Ericsson Q2 Profit Beats Forecasts as Networks Margin Shines

Ericsson, the world's No.1 mobile network equipment maker, topped second-quarter sales and profit forecasts and said its mainstay North American business had stabilised after three quarters of declines, lifting its shares as much as 6 percent.

Mobile operators in North America, which accounts for about a quarter of Ericsson's turnover, have largely finished building out the latest 4G networks, meaning suppliers are having to focus on upgrading congested parts of existing networks there.

"We see stabilisation," Ericsson CEO Hans Vestberg said of the U.S. business on a call, adding "we are operating still on a lower operating level compared to last year." He declined to forecast whether U.S. sales would continue to grow this year.

Analysts said the rise in beaten-down Ericsson shares reflected investor relief over the levelling off in its U.S. business and better margins, excluding hefty restructuring charges, rather than an improvement in fundamental demand.

"There's probably an element of relief in the share price move, particularly around comments on North America," Jefferies analyst Robert Lamb said, adding that cost cuts pointed to further improvement of profitability ahead.

The Swedish firm also reported sales growth from the fast roll-out of 4G networks in China as well as demand in India, the Middle East and South-East Asia, offsetting weakness in Japan.

Sticks to strategy
Despite a global explosion in data traffic on new mobile Internet and video services, spending on network equipment has plateaued as telecoms operators switch to upgrading existing capacity after years of building new high-speed networks. This has spurred a new wave of consolidation in the industry.

Ericsson, which was trading at seven-year highs in April, has plunged since rivals Nokia and Alcatel Lucent moved to merge in a 15.6 billion euro deal to create the world's second-largest mobile gear maker after Ericsson.

Refusing to alter a business strategy that relies on modest growth from existing businesses coupled with steep cost-cutting, rather than a shift to act as an aggressive consolidator in search of higher growth, Ericsson shares remain 18 percent down, even after Friday's gains.

Shares were up 3.8 percent in late afternoon trading, more or less flat for the year-to-date. Ericsson has underperformed the STOXX Europe 600 Technology index, which has gained 14 percent in the same period.

Second-quarter sales were 60.7 billion crowns ($7.1 billion), topping analysts' average forecast of 58.6 billion.

Turnover grew 11 percent, buoyed by currency translation effects. On a like-for-like basis, sales declined 6 percent.

Operating profit was SEK 3.6 billion (roughly Rs. 2,678 crores) compared with 4.0 billion in the year-ago quarter, beating a mean forecast of SEK 2.8 billion in a Reuters poll of analysts.

The operating margin in Ericsson's key networks unit, which accounted for just over half of sales last year, hit 8 percent, up from just 2 percent in the first quarter.

Ericsson accelerated restructuring of its workforce, leading to a net loss of 1,700 jobs in the quarter, mainly in its home market. It took second-quarter restructuring charges of 2.7 billion crowns compared with 614 million in the first quarter.

"It looks as though restructuring is quite deep, and if sustainable, points to greatly improved operating margins in the Networks business going forward," Jefferies analyst Lamb, who has a "hold" rating on the stock, said.

Gross margin fell from above 36 percent to 33.2 percent But excluding restructuring charges, margins were 35.1 percent.

The company has set a goal of saving SEK 9 billion (roughly Rs. 6,604 crores) per year by 2017 compared with 2014 levels.

Margins were also hurt by increased sales of lower priced gear in the fast-growing Chinese market, and a decline in patent revenue tied to a patent dispute with Apple Inc and increased services revenue, which carry lower profit margins.

© Thomson Reuters 2015