LM Ericsson Telephone Company (ERIC) reported Non-IFRS earnings (excluding the gains from Sony Ericsson) of 6 cents per share in the first quarter of fiscal 2012. The results were below the Zacks Consensus Estimate of 12 cents per share and down 71.4% year over year.
Revenues during the quarter grew 1% year over year to SEK 55.3 billion ($7.8 billion) and improved 9% sequentially. However, sales for comparable units after adjusting for foreign exchange and hedging contracted 6% year over year. The recent acquisition of Telcordia added another SEK 1.1 billion to the top line.
Segment Details
Sales in Networks declined 17% year over year but grew 2% sequentially. However, after adjusting for organic sales and foreign exchange, revenues for the segment declined 20% year over year. The year-over-year sales were negatively impacted by lower business activity in China, including weaker sales of GSM as well as lower 3G sales in Russia and reduced operator investments in India. CDMA equipment sales are expected to further decline in the second half of 2012.
Global Services sales increased 26% year over year and 17% sequentially. Adjusted sales growth was 18% year over year. Overall revenue growth was driven by increase in Professional Services which were in turn driven by Managed Services and Consulting & Systems Integration.
The demand for Professional Services was driven by operators’ focus on increasing operational efficiency and reducing operational expenditure through transformation activities in the voice, IP and OSS/BSS domains as well as outsourcing. During the quarter, Network Rollout sales also improved year over year, driven by high volumes of network modernization in Europe and coverage projects in other regions.
Support Solutions sales for the quarter grew a robust 47% year over year and increased 15% sequentially. Adjusted sales growth for the quarter was 16% year over year. The Telcordia acquisition added an additional SEK 0.55 billion in the quarter. The strong year-over-year development in the quarter was related to billing solutions in the Middle East and Sub-Saharan Africa. The solid growth in TV is especially related to IPTV and compression.
Revenue by Geography
In North America, Network sales were negatively impacted by the decline in CDMA sales. This was partially offset by the continued transition to Long Term Evolution (LTE). Major wireless network expansion and transformation projects contributed to the growth in Global Services sales. The acquisition of Telcordia has generated momentum in OSS/BSS.
The year-over-year sales growth in Latin America was driven by services. Network Rollout sales increased due to project implementations in Brazil, Chile and Mexico. Support Solutions increased due to Telcordia acquisition and strong sales. Operators in Brazil and Mexico are preparing for LTE deployments.
In the Northern Europe and Central Asia region, sales of Networks contracted year over year mainly due to continued low investment levels in Russia. The region noted solid increase in sequential sales due to continued modernization projects and the win of a WCDMA contract with pan-Russian operator Rostelecom. In the Nordics, all major operators have now launched LTE services.
Western and Central European region witnessed impact from the macroeconomic environment leading to some capital expenditures and focus on measures to improve efficiency.
Sales growth in the Mediterranean was mainly driven by network modernization projects, which drive both sales of networks and services. In Global Services, both Network Rollout and Systems Integration sales contributed to the positive development.
Year over year sales growth in the Middle East was driven by sales in Global Services and Support Solutions. Political unrest is still impacting the region and operators in those countries continue to be cautious with infrastructure investments. Services grew, especially in Managed Services and Systems Integration, as operators are looking into network performance quality and operational efficiencies.
Revenue in the Sub-Saharan Africa region increased both year over year and sequentially, driven by increased investments in 2G. However, 2G investments are expected to level out, while 3G are expected to increase. Mobile broadband penetration is expanding from its current low level of 4%, as low cost smartphones enter the market and the internet connectivity is improving.
In India, there has been a recovery in network capital expenditure as operators have started focused investments in areas where data traffic is growing. However, regulatory uncertainties continue in India.
The year-over-year decrease in China and North East Asia in Networks is mainly due to lower sales of GSM and generally lower business activity in China and continued transition to LTE in Korea, impacting 3G sales. Services sales were driven by more turnkey projects in Japan. The product mix is rapidly changing towards more initial LTE deployments and a larger share of services.
Networks sales in the South East Asia and Oceania increased year over year in several countries, driven by 3G investments and initial LTE deployments. The sequential improvement is due to capacity investments in Indonesia and deployments in other markets. Global Services reported an increase year over year driven by network rollout and support services aligned with infrastructure investments.
Margins and Balance Sheet
Gross margin for the quarter declined to 32.0% from 37.8% year over year and 33.3% sequentially. The year over year decrease is due to the increased Global Services share as well as a higher proportion of coverage projects and network modernization projects in Europe.
Approximately half of the year-over-year gross margin decline is related to the increased services mix. The sequential gross margin reduction is due to higher Global Services share and lower sales of mobile broadband capacity than in the first quarter of 2012.
Total operating expenses declined 5.1% year over year amounting to SEK 15.0 billion. R&D expenses were flat year over year at SEK 8.1 billion while it increased marginally on a sequential basis due to restructuring. Operating income for the quarter was severely impacted due to lower profitability in Networks which was partially offset by lower restructuring costs. Operating income for the quarter was SEK 3.3 billion declining 34% year over year.
Cash, cash equivalents and short-term investments amounted to SEK 66.4 during the quarter. The net cash position decreased sequentially to SEK 25.9 billion primarily due to payment of dividends worth SEK 8.2 billion and negative operating cash flow. Capital expenditure investments amounted to SEK 1.6 billion during the reported quarter.
Cash flow from operations was negative SEK -1.4 billion compared to a positive SEK 5.8 billion in the prior year period. The decline was primarily attributable to late invoicing in the quarter.
Acquisitions
On July 5, 2012, Ericsson completed the acquisition of French company Technicolor’s Broadcast Services Division for EUR19 million. Ericsson intends to expand its broadcasting area by increasing its current broadcast operations in terms of channels managed and households reached. This deal was announced in March this year.
Ericsson currently has a Zacks Rank of #3, which implies a short-term Hold rating on the stock.
To read this article on Zacks.com click here.
Zacks Investment Research
