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Ericsson 2Q Earnings Fall Short

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Ericsson (ERIC - Free Report) reported Non –IFRS earnings (excluding losses due to divestments and exiting the telecom and power cable operations) of SEK 0.45 ($0.07) in the second quarter of 2013 compared to the Zacks Consensus Estimate of earnings of 17 cents. Earnings grew 32% year over year driven by lower operating costs and higher gross margins.


Revenues in the quarter were flat year-over-year at SEK 55.3 billion ($8.4 billion), but increased 6% sequentially. Yearly revenues were impacted by currency fluctuations, while the sequential growth was driven by Global Services. 

Segment Details

Sales in Networks surged 1% year over year, but were flat sequentially. The year-over-year increase was driven by strong activity in North America and Japan due to continued mobile broadband investments and demand for services. Sequentially the segment was impacted by delays in certain LTE licenses and continued structure decline in CDMA.

Global Servicessales increased 3% year over year and 16% sequentially. The year-over-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 is driven by Consulting and Systems Integration as well as Network Rollout.

Support Solutionssales for the quarter contracted 33% year over year and 4% sequentially. The year-over-year sales decline for the segment was attributable to weak sales in business support solutions BSS (charging solutions), mainly in Latin America and Middle East. Further, divestiture of the ACS business of Telcordia impacted the segment’s operating profit. However, the recent acquisitions of Microsoft’s media business and the Red Bee Media should help this segment regain profits moving forward.

Margins and Balance Sheet

Gross margin in the quarter was 32.4% versus 32.0% in both the prior-year quarter and in the previous quarter. The year-over-year increase was driven by improvement in the hardware and services margins and positive impact of the business mix.

The operating margin for the quarter was 4.5% versus 5.9% in the prior-year quarter and 4.1% in the previous quarter. The year-on-year decline was due to unfavorable impact of currency translations.  

Total operating expenses increased 19% to SEK 2.5 billion ($0.3 billion). Operating income was positively impacted by reduced operating expenses and improved gross margin, partly offset by one-time effects of SEK 0.9 billion ($0.13 billion) from losses due to divestments, exiting the telecom and power cable operations, and foreign exchange.

Cash flow from operations was SEK 4.3 billion ($0.6 billion) compared to a negative cash flow of SEK (1.4 billion) in the prior-year quarter. The increase was driven by reduced working capital.

Cash, cash equivalents and short-term investments amounted to SEK 64.8 billion ($10.0 billion). The net cash position decreased sequentially to SEK 27.4 billion ($4.2 billion) due to shareholder dividend payments of SEK - 8.9 billion ($1.4 billion), offset by positive operating cash flow.

Ericsson currently has a Zacks Rank #3 (Hold). However, some other stocks worth considering at the moment are MITEL Networks (MITL - Free Report) , Motorola Solutions (MSI - Free Report) and Sonus Networks Inc. . All three carry a Zacks Rank #2 (Buy).

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