Ericsson's Q3 sales beat expectations, but N. America is now a point of uncertainty

Ericsson (NASDAQ: ERIC) reported third-quarter sales that beat analysts' expectations, but falling revenue in the North American market cast concerns over the vendor's forthcoming fourth-quarter results. North America is the company's largest region by revenue and carrier spending in the market has traditionally been a growth driver for Ericsson--but that could be starting to shift.

Overall, Ericsson said net income fell 13 percent year-over-year in the quarter to 2.65 billion Swedish kronor ($365 million) from 2.92 billion kronor ($402 million) in the year-ago period. According to the Wall Street Journal, Ericsson's profit took a hit largely because of higher research and development expenses, as well the effects from currency hedge contracts. Ericsson's closely watched gross margin was in line with expectations, the WSJ said, at 35.2 percent in the quarter, up from 32 percent a year ago.

However, total sales at the company jumped 8.7 percent year-over-year to 57.6 billion kronor ($7.94 billion), beating analysts' average estimates of 54.8 billion-kronor ($7.55 billion), according to Bloomberg.

Sales in the company's networks unit grew 13 percent year-over-year, driven by high mobile broadband activities in the Middle East, China and India. Revenue from support solutions ballooned 30 percent in the quarter due to strong development in OSS and BSS. Sales in global services were up 2 percent from a year ago.

Ericsson made a number of acquisitions in the quarter, including a $95 million deal for Fabrix Systems, a provider of cloud storage, computing and network delivery for video applications. Ericsson also beefed up its OSS/BSS capabilities with a deal to acquire MetraTech.

Yet North America was a troubling point for Ericsson. Sales in the region fell 3 percent year-over-year and 8 percent from the second quarter, down to 14 billion kronor ($1.92 billion).

Ericsson said North American carriers were cutting back on network quality and capacity expansion projects and focusing more on "on cash-flow optimization." The vendor also said that recent network ICT transformation contracts, including the modernization of OSS and BSS systems, drove the professional services business in North America in the quarter. Ericsson said that the shift in North American operator spending patterns made estimating near-term sales difficult.

"I think that is the main uncertainty for Q4," Ericsson CFO Jan Frykhammar said on the company's earnings conference call, according to Reuters.

Ericsson CEO Hans Vestberg tried to reassure investors that underlying trends appeared strong. "But we're not seeing any change in the underlying market demand in the U.S.," he said, according to the Journal. "Demand for new smartphones remains high."

Rival Nokia (NYSE:NOK) just reported that network sales in North America soared 53 percent from the year-ago period, primarily due to "a new LTE network deployment at a major customer," which CEO Rajeev Suri identified as Sprint (NYSE: S). Nokia, Alcatel-Lucent (NYSE: ALU) and Samsung are providing 8T8R radios for Sprint's tri-band Spark LTE service. Nokia is also helping T-Mobile US (NYSE:TMUS) enhance its LTE network and implement carrier aggregation.

"The trend is clear: Ericsson's biggest customers in North America and Japan have largely completed their large roll-out programs of LTE, and revenues are to an increasing level coming from other markets, among them Middle East and China," Bengt Nordstrom, CEO at telecoms consultancy firm Northstream, told Reuters. "It will be increasingly important to grow market share in China which by far will be the biggest LTE market for the coming three to four years."

Ericsson said sales in North East Asia grew 16 percent year-over-year as a result of execution on previously awarded LTE contracts in China and Taiwan, which was partly offset by lower network investment levels in Japan and South Korea.

In an interview with FierceWireless, Johan Wibergh, Ericsson's head of its networks segment, said from a big-picture perspective the company is still doing quite well. "It's important to remember if you look at Ericsson's total sales compared to the last year, for instance, we're doing very great," he said.

"One shouldn't draw too [many] conclusions" from one quarter, he said. Sales are usually very closely related to how carriers are executing on projects, and sometimes they are more intensely buying gear in one quarter and not in another. Wibergh said sometimes carriers build up inventory of equipment and then they hold off on buying in a later quarter as a result--the "cash-flow optimization" Ericsson referenced. He said that in North America the vendor is not losing market share, but acknowledged that business activity in the market slowed in the third quarter.

Wibergh also agreed that some markets will start to have more LTE activity than other mature markets like North America. He also noted that 3G network deployments remain a major part of the company's business globally, and that 3G subscriber growth has actually been higher than LTE worldwide.

Wibergh said that falling average selling prices for smartphones, driven by higher sales of low-cost devices in emerging markets, bodes well for mobile broadband growth. "It's our best friend," he said.

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 third quarter of 2014

Related Articles:
Ericsson maintains run of acquisitions with cloud specialist Sentilla
Ericsson to exit wireless-modem market, cut 1,000 jobs
Ericsson cites 35% annual growth in mobile broadband subscribers
Ericsson's profit surges in Q2, as vendor points to stronger second half

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