Ericsson Reports a Mediocre Third Quarter

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Ericsson reported a mediocre third-quarter result on Thursday. For the quarter, sales decreased 2% year over year to SEK 54.6 billion, gross margins fell to 30.4% from 35.0% year over year, and non-IFRS earnings per share dropped 32% to SEK 1.04 year over year. Ericsson faces a number of headwinds. It is tackling a slowdown in the macroeconomic environment, it faces pressure in the networks segment, and its sales mix continues to generate relatively weak margins.

The company’s margins are expected to improve during the next six to nine months as capacity projects increase relative to coverage projects. The company will also target additional efficiency gains and cost reductions. In the long term, the company is poised to benefit from strong demand for networking equipment and services.

By segment, networks was the weakest. Network sales fell 17% to SEK 26.9 billion year over year, due to lower sales in Europe, a sharp 50% decline in CDMA, lower GSM sales in China, and weaker results in Russia. Operating margins were 5%, down from 13% year over year. The margin decline is a result of lower sales as well as an unfavorable business mix due to the European modernization projects.

Although networks was weak, global services and support solutions showed encouraging signs. Global services revenue grew 19% to SEK 24.3 billion year over year. Demand for Ericsson’s managed services grew as companies continue to look for ways to reduce operating expenses and increase efficiencies. Additionally, major work in network rollouts across geographies helped to boost the segment, too.

For the quarter, operating margins were down slightly to 8%, from 9% year over year. Support solutions’ sales increased 4% year over year on an organic and foreign exchange adjusted basis. With Telcordia’s contribution included for the period, sales grew 29% to SEK 3.3 billion year over year.

An increase in business support solutions for Latin America and the Middle East were the main drivers. Excluding a oneoff payment, operating margins increased to 7%, from 3% year over year.

Geographically, the North American market continues to be Ericsson’s strongest region. For the quarter, North American sales increased 16% year over year to SEK 14.0 billion as investments in LTE coverage and capacity grew. Unfortunately, Europe and China were particularly weak. Demand for networks in Russia slowed considerably, Western Europe was negatively affected by more network modernization contracts, and lower GSM sales in China hurt the region.

Overall, Ericsson faces a number of headwinds yet it remains one of the world’s pre-eminent providers of telecom equipment and services. Although the telecom equipment industry remains sluggish in the short term, Ericsson will benefit when conditions improve.

 

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