Ericsson shines in North America, but restructuring nails earnings

Despite a 2 percent year-over-year uptick in sales, restructuring costs led Ericsson's (NASDAQ:ERIC) first-quarter 2013 income to plummet 86 percent from the prior-year period to $181.43 million.

Quarterly restructuring charges of $272.29 million, mostly from downsizing its Sweden-based operations, were reflected in Ericsson's lower profit figure. The company noted its stronger first-quarter 2012 earnings also reflected gains from its divestiture of ownership in the Sony Ericsson mobile phone venture.

Sales for 2013's first quarter reached $7.87 billion. Sales for comparable units, adjusted for currency exchange rates and hedging, grew 7 percent.

The quarter's operating margin was 4 percent, though exclusion of restructuring charges resulted in a margin of 6.7 percent. Gross margin was 32 percent, down from 33.3 percent a year earlier.

"The report was a bit weak and while the network side of the business held up, the services side was soft," said Erik Paulsson, an analyst at Pareto Securities, who was quoted by Bloomberg.

Network sales improved nearly 3 percent to $4.25 billion. Regionally, North America shined for Ericsson during the first three months of 2013. "North America remained the strongest region and showed a growth of 23 percent despite the decline in CDMA," said Hans Vestberg, Ericsson's president and CEO.

Modernization activities in Europe were also fairly positive for Ericsson, where the company said activity is high but value is low due to extensive labor hours. The company expects those projects will become more lucrative capacity operations with added software sales and higher margins over time.

Ericsson suffered lower sales in South Korea, "which remains one of the most advanced LTE markets but without parallel 3G deployments," as in the first quarter of 2012, said Vestberg. Slowing GSM investments in China and currency-exchange effects in Japan also impacted Ericsson.

Johan Wibergh

Johan Wibergh

While vendors seek an upside from China's commercial deployments of TD-LTE network this year, Ericsson does not stand to gain as much as its Chinese competitors. The company has more than 30 percent market share in 2G networks across China, but a much lesser share in 3G because it did not produce network gear for China's homegrown standard, TD-SCDMA. So, not only does Ericsson not have that 3G base to build upon, but so far 85 percent of contracts for TD-LTE trials in China have gone to domestic vendors, Johan Wibergh, Ericsson's head of networks, told FierceBroadbandWireless.

Further, he indicated that competing with local vendors on any big procurement creates pricing pressures that make pursuit of market share less desirable.

Wibergh said Ericsson is enjoying momentum for its SSR routing platform, with 12 new contracts signed in the quarter for a total of 51. The router was largely dedicated to mobile applications, such as wireless packet core, last year. However, a new software release planned for this quarter will make Ericsson's SSR routing platform more competitive on the fixed side for IP edge and broadband network gateway (BNG) applications, said Wibergh.

Ericsson also anticipates higher adoption rates for software releases and optional software features, driven, of course, by increasing mobile data adoption. For example, in conjunction with the release of Apple's (NASDAQ:AAPL) iPhone 5 last summer, Ericsson released a package for operators that makes smartphones perform better on the network by taking up less capacity and delivering faster latency. In addition, LTE Broadcast initiatives by operators such as Verizon Wireless (NYSE:VZ) require new software in the network.

Demand for new and improved data services "benefits us because we get to send more frequent software releases and do the job of upgrading the network with new software," said Wibergh.

Ericsson's global services unit also had a positive quarter, seeing sales rise 4 percent year-over-year to $3.25 billion. The vendor signed 21 new managed services contracts during the quarter, including wins in Russia and a $1 billion, eight-year services contract with Reliance in India.

Michael Soper, networking and mobility analyst with Technology Business Research, said Ericsson had an estimated 17 percent market share in managed services during 2012. "The company is increasingly upselling managed services customers to consulting and systems integration business and winning new customers in regions that have been curbing infrastructure spending," he said.

Ericsson's support solutions sales plummeted 19 percent over 12 months to $363 million. The vendor said its divestment of multimedia brokering (IPX) in 2012's third quarter negatively impacted year-over-year sales results. The company reported demand for OSS and BSS is strong, driven by operators' focus on improving efficiency and adapting to mobile broadband business requirements. The number of subscriptions served by Ericsson's charging and billing solutions was 2 billion at the end of 2013's first quarter.

Last month, Ericsson and STMicroelectronics agreed to shutter their ST-Ericsson chipset joint venture. Ericsson said it is seeing good progress in the breakup of the joint venture.

Earlier this month, Ericsson announced it would acquire Microsoft's (NASDAQ:MSFT) Mediaroom unit to strengthen its IPTV position.

For more:
- see this Ericsson release
- see this Ericsson earnings report (PDF)
- see this Ericsson presentation (PDF)
- see this Bloomberg article
- see this Reuters article

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Article updated April 24, 2013, to add vendor and analyst comments.