Ericsson's profit surges in Q2, as vendor points to stronger second half

Ericsson (NASDAQ: ERIC) reported strong results for the second quarter, with its sales and profit margins beating analysts' expectations. The Swedish vendor expects a better sales and business mix in the second half of this year and is riding stronger growth in network-capacity projects, which are more profitable than network buildouts.

Overall, Ericsson posted net profit of around $378 million, 76 percent higher than the $215.3 million it reported in the second quarter of 2013. Net sales clocked in at $8.02 billion, which was down 1 percent year-over-year but up 15 percent from the first quarter and higher than analysts' estimate of $7.69 billion, according to Bloomberg. Ericsson's closely watched gross margin grew to 36.4 percent, a huge jump over the 32.4 percent Ericsson had in the second quarter of 2013 and higher than analysts' estimate of 35.5 percent, Bloomberg reported.

Ericsson saw a sharp uptick in its networks business, which accounts for the majority of its sales. Sales in the network unit grew to around $4.25 billion, up 3 percent year-over-year and up 19 percent from the first quarter. Global services sales came in at $3.38 billion, down 7 percent year-over-year, while sales in support solutions grew 21 percent, to $410 million. Ericsson said its modems business will start generating sales by the end of the year, and its modem M7450 will be featured in smartphones and data devices.

The vendor said sales in the quarter were driven by growth in the Middle East, China and India, as well as continued capacity business in North America, though the company saw reduced activity in Japan.

Ericsson said its margin growth was a result of an improved business mix and an increased share of mobile-broadband-capacity projects in advanced LTE markets, as well as higher recurring patent revenues and "efficiency improvements."

After a slow start in 2014, Ericsson said it is executing on previously awarded LTE contracts in China and Taiwan. Furthermore, the company said the investment climate in India is improving following the spectrum auctions held there in February and government elections held in May.

North America is Ericsson's largest region by sales and made up 27.7 percent of sales in the second quarter. Revenue in the region dropped 1 percent year-over-year but was up 24 percent from the first quarter. Ericsson said sales in the quarter in North America were driven by network-quality and capacity-expansion business, primarily as a result of increasing video traffic. The company also said that recent network ICT-transformation contracts, including the modernization of OSS and BSS, drove the professional-services business in the quarter.

In the second quarter, T-Mobile US (NYSE:TMUS) signed a long-term managed-services agreement with Ericsson, which will supply the operator with its Service Agility package, including unified charging, billing, order management, product catalog and customer-relationship management. The update will cover all branded T-Mobile and MetroPCS customers.

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 in June 2013 and now covers 306 million POPs, and AT&T said its LTE network, which now covers 290 million POPs, will cover 300 million by year-end. However, Ericsson is also a major vendor for Sprint (NYSE:S) and T-Mobile, which are continuing their LTE deployments, as well as many other smaller carriers.

Ericsson CEO Hans Vestberg said the gross margin improved compared with the previous quarter because of "lower activity on the larger projects that had been on a high pace before," according to Bloomberg. He said that capacity projects helped but that it was difficult to determine how that trend would continue, since such contracts are unpredictable.

As LTE buildouts tail off, Ericsson will benefit because network-improvement and -capacity deals have a higher margin, Vestberg said. Still, he added, Ericsson will strike more deals to expand rollouts this year, which will put some pressure on margins.

In an interview with FierceWireless, Johan Wibergh, an Ericsson executive vice president and the head of its networks segment, said that the shift from lower-margin coverage buildouts to higher-margin capacity projects varies from operator to operator and region to region, depending on when carriers get new spectrum and how quickly they roll out LTE service.

In general, capacity projects involve densification of the network, building new sites or deploying new radios to support new spectrum bands on existing sites. "North America has had that," he said. "As long as data traffic continues to grow, that's important." He noted that carriers need to continue investing in their networks to maintain a high-quality user experience as data traffic grows.

In the U.S., T-Mobile and Sprint have indicated that they are deploying 4x2 MIMO antenna technology to boost LTE-network performance, especially at the edges of cells. "We have been predicting these things and we have been betting on these things to happen," Wibergh said, adding that networks are becoming more complex, with carriers using multiple spectrum bands for LTE service.

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

Special Report: Wireless in the second quarter of 2014

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