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Ericsson Q2 Earnings Beat on Strong Networks Business

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Ericsson (ERIC - Free Report) reported non-IFRS earnings of SEK 1.07 (16 cents) in the second quarter of 2014, surpassing the Zacks Consensus Estimate of 14 cents. Earnings increased 22% compared to the prior-year figure of SEK 0.88.

The bottom-line improvement was driven by strong performance of the company’s Networks segment and a modest increase in the support solutions business. However, the continued weakness in the Global Services division partially offset the results.

Revenues and Margins

Revenues in the quarter declined 1% year over year but increased 15% sequentially to SEK 54.8 billion. In U.S. dollar terms, revenues came in at $8.03 billion, falling short of the Zacks Consensus Estimate of $8.11 billion.

Sales were impacted negatively due to continued sluggish performance 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 India.

Ericsson’s gross margin came in at 36.4%, up from 32.4% in the prior-year quarter. The operating margin for the quarter rose to 7.3%, from 4.5% in the year-earlier quarter.

Margins benefited from a favorable business mix and efficiency improvements, with more focus on mobile broadband capacity solutions in advanced LTE markets. This apart, the strong performance of its Networks and increase in recurring IPR revenues drove the results.

Segment Details

Sales in Networks increased 3% year over year to SEK 29.0 billion ($4.25 billion). Further, the segment’s operating margin increased to 12% from 5% in the second quarter of 2013.

Global Services sales declined 7% year over year to SEK 23.1 billion ($3.38 billion). The segment’s operating margin remained flat at 6% year over year.

Support Solutions sales for the quarter surged 21% year over year to SEK 2.8 billion ($0.41 billion). The segment’s operating margin came in at a negative 13% compared with negative 12% in the year-ago quarter.  The business was impacted by reduced sales in relation to its legacy portfolio.

Other Financial Aspects

Cash flow from operating activities during the quarter decreased to SEK 2.1 billion ($0.31 billion), from SEK 4.3 billion ($0.63 billion) in the prior-year period. 

Ericsson’s net cash at the quarter-end amounted to SEK 32.5 billion ($4.76 billion), down from SEK 43.6 billion ($6.39 billion) as on Mar 31, 2014.

Business Update

Ericsson completed the integration of the modems business in Aug 2013. The company’s modem M7450 has been selected for several smartphones and data devices which is likely to start generating revenues by the end of 2014. The company has invested about $0.18 billion (SEK 1.2 billion) in the year-to-date timeframe to enhance its technology platform by promoting research and development (R&D). The business performance being dependent on the customers experience can be gauged after about a year.

Looking Ahead

The company has started the execution of key contracts in the 4G/LTE domain in Mainland China and Taiwan. Further, the company’s business in India is also expected to perform well driven by the conclusion of the spectrum auctions and positive sentiments from the election results that were held in May 2014. The company expects to reap the benefits of such contract in the latter half of 2014.

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

Ericsson’s business has been negatively impacted by the prevailing political strife in Middle East and Africa regions. Though persisting unrest in the Ukraine – Russia region did not have any significant negative impact in this quarter, the situation can prove to be a headwind for the company going forward.

Further, Ericsson has been taking strategic initiatives to expand its business in promising areas like modems and Mediaroom businesses. Additionally, the company has increased investments in R&D to enhance its IP portfolio. 

At present, Ericsson has a Zacks Rank #3 (Hold). Some better-ranked wireless equipment stocks worth mentioning include Comtech Telecommunications Corp. (CMTL - Free Report) , InterDigital, Inc. (IDCC - Free Report) and Aruba Networks, Inc. . While, Comtech Telecommunications and InterDigital sport a Zacks Rank #1 (Strong Buy), Aruba Networks carries a Zacks Rank #2 (Buy).

Note: 1 SEK = $0.1465 (period average from Apr 20, 2014 to Jul 18, 2014)

One Ericsson ADR corresponds to one Ericsson share.

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