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Ericsson (ERIC - Analyst Report) reported Non-IFRS earnings of 14 cents (SEK 0.90) in the first quarter of 2014, which missed the Zacks Consensus Estimate by a penny.

Lower-than-expected results were mainly owing to weakness in two of the company’s business segments, namely Networks and Global Services. Further, growth in its support solutions business had slowed down in the quarter.

Revenues

Revenues in the quarter declined 9% year over year and 29% sequentially to $7.35 billion (SEK 47.5 billion). The decrease in revenues was due to continued sluggish performances of the company’s two major mobile broadband coverage projects in North America.

The prevailing weakness in Japan was also a dampener. However, this was partly offset by growth in regions like China, the Middle East and Latin America. The company’s Networks and Global Services network rollout businesses were hurt by a fall in sales. Revenues also lagged the Zacks Consensus Estimate of $8.08 billion.

Segment Details

Sales in Networks decreased to $3.78 billion (SEK 24.4 billion) from $4.35 billion (SEK 28.1 billion) in the prior-year period. However, the segment’s operating margin increased to 10% from 6% in the first quarter of 2013.

Global Services sales declined 5% year over year to $3.16 billion (SEK 20.4 billion). However, the segment’s operating margin increased to 5% from 3% in the first quarter of 2013 as the margins in both professional services and network rollout business improved in the quarter.

Support Solutions sales for the quarter surged 13% year over year but declined 46% sequentially. The segment’s operating margin improved from the negative 1% in the year-ago quarter.  

Margins and Balance Sheet

Gross margin came in at 36.5%, up from 32.0% in the prior-year quarter. The operating margin for the quarter was 5.5%, an increase from 4.0% in the year-earlier quarter.

The margins benefited from a favorable business mix, with more focus on mobile broadband capacity solutions. The increased investment in software also pushed the margins up.

Cash flow from operating activities during the quarter increased to $1.46 billion (SEK 9.4 billion), reflecting an increase of 413.3% from a negative of $0.46 billion (SEK 3.0 billion) in the prior-year period.  Ericsson’s cash flow increased on the back of lower sales and better working capital management. Also, the IPR licensing payment received from Samsung added to the company’s gain.

Ericsson’s net cash at the quarter-end amounted to $6.75 billion (SEK 43.6 billion).

Looking Ahead

The company has been receiving key contracts in the 4G/LTE domain in countries like China, Japan, Taiwan and Europe. It has already been working on such contracts in the Northeast Asia region. In the reported quarter, Ericsson also received a contract from Vodafone Group (VOD - Analyst Report) to upgrade and manage its 2G and 3G networks, while developing its 4G/LTE network. 

The company is likely to benefit from the increased operator investments in major economies like North America. Ericsson has also partnered with AT&T, Inc. (T - Analyst Report) in the latter’s Domain 2.0 initiative, which is intended to enhance and expand it’s network by utilizing technologies like Network Function Virtualization (NFV) and Software-Defined Networking (SDN).

Management also expects to benefit from the ongoing developments in the ICT industry.

However, the company’s business could be impacted by the strife between Ukraine and Russia as company derived as much as $0.91 billion (SEK 5.9 billion) from business in these areas in the previous year.

At present, Ericsson has a Zacks Rank #3 (Hold). A better-ranked wireless equipment stocks worth mentioning is Shoretel, Inc. (SHOR - Snapshot Report), which sports a Zacks Rank #1 (Strong Buy).

Note: 1 SEK = $0.15479 (period average from Jan 1, 2014 to Mar 31, 2014)

One Ericsson ADR corresponds to one Ericsson share.

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