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Ericsson (ERIC - Analyst Report) reported a Non–IFRS net income (excluding amortizations, write-downs of acquired intangible assets, and restructuring costs) of 15 cents or SEK 0.99 per share in the first quarter of 2013, beating the Zacks Consensus Estimate of 9 cents. The Non-IFRS earnings for the earlier year quarter were SEK 3.14 per share or 49 cents, inclusive of a gain from the divestment of Sony Ericsson aggregating SEK 7.7 billion.

Revenue

Revenues in the quarter were SEK 52 billion ($8.08 billion), up 7% year over year but decreased 19% sequentially for comparable units and adjusted for foreign exchange impacts. The Zacks Consensus Estimate for revenue was $7.8 billion for the quarter. Consolidated revenues during the quarter were primarily driven by higher revenues across Networks and rollout services, especially from high value project activities centered in Europe and North America. Geographically, North American segment reported a 23% growth, while North East Asia experienced a tough quarter with reduced sales in South Korea and adverse foreign exchange effects in Japan.

Segment Details

Sales in Networks surged 3% year over year and decreased 20% sequentially. The year-over-year sales growth was driven by strong activity in the U.S. and Indonesia due to continued investments in mobile broadband and demand for services. The sequential decrease was attributable to unrelenting decline in sales of GSM services in China and Japan, resulting from an adverse foreign exchange effect.

Global Services sales increased 4% year over year but were down 24% sequentially. The year-over-year increase was driven by Network Rollout and 21 new Managed Services contracts signed by the company during the quarter. The quarterly decrease in sales on a sequential basis was driven by lower business activities in North East Asia and delayed LTE deployments in Latin America.

Support Solutions sales for the quarter reduced 19% year over year and 33% sequentially. The Multimedia brokering (IPX) business was divested during the third quarter of 2012, which impacted sales negatively both annually and sequentially. However, the segment benefited from the strong demand for OSS/BSS, driven by operators focusing to improve efficiency and adapting themselves to mobile broadband business requirements.

Margins

Gross margin in the quarter was 32.0% versus 33.3% in the prior-year quarter and 31.1% in the previous quarter. The year-over-year decrease was driven by a reduced Network Rollout margin and the additional burden of restructuring charges, while the sequential improvement was based on effects of network modernization projects in Europe. This improvement also offset the year-over-year decline partially. Operating margin for the quarter was 4% versus 17.8% in the prior year quarter. The decrease was mainly attributable to restructuring charges and reduction of operation in Sweden compared with gains in the prior year from the divestment of Sony Ericsson.

Total operating expenses increased year over year by 2% to SEK 14.5 billion ($2.25 billion) due to higher restructuring charges. Excluding acquisitions and restructuring charges, total operating expenses were down 6% year over year. R&D expenses amounted to SEK 7.9 billion ($1.2 billion). Selling and general administrative expenses (SG&A) increased Y/Y to SEK 6.6 billion ($1.02 billion) due to acquisitions.

Balance Sheet

There was a negative cash flow of SEK -3.00 billion ($0.47 billion) from operations, primarily resulting from increased working capital requirements for restructuring. Cash outlays for restructuring amounted to SEK 0.3 billion ($ 0.04 billion).Trade payables increased by SEK 3 million totaling to SEK 23 million as on 31st Mar, 2013.

Ericsson currently has a Zacks Rank #3 (Hold) and we prefer to wait for signs of improvement in the performance of Ericsson. Other stock form the same industry worth a look is Qualcomm Inc. (QCOM - Analyst Report) ), Motorola Solutions, Inc. (MSI - Analyst Report) and Sonus Networks, Inc. (SONS - Snapshot Report) all having a Zacks Rank #2 (Buy).

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