroeconomic slow down and political unrest in parts of the world, which has led to more cautious operator spending in some parts of the world."
Ericsson's biggest slip was in its key networks unit, where sales declined 17 percent year-over-year to $3.99 billion. Ericsson noted that sales in parts of Europe, China, South Korea and Russia continued to be slow. Despite the weakness in networks, sales in global services jumped 19 percent year-over-year and support solutions sales grew 29 percent.
In networks, the company said that the decline in sales was primarily related to lower sales in parts of Europe, continued (and expected) declines in CDMA sales, lower GSM sales in China as well as lower 3G sales in Russia. Ericsson sales fell in South Korea year-over-year because of large 3G investments that had been made in the year-ago period. CDMA sales, which aver been declining for the past several quarters as more carriers switch to LTE, clocked in at only $237.8 million, down 50 percent from the year-ago period. CDMA sales also have a lower operating margin than average in the networks business, Ericsson said.
In an interview with FierceWireless, Ericsson CFO Jan Frykhammar said that a major part of Ericsson's business remains selling low-margin base stations to carriers. But, Frykhammar said, such sales open the door for Ericsson to sell additional, higher-margin products and services to those carriers. "It is a business that requires you to have an installed base that you can upsell," he said.
A major bright spot for Ericsson in the third quarter was North America though, where total sales climbed 16 percent year-over-year to $2.08 billion, led by networks and services sales. Ericsson said it saw continued high activity for contracts it has already won and is maintaining, and that it expects LTE sales to offset the decline in CDMA.
Frykhammar said that Ericsson's North American business was boosted in the quarter by both network sales and managed services to customers like Sprint Nextel (NYSE:S). He also noted that Sprint is in the middle of its LTE deployments and T-Mobile USA, another customer, is upgrading its network and launching LTE next year.
The Ericsson CFO said it was too early to comment on how T-Mobile's effective acquisition of MetroPCS (NYSE:PCS) might affect Ericsson's business. "We work closely with them and will support their strategy," he said.
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