Ericsson posts weak sales in Q4 as North American carriers cut back

Ericsson (NASDAQ: ERIC) posted tepid sales in the fourth quarter and although the company's gross margin was higher than expected the Swedish vendor is facing continued weakness in North America, its largest market by revenue.

Ericsson said sales for the fourth quarter clocked in at $8.2 billion (68 billion Swedish kronor), up 1 percent year-over-year but actually down 2 percent from the year-ago period when adjusted for comparable units and currency. The company said its weakness in North America was offset by strong sales growth in the Middle East, Europe and Asia. Nonetheless, Ericsson's net income for the quarter dove by 35 percent, down to around $512.4 million from around $778.3 million a year ago.

The vendor's closely watched gross margin, a key measure of profitability, fell year over year to 36.6 percent from 37.1 percent, but it handily beat analysts' average estimate of 34.7 percent, according to Bloomberg.

Sales in the company's networks business dipped 2 percent to $4.14 billion, while sales in global services jumped 10 percent to around $3.62 billion. Revenue from support solutions was $485.7 million and sales from modems was a miniscule $12.1 million.

Ericsson's networks business is in the middle of a shift as CEO Hans Vestberg manages it following the departure earlier this month of former networks chief Johan Wibergh, who left to become Vodafone's new CTO. The networks business slumped because of a drop in mobile broadband business in North America, but the company said network sales were strong in Western and Central Europe, the Middle East, North East Asia as well as in Northern Europe and Central Asia.

For the past several quarters Ericsson has been pointing to a slowdown in North America as investments in macro LTE deployments come to an end and carriers focus more on software and capacity improvements. Those trends continued in the fourth quarter, as Ericsson's sales in North America dropped 5 percent year over year. North America accounted for 19.2 percent of Ericsson's total sales in the fourth quarter, by far its largest region.

In explaining what caused the drop in North American sales, Ericsson said carriers in part "remain focused on cash flow optimization to finance acquisitions and spectrum auctions." Indeed, the FCC's AWS-3 spectrum auction in the United States remains open and bids now top $44.88 billion--Ericsson customers including Verizon Wireless (NYSE: VZ), AT&T Mobility (NYSE:T) and T-Mobile US (NYSE:TMUS) are expected to be big spenders (bidders will remain anonymous until the end of the auction).

In an interview with FierceWireless, Ericsson CFO Jan Frykhammar said that although the North American region continued to slow down, Ericsson had strength in other markets. "That shows again the benefits of doing the mobile broadband business in 180 countries," he said.

Frykhammar noted that North America is a mature market in terms of mobile broadband deployment but that other markets would follow its example and continue deploying LTE networks. "We see the potential to benefit over time from those trends," he said.

Ericsson said it expects the North American mobile broadband business "to remain slow in the short-term." Frykhammar said that could mean one quarter or three quarters, but said the company is not worried about the long-term outlook. "We don't believe that there is any change to the business fundamentals," he said. "Mobile data growth continues to be strong."

Ericsson said that in North America its professional services business was driven by network ICT transformation contracts, including modernization of OSS and BSS platforms.

Ericsson CEO Hans Vestberg told FierceWireless earlier this month that that last year the company derived fully 15 percent of its revenues from customers that are not wireless carriers, a figure up from 10 percent in 2013 and 5 percent in 2009. The company has targeted raising that figure to up to 25 percent in 2020.

Frykhammar said these customers include utilities, transportation and car companies or those interested in assets tracking, including companies that want to keep track of items on larger container ships, like the Maresk Line. "It's important for us because it provides an opportunity to leverage scale on services," he said.

Although North America remains weak spot for Ericsson, and likely for rivals Alcatel-Lucent (NYSE: ALU) and Nokia (NYSE:NOK) as well, analysts are pointing to optimism in the wider network equipment market. While LTE deployments are maturing in North America, Japan and South Korea, they are still ongoing in China, India, Europe, Latin America and Africa.

Research firm Gartner predicts carriers' spending on mobile infrastructure, including traditional base stations as well as small cells, will jump 8 percent this year to hit $43.36 billion.

"The 4G story is spreading after the first spurt of rollouts in the U.S., Japan and Korea is behind us," Gartner analyst Deborah Kish told Reuters. "Telcos in more far-flung places from Honduras to Croatia are looking to introduce more advanced services and move prepaid customers on to contracts."

Meanwhile, analysts at brokerage firm Bernstein Research expect wireless equipment spending will increase 5 percent, though they think fixed network equipment spending will be flat.

For more:
- see this release
- see this Ericsson report (PDF)
- see this WSJ article (sub. req.)
- see this Bloomberg article
- see these two separate Reuters articles

Special Report: Wireless in the fourth quarter of 2014

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