Ericsson bounces back to stronger Q1 profit, but N. American sales plunge 23%

Ericsson (NASDAQ: ERIC) reported lower first-quarter sales but higher gross margins and profits as it focused on more lucrative contracts. However, the company saw a sharp 23 percent fall in revenue from North America, as large LTE coverage buildouts have peaked.

Overall, Ericsson said net profit came in at around $322.8 million, up from $184.3 million in the year-ago period when the company's profits were weighed by restructuring costs. The company's closely-watched gross margin grew to 36.5 percent from 32 percent a year earlier, compared with an average of analysts' estimates of 34.4 percent, according to Bloomberg.

However, the company's sales in the first quarter dropped 9 percent to around $7.2 billion, missing analysts' expectations of around $7.73 billion, according to Bloomberg. Network sales fell 13 percent and global services fell 5 percent from the year-ago period, while Ericsson's support solutions business saw sales jump 13 percent.

"The anticipated decline in mobile broadband coverage projects, primarily related to North America and Japan was not fully offset by growth in China, Middle East and Latin America," Ericsson said in a statement. "The capacity business continued to show good growth."

In North America, Ericsson's largest market by sales, revenue declined 23 percent to around $1.85 billion. The vendor said a slowdown in network buildout projects was partially offset by network quality and capacity expansion sales. Ericsson also said that network ICT transformation is driving a strong professional services business in the North American market, including the modernization of OSS and BSS systems.

However, as it has in the past few quarters in describing its business in North America, the company noted that it received lower revenue from "two large mobile broadband coverage projects in North America, which peaked in the first half of 2013," most likely referring to Verizon Wireless (NYSE: VZ) and AT&T Mobility (NYSE:T). Verizon completed its initial LTE buildout last June, and now covers 305 million POPs, and AT&T said its LTE network, which now covers 280 million POPs, will be completed by this summer. However, Ericsson is also a major vendor for Sprint (NYSE:S) and T-Mobile US (NYSE:TMUS), which are continuing their LTE deployments, as well as many other smaller carriers.

"We envisioned that we would come into (the year) with a bit lower activity in the coverage projects in North America and that is such a big market for us and that has continued into the first quarter," Ericsson CEO Hans Vestberg told CNBC.

"It was as expected. Of course you never want to have a decline in revenue but it was very much expected. The same goes for Japan where we also talked in Q3 last year about lower activity and those are not offset by the improvements in capacity where we are 'densifying' networks and selling more software," he said.

Ericsson expects business to pick up in the second half of 2014. The company noted that in Europe it has been awarded a five-year contract as part of Vodafone's "Project Spring" network upgrade program, which includes upgrades and expansions of Vodafone's 2G and 3G networks, and the buildout of LTE networks along with professional services.

Additionally, Ericsson sees upside in China as China Unicom and China Telecom follow China Mobile's lead in deploying LTE networks. "We are in execution mode on 4G in China right now," Vestberg said on an earnings conference call, according to Reuters.

Yet Ericsson faces tough competition in China and other emerging markets, most notably from Huawei. Huawei has seen sales and profit grow steadily in recent years. Last month, it forecast an 8 percent rise in revenue from its network gear business. Huawei also said in March it hopes to almost double 2013's record revenue by 2018.

Ericsson also faces challenges from a restructured Alcatel-Lucent (NYSE: ALU) as well as Nokia (NYSE:NOK) Solutions and Networks and ZTE.

"Ericsson is the leader in an industry that is growing in users and data traffic but not in revenues," Bengt Nordstrom, CEO at telecom consultancy Northstream, told Reuters.

For more:
- see this release
- see this Ericsson report (PDF)
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see this Reuters article
- see this CNBC article

Special Report: Wireless in the first quarter of 2014

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