Ericsson boosted by US and Japan, but component shortages hit sales

Ericsson surprised the world's financial markets by posting a stronger than expected third-quarter net profit as sales within North America and Japan surged due to rising smartphone-generated data traffic.

Ericsson's CEO, Hans Vestberg, said that "mobile broadband continued to grow, especially in North America and Japan, and we see continued growth opportunities in the market."

The company excelled itself by posting a net profit of 3.68 billion Swedish kronor (US$554 million) for its third quarter, slightly ahead of analysts' expectations for SEK3.47 billion. A year ago Ericsson reported depressed profits of SEK810 million when the company was hit by charges totaling SEK2.7 billion for ongoing restructuring.

Of particular note was the company's closely-watched gross margin--excluding restructuring costs--which rose to 39 per cent, up from 36 per cent a year earlier, helped by the increase in high-value network upgrades and software sales, as well as internal cost cuts.

Vestberg highlighted the North American market where sales more than tripled from a year earlier, to SEK12.9 billion from SEK4 billion, helped significantly by growing demand for mobile broadband as well as the recent Nortel acquisition.

The CEO admitted that market conditions were tough, but pointed to some rivals that were posting consistent losses. He also partly squashed any talk of further major acquisitions, claiming that the company always looked at potential takeover opportunities, but was happy with its current portfolio.

Commenting on the results, WestLB analyst, Thomas Langer, said he had upgraded Ericsson from neutral to a buy rating, adding that the company's improving margins within its services business were acting as a catalyst for the share price.

"We think the market is undervaluing the company's potential, particularly in services, which are high margin with good cash flow," said Langer. "This will be the main theme in coming years with the introduction of LTE which will lead to higher services margins and we expect to see more network sharing and outsourcing."

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