Ericsson surges in Q1 on strong sales, but sees component issues

Ericsson (NASDAQ:ERIC) posted first-quarter earnings and sales that topped analysts estimates, but the company expects that its supply chain will continue to be impacted during the next several months by the effects of the earthquake and tsunami that struck Japan. 

The company, the world's largest network equipment vendor, reported net income of $671 million in the quarter, more than triple the $212 million it posted in the year-ago period. The profit figure topped estimates of $500 million, according to a survey of analysts conducted by Bloomberg. Ericsson reported sales of $8.67 billion, up 17 percent from $7.38 billion in the year-ago quarter.

Ericsson said network sales jumped 53 percent in the quarter, and that it saw year-over-year growth in five of its ten regions. The vendor said sales in North America, Ericsson's largest market in terms of revenue, rose 39 percent in the quarter to $2.16 billion. The company said North American carriers continue to spend money on hardware and software to expand network capacity, in response to users' increasing data traffic.

In an interview with FierceWireless, Ericsson CFO Jon Frykhammar said the company is benefiting from strong mobile broadband demand in countries where it has a large presence--the U.S., Japan, China and Russia. "That creates a bit of what we call portfolio momentum," he said. "You are in the right spots from a country point of view as well as a portfolio point of view."

However, Frykhammar cautioned that there are uncertainties in the North American market--chief among them the fate of AT&T's (NYSE:T) proposed $39 billion acquisition of T-Mobile USA, as well as the long-term growth potential of CDMA networks as more carriers migrate to LTE. For now, he said, Ericsson is pleased with its CDMA business. "We are extremely grateful and happy about the acquisition of the Nortel assets," Frykhammar said of Ericsson's $1.13 billion acquisition of Nortel Networks' CDMA and LTE assets in 2009. "So far, that business has developed actually better than anticipated when we acquired it."

Despite the rosy results, Ericsson did warn that its operations will be impacted by the disaster in Japan, and that supply chain problems could lead to delays in certain products. "We have done very much to mitigate this problem, but we can't rule out delays for certain products as a result of the earthquake," Ericsson CEO Hans Vestberg told Dow Jones Newswires. He said the issues should be resolved by the third quarter, but also said it is unclear how sales will be affected. Ericsson said it is working on finding and integrating alternative components in its products as well as increasing volumes with alternative suppliers.

Frykhammar said Ericsson took early measures to mitigate the impact of the disaster, but that some of its subcontractors have been affected. "The best estimate we have right now is that we think we will be able to deliver the majority of the delayed volumes by the end of the third quarter," he said. "This is something we are tracking on a daily basis."

Ericsson has steadily maintained its leading market position for years, but has come under increasing pressure from China's Huawei, the world's second largest infrastructure vendor. Huawei said Wednesday it is aiming for $100 billion in annual sales in the next five to 10 years, up from a forecast of $31 billion for this year. Frykhammar said Huawei has become a much more potent competitor over the past five years.

"We treat them as a very competent competitor," he said. "What we are obviously trying to do is ensure that we are differentiated in front of our customers, both in terms of what our products are capable of doing, and using the services business that we have and the truly global presence we have." He pointed out that Ericsson believes it can grow sales by between 4 and 10 percent annually over the next three years. 

For more:
- see this release
- see this Bloomberg article
- see this Dow Jones Newswires article (sub. req.)
- see this Bloomberg article

Special Report: FierceWireless Q1 earnings page

Related Articles:
Ericsson's Q4 profit rises as mobile broadband demand surges
Ericsson considers buying network capacity, with financial partners
Ericsson's Q3 profit beats estimates as North American sales surge
Ericsson is hit by component shortages, weak demand
Ericsson's Q1 profit slides on weaker sales

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