Ericsson's North American sales surge, vendor predicts improving margins

Ericsson (NASDAQ:ERIC) posted a net loss for the fourth quarter due to an expected write down from its ST-Ericsson joint venture, but the networking giant also reported rising revenue and strong results from the North American market, which cheered investors.

The vendor reported a net loss of around $986 million for the fourth quarter, down from a profit of around $236 million in the year-ago period. Ericsson took a $1.2 billion charge on its money-losing chipset joint venture with STMicroelectronics, ST-Ericsson, during the period; Ericsson warned in December that it would take the charge. Ericsson CEO Hans Vestberg told Bloomberg that the company is "pursuing all other options on how to take this joint venture forward" but that nothing has been decided yet.

Despite the weak profit figures, Ericsson reported net sales of $10.5 billion, up 5 percent year-over-year. Investors sent the company's stock up the most in almost two years in Stockholm trading as revenue beat analysts' estimates, according to Bloomberg

Sales in the company's key networks division shined in the quarter, climbing 6 percent from the year-ago period to around $5.54 billion, driven largely by strength in the North American market. Global services sales rose 4 percent year-over-year. Ericsson's gross margin, or sales minus production costs, grew to 31.1 percent, up from 30.2 percent in the year-ago period, beating the 30.7 percent analysts had estimated.

Ericsson said the increase in its network sales was mainly related to high year-end business activity in North America and Japan, primarily within mobile broadband infrastructure. CDMA equipment sales fell 18 percent year-over-year, as expected, to around $393 million.

Still, Ericsson said its long-term strategy in networks appears to be ready to pay off. Starting in 2011 the vendor began a number of contracts to upgrade and modernize networks, projects with high initial costs. However, now Ericsson anticipates that it will turn those projects into "capacity" operations with more software sales and higher margins.

"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," Vestberg said. "With present visibility of customer demand, and with the current global economic development, underlying business mix is expected to gradually shift towards more capacity projects during the second half of 2013."

Overall in the infrastructure market, research firm Gartner predicts that sales of network equipment to carriers will rise 2.3 percent to $79 billion in 2013, after falling 6.6 percent to $77.3 billion in 2012.

In North America Ericsson's sales climbed 51 percent year-over-year to $2.67 billion, leading every other region in sales in the quarter by a wide margin. The vendor said CDMA sales continued to drop, but at a slower pace in the quarter due to temporary capacity needs.

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

Special Report: Wireless in the fourth quarter of 2012

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