Ericsson (NASDAQ:ERIC) reported weaker sales year-over-year in the third quarter and the company warned that it is facing pressure overall and that sales have fallen in North America as major LTE projects have peaked.
The Swedish vendor said total sales dipped 3 percent year-over-year to $8.3 billion. Although Ericsson's net profit jumped 38 percent in the period to $472 million, its closely watched gross margin was 32 percent; analysts had predicted 33.4 percent, according to an average of estimates compiled by Bloomberg.
Ericsson said its networks sales clocked in at $4.2 billion, down 1 percent year-over-year. The firm said that sales were driven by growth in its mobile broadband business in Europe and Latin America, which was partly offset by slightly lower sales in North America. GSM investments continued to decline in China, Ericsson said, as the market there migrates to TD-LTE. Sales in the company's services business were off 1 percent year-over-year but its solutions business fell 29 percent. Ericsson said the decline "was primarily driven by divestments as well as portfolio changes and somewhat lower sales of compression technology."
Sales in North America, Ercisson's biggest region in the quarter, came in at $2.28 billion, which was up 3 percent from the year-ago period but down 6 percent from the second quarter. Ericsson is likely facing the effects of macro LTE network deployment projects peaking with Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T). Verizon completed its LTE buildout in June, covering 300 million POPs, and AT&T's LTE network now covers 250 million POPs. However, Ericsson is a major vendor for Sprint (NYSE:S) and T-Mobile US (NYSE:TMUS), which are continuing their LTE deployments.
"Sales for Networks continued to decline QoQ as a result of the two large mobile broadband coverage projects which peaked in first half of 2013," Ericsson noted. "Smartphone penetration, increased mobile broadband consumption and 4G device lineup remain driver s for network expansion. Network evolution and professional services remain a growth theme in North America while CDMA sales continue to decline."
Overall, Ericsson CEO Hans Vestberg said the company is "currently seeing sales coming under some pressure." He said Ericsson hopes to build on its TD-LTE wins in China and that in Europe, "the pace is picking up in the European market with continued WCDMA/LTE investments," and that Ericsson "now sees growth in several European markets and margins are also improving as the network modernization projects gradually come to an end and we engage more in new capacity and LTE business."
"The projects that peaked in the first half in North America are starting to have an effect," Fredrik Thoresen, an analyst at DNB ASA in Oslo, told Bloomberg. He noted that weaker revenue in in North America, a high-margin region for Ericsson, bring down its profitability.
There has been continued speculation that Nokia (NYSE:NOK) will look to combine its Nokia Solutions and Networks (NSN) business with Alcatel-Lucent's (NYSE:ALU) mobile unit. Vestberg told Bloomberg in an interview that Ericsson is not interested in such a deal. Alcatel-Lucent recently announced 10,000 jobs cuts as part of its new restructuring plan and CEO Michel Combes has painted a dire picture for the company as it looks to cut costs and become more of a specialist in network infrastructure.
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