Ericsson thrives despite 4Q loss

Ericsson made its biggest net loss in a decade in its fourth quarter, but this was no return to the dark days when the Swedish giant was in danger of collapse. Instead its shares leapt by the highest amount in almost two years because of better than expected sales and margins.
Revenue was up 5% year-on-year to 66.9 billion kronor (€7.7 billion), ahead of analyst forecasts of 65.8 billion. The net loss was 6.3 billion kronor 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.
“Improving profitability, reducing costs and working capital remain high on the agenda also for 2013,” Vestberg said. “While the macroeconomic and political uncertainty continues in certain regions, the long term fundamentals in the industry remain attractive.”
For the full year, revenues were flat at 227.8 billion kronor ($35.8 billion) and net profit halved to 5.9 billion kronor ($927 million) from 12.6 billion in 2011. The main sales growth was in the Global Services and Support Solutions unit, while the core Networks business saw its sales decline, mainly because of a 40% drop in the CDMA equipment space.
Although Ericsson says CDMA will continue to decline, operators with that technology have led the transition to LTE, so some of the fallback is offset by the rise in 4G contracts, especially in the US and Korea. This was the justification for the purchase of many elements of Nortel, which had a strong base in North America and CDMA.
Meanwhile, the green shoots in Nokia's performance may be fragile at the moment, but a strong one is the Nokia Siemens infrastructure joint venture. After years of struggles, NSN reported record margins and a sharp rise in sales and operating profit.
Over the past year, the venture has been trimming down its activities to focus laser-like on mobile broadband and, according to Nokia CEO Stephen Elop, this has now resulted in a “tremendous and successful 2012.” However, he did nothing to end the persistent speculation that NSN‘s parents are looking to break up or sell the joint venture, saying his firm was open to “all options” for the unit.
NSN reported fourth quarter operating profit of $766 million, up more than threefold from $234 million in the year-ago period and from around $430 million in Q312. Net sales were up 14% year-on-year to $5.31 billion and a 14.4% operating margin was up from 4.2% a year earlier and broke NSN‘s previous record, 9.2%, in Q312. It was also the fifth quarter in a row in which NSN generated positive cashflow.