LM Ericsson Telephone Company (ERIC) reported earnings from continuing operations of approximately 14 cents for the first quarter of 2010, beating the Zacks Consensus Estimate of 13 cents. This excludes restructuring charges of SEK 2.2 billion ($305.78 million) incurred in the first quarter.

Revenues in the quarter were down 9% year-over-year and 23% sequentially. Sales for comparable units, declined 16% year-over-year. During the quarter, operators in a number of developing markets were cautious with fresh investments which impacted sales, primarily in Networks. This was partly offset by continued good services sales.

Gross margin, excluding restructuring charges, improved year-over-year and sequentially to 39% due to efficiency gains and product mix.

Operating expenses were reduced to SEK 13.1 billion, excluding restructuring charges. This includes operating expenses from the acquired CDMA business. Operating income, excluding joint ventures and restructuring charges, amounted to SEK 4.5 billion, including positive contribution from the acquired CDMA business.

Ericsson’s share in earnings of joint ventures, before tax, amounted to a loss of SEK 0.3 billion, excluding restructuring charges, compared to loss of SEK 0.4 billion in the fourth quarter. Sequentially, Sony Ericsson improved sales and margins significantly due to efficiency programs and new products, while ST-Ericsson’s loss increased due to lower sales and seasonality.

Segment Results

Networks

Networks’ sales in the quarter declined by 14% year-over-year, positively impacted by CDMA sales. However, tight industry component supply conditions have affected sales in the quarter. This was more than offset by the acquired CDMA operations. Voice related sales, such as 2G access and core continued to decline. Increased mobile broadband (3G) sales, including radio, mobile backhaul and packet core, partly offset this impact.

Global Services

Global Services sales grew 3% year-over-year and declined 22% sequentially. Professional Services sales increased 4% year-over-year and in local currencies, growth amounted to 12% year-over-year. Managed Services sales in the quarter increased by 17% year-over-year. Network Rollout sales increased 3% year-over-year.

Multimedia

Multimedia sales in the quarter declined by 29% year-over-year and 31% sequentially, due to continued slower sales of revenue management solutions in Sub-Saharan Africa, Middle East and South East Asia and Oceania. Sales in multimedia brokering (IPX) were also somewhat slower. The TV business continued to show good development with strong demand for compression technology and IPTV solutions.

Sony Ericsson

Ericsson’s joint venture with Sony Corporation (SNE) shipped 10.5 million units during the quarter, a decline of -28% year-over-year. Sales in the quarter were EUR 1,405 million, a decrease of 19% year-over-year. Average selling price in the quarter increased by 12% due to good sell-through of existing models and new flagship phones starting to ship at the end of the quarter and a positive currency effect.

Ericsson’s share in Sony Ericsson’s income before tax was SEK 0.1 billion in the quarter.

ST-Ericsson

Net sales in the quarter showed an 18% decrease sequentially, due to the impact of the ongoing portfolio transition, seasonal effects as well as the number of days in the quarter. The sequential change in operating loss mostly reflects lower sales, the effect of an unfavorable product mix and the lower contribution from European funding programs, which positively impacted the previous quarters.

Ericsson’s share in ST-Ericsson’s income before tax, adjusted to IFRS, was negative SEK 0.5 billion in the quarter, including restructuring charges of SEK 0.1 billion.

Regional Reporting Pattern

As of Jan 1, 2010, the geographical reporting is changed. Instead of five geographical areas, ten regions are reported which mirrors the new internal geographical organization.

Market Data

While the global mobile infrastructure market declined by more than 10% in 2009, measured in dollars, the company believes that the fundamentals for longer-term positive development for the industry remain solid. Global mobile data traffic has surpassed voice traffic.

In addition, 3G/WCDMA traffic has surpassed GSM traffic. Ericsson’s findings show that mobile data traffic globally grew 280% during the last two years and is forecast to double annually over the next five years. Mobile subscriptions grew by 184 million in the quarter to a total of 4.8 billion, returning to higher growth levels. Global mobile penetration is now 70%. China and India alone accounted for 44% of net additions with 28 and 53 million respectively.

Acquisition

On Mar 31, 2010, Ericsson completed the acquisition of Nortel’s North American GSM business. More than 350 employees from Nortel will be integrated into the Ericsson Group over the coming months. The acquired operations are expected to be accretive to Ericsson’s earnings within a year after closing.

Headquartered in Stockholm, Sweden, LM Ericsson Telephone Company is a multinational company engaged in manufacturing and selling wireless infrastructure equipment for the telecom sector. It is a total network solutions provider, serving wireless and wireline operators, enterprises, and consumers.

We currently have a Neutral recommendation on ERIC.

Read the full analyst report on “ERIC”
Read the full analyst report on “SNE”
Zacks Investment Research