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Ericsson (ERIC - Analyst Report) reported Non–IFRS earnings (excluding charges from restructuring, amortizations and write-downs of acquired intangible assets) of 37 cents (SEK 2.42) in the fourth quarter of 2013, significantly beating the Zacks Consensus Estimate of 21 cents per share.
For full-year 2013, the company reported Non–IFRS earnings of 54 cents (SEK 3.55) reflecting a year-over-year increase of 58%. The earnings fell short of the Zacks Consensus Estimate of 72 cents per share.
The growth was driven by increasing global demand for the mobile broadband which led to growth of 40% in the Ericsson’s subscribers. The other key catalyst was Ericsson’s multi-year IPR (intellectual property rights) cross-license agreement with Samsung that is based on the global fair, reasonable and non-discriminatory (FRAND) terms.
Revenues in the quarter increased 4% year on year and 27% sequentially to $10.3 billion (SEK 67.0 billion). The rise in revenues was driven by the company’s strong performance in both core and acquired businesses. The revenues beat the Zacks Consensus Estimate of $10.2 billion.
The company reported revenues of $34.88 billion (SEK 227.4 billion) for full-year 2013 compared to the $33.64 billion (SEK 227.8 billion) reported for full-year 2012 (which included an additional gain from the divestment of the company’s Sony Ericsson business).
Sales in Networks contracted 1% year over year despite an increase of 30% sequentially. During the quarter, the segment was impacted by lower sales in North America. The GSM (Global System for Mobile Communication) investments continued to decline in North East Asia, especially in China and Japan. The business also continued to be negatively impacted by currency effects. However, sequential growth was driven by the company’s strong position in the mobile broadband industry as well as the increasing demand for Ericsson’s Smart Services Routers (SSR).
Global Services sales declined 3% year over year but increased 13% sequentially. The decline in revenues was primarily due to the foreign currency translation. After adjusting foreign exchange impacts, revenues grew 4% year over year driven by increased activity in North America. Demand for professional services continued to be on the rise with operators increasing their efficiency and reducing expenses.
Support Solutions sales for the quarter surged 41% year over year and 117% sequentially. The segment benefited significantly from the company’s agreement with Samsung which completely offset the negative impacts of divestments and restructuring initiatives taken by the company. However, OSS (Operations Support System) and BSS (Business Support System) sales continued to grow both year-over-year and sequentially.
Margins and Balance Sheet
Gross margin increased to 37.1%, up from 31.1% in the prior-year quarter. The growth was supported by lower share of network modernization projects in Europe and an improved business mix. On a sequential basis, gross margin increased from 32.0% to 37.1%.
The operating margin for the quarter was 13.5%, a significant increase from the prior-year quarter’s negative operating margin of 5.7% and the previous quarter’s margin of 8.1%. The year-on-year increase was primarily due to the positive impact from the company’s performance in networks and network rollouts. For full-year 2013, the operating margin was 7.8% compared to 4.6% in the prior-year quarter.
Cash flow from operating activities during the quarter decreased to $2.2 billion (SEK 14.6 billion). The cash flow also decreased 21% year over year to $5.8 billion (SEK 37.8 billion).
The company’s net cash, as on Dec 31 2013, amounted to $5.8 billion (SEK 37.8 billion).
Ericsson’s Board of Directors has also proposed to increase the annual dividend for 2013 by 9% to SEK 3.00 (46 cents) per share.
Ericsson currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the wireless equipment sector include ShoreTel, Inc. (SHOR - Snapshot Report), Juniper Networks Inc. (JNPR - Analyst Report) and Comtech Telecommunications Corp. (CMTL - Snapshot Report). While ShoreTel carries a Zacks Rank #1 (Strong Buy), Juniper and Comtech both carry a Zacks Rank #2 (Buy).
Note: 1 SEK = $0.1535 (period average from Oct 1, 2013 to Dec 31, 2013)
1 SEK = $0.1534 (period average from Jan 1, 2013 to Dec 31, 2013)
One Ericsson ADR corresponds to one Ericsson share.