Modest 4Q for Ericsson

LM Ericsson Telephone Company (ERIC - Analyst Report) reported a Non–IFRS loss (excluding the gains from Sony Ericsson) of 21 cents per share in the fourth quarter of 2012 compared to Non-IFRS earnings of SEK 0.81 in the prior-year quarter.

Profits during the quarter were primarily impacted by operating losses in ST-Ericsson, the ongoing network modernization projects in Europe and the underlying business mix, with a higher share of coverage projects than capacity projects.

Revenue

Revenues in the quarter were SEK 66.9 billion ($10.1 billion), up 5% year over year and 23% sequentially. Consolidated revenues during the quarter were primarily driven by higher revenues across the three operating segments.

Segment Details

Sales in Networks surged 6% year over year and 31% sequentially. The year over year sales growth was driven by strong activity in North America and Japan due to continued mobile broadband investments and demand for services. The sequential increase was attributable to higher sales and a higher share of software sales.

Global Services sales increased 4% year over year and 15% sequentially. The year-over-year increase was driven by Managed Services and Consulting and Systems Integration. Now with operators increasing their operational efficiency and reducing operating expenses through transformation activities in the voice, IP and OSS/BSS domains, the demand for professional services is on the rise. The quarterly increase in sales was driven by Consulting and Systems Integration as well as Network Rollout.

Support Solutions sales for the quarter grew 6% year over year and 9% sequentially. The year-over-year sales increase for the segment was driven by business support solutions BSS (charging solutions), mainly in Latin America and Middle East. The yearly sales were driven by the Telcordia operation, which contributed sales of SEK 0.6 billion ($0.09 billion) in the quarter.

However, the Multimedia brokering (IPX) business was divested during the previous quarter, which impacted sales negatively both annually and sequentially. The segment benefited from the strong demand for OSS/BSS, driven by operators’ focusing to improve efficiency and adapt to mobile broadband business requirements.

Margins and Balance Sheet

Gross margin in the quarter was 31.1% versus 30.2% in the prior-year quarter and 30.4% in the previous quarter. The year-over-year increase was driven by higher Networks sales while the sequential improvement was based on increased software share and lower Global Services share. Operating margin for the quarter was 7.1% versus 6.4% in the prior year quarter and 6.7% in the previous quarter.

The increase was driven by an improvement in Networks sales, which was partly offset by continued efficiency measures generating restructuring charges, which had a negative impact of approximately 3%. The sequential margin improvement was mainly driven by higher sales in Networks and improved gross margin, partly offset by higher operating expenses and restructuring charges.

Total operating expenses increased 5.1% to SEK 16.4 billion ($2.5 billion) due to higher restructuring charges. Sequentially, expenses increased SEK 3.1 billion ($0.5 billion), partly driven by restructuring charges.

Excluding acquisitions and restructuring charges, total operating expenses amounted to SEK 14.9 b. ($2.3 billion) down 3% year over year. R&D expenses amounted to SEK 9.2 billion ($1.4 billion). Selling and general administrative expenses (SG&A) increased to SEK 7.1 billion ($1.1 billion) due to acquisitions.

Cash flow from operations increased 185.4% to SEK 15.7 billion ($2.4 billion), driven by reduced working capital. Cash outlays for restructuring amounted to SEK 0.3 billion (0.04 billion).

Ericsson currently has a Zacks Rank #1 (Strong Buy) and its rivals such as Aviat Networks (AVNW - Snapshot Report) has a Zacks Rank #1 while Juniper Networks (JNPR - Analyst Report), Interdigital Inc. (IDCC - Snapshot Report) and Qualcomm Inc. (QCOM - Analyst Report) have a Zacks Rank # 2 (Buy).