Ericsson (NASDAQ:ERIC) reported stronger profit and sales in the third quarter than analysts had expected, but sales in North America, which accounted for around 22 percent of the company's total sales in the quarter, continued to fall on weakened demand for CDMA.
Overall, Ericsson, the world's largest network infrastructure provider, posted solid financial results. The Swedish vendor reported net income of $579 million, up from $558 million in the year-ago period and beating the consensus of $555 million of analysts surveyed by Bloomberg. Total sales climbed to $8.42 billion, up 17 percent from $7.20 billion in the year-ago quarter.
In Ericsson's core networks business, sales spiked 25 percent, up to $4.93 billion. Ericsson said all regions in the world except North America, Northern Europe and Central Asia, Mediterranean and India showed sequential growth in networks. Ericsson's services business grew 7 percent to $3.09 billion.
Despite the strong top-line results, Ericsson's closely watched gross margin slipped to 35 percent from 38.2 percent in the year-ago period as network modernization projects in Europe, which have lower margins than buildouts, accelerate. Ericsson CEO Hans Vestberg told Dow Jones Newswires that this is in a period where gross margins are coming down. "Our network modernization projects will continue and they will accelerate into the fourth quarter," Vestberg said.
In an interview with FierceWireless, Ericsson CFO Jan Frykhammar said Ericsson's business goes through cycles in which coverage buildout of a new technology--CDMA, HSPA, LTE--increases and margins go down, but then pick back up as operators invest in additional capacity, software and services. "It's natural," he said. "We are always trying to have a good balance."
In North America, sales fell 2 percent sequentially and 6 percent year-over-year, down to $1.83 billion. Ericsson said a strong "uptake in the services and OSS/BSS businesses in the quarter could not fully offset the impact from a slower networks business after a period of high operator investments in network capacity." The company noted that CDMA sales declined sequentially although they increased year-over-year and that there is a continued operator focus on commercial LTE launches. However, the company also noted that operators are also focusing on cash flow management, which could impact their network investments.
Frykhammar said in North America there are still uncertainties related to AT&T's (NYSE:T) proposed $39 billion acquisition of T-Mobile USA as well as when CDMA investment will peak. "There is, of course, an ambition from our customer to limit investment in that technology and focus more on 4G and LTE," he said, referring to CDMA. "It is a little bit too early to say whether we have seen the peak of CDMA or not."
The Ericsson finance chief said said it is logical to conclude that CDMA investments will peak "when the ecosystem on LTE from a handset point of view is sufficient to be able generate significant traffic on the LTE networks" and when carriers move to Voice over LTE.
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