LM Ericsson Telephone Company
) reported Non-IFRS earnings (excluding the gains from Sony
Ericsson) of 6 cents per share in the first quarter of fiscal 2012.
The results were below the Zacks Consensus Estimate of 12 cents per
share and down 71.4% year over year.
Revenues during the quarter grew 1% year over year to SEK 55.3
billion ($7.8 billion) and improved 9% sequentially. However, sales
for comparable units after adjusting for foreign exchange and
hedging contracted 6% year over year. The recent acquisition of
Telcordia added another SEK 1.1 billion to the top line.
Sales in Networks declined 17% year over year but grew 2%
sequentially. However, after adjusting for organic sales and
foreign exchange, revenues for the segment declined 20% year over
year. The year-over-year sales were negatively impacted by lower
business activity in China, including weaker sales of GSM as well
as lower 3G sales in Russia and reduced operator investments in
India. CDMA equipment sales are expected to further decline in the
second half of 2012.
sales increased 26% year over year and 17% sequentially. Adjusted
sales growth was 18% year over year. Overall revenue growth was
driven by increase in Professional Services which were in turn
driven by Managed Services and Consulting & Systems
The demand for Professional Services was driven by operators'
focus on increasing operational efficiency and reducing operational
expenditure through transformation activities in the voice, IP and
OSS/BSS domains as well as outsourcing. During the quarter, Network
Rollout sales also improved year over year, driven by high volumes
of network modernization in Europe and coverage projects in other
sales for the quarter grew a robust 47% year over year and
increased 15% sequentially. Adjusted sales growth for the quarter
was 16% year over year. The Telcordia acquisition added an
additional SEK 0.55 billion in the quarter. The strong
year-over-year development in the quarter was related to billing
solutions in the Middle East and Sub-Saharan Africa. The solid
growth in TV is especially related to IPTV and compression.
Revenue by Geography
In North America, Network sales were negatively impacted by the
decline in CDMA sales. This was partially offset by the continued
transition to Long Term Evolution (LTE). Major wireless network
expansion and transformation projects contributed to the growth in
Global Services sales. The acquisition of Telcordia has generated
momentum in OSS/BSS.
The year-over-year sales growth in Latin America was driven by
services. Network Rollout sales increased due to project
implementations in Brazil, Chile and Mexico. Support Solutions
increased due to Telcordia acquisition and strong sales. Operators
in Brazil and Mexico are preparing for LTE deployments.
In the Northern Europe and Central Asia region, sales of Networks
contracted year over year mainly due to continued low investment
levels in Russia. The region noted solid increase in sequential
sales due to continued modernization projects and the win of a
WCDMA contract with pan-Russian operator Rostelecom. In the
Nordics, all major operators have now launched LTE services.
Western and Central European region witnessed impact from the
macroeconomic environment leading to some capital expenditures and
focus on measures to improve efficiency.
Sales growth in the Mediterranean was mainly driven by network
modernization projects, which drive both sales of networks and
services. In Global Services, both Network Rollout and Systems
Integration sales contributed to the positive development.
Year over year sales growth in the Middle East was driven by sales
in Global Services and Support Solutions. Political unrest is still
impacting the region and operators in those countries continue to
be cautious with infrastructure investments. Services grew,
especially in Managed Services and Systems Integration, as
operators are looking into network performance quality and
Revenue in the Sub-Saharan Africa region increased both year over
year and sequentially, driven by increased investments in 2G.
However, 2G investments are expected to level out, while 3G are
expected to increase. Mobile broadband penetration is expanding
from its current low level of 4%, as low cost smartphones enter the
market and the internet connectivity is improving.
In India, there has been a recovery in network capital expenditure
as operators have started focused investments in areas where data
traffic is growing. However, regulatory uncertainties continue in
The year-over-year decrease in China and North East Asia in
Networks is mainly due to lower sales of GSM and generally lower
business activity in China and continued transition to LTE in
Korea, impacting 3G sales. Services sales were driven by more
turnkey projects in Japan. The product mix is rapidly changing
towards more initial LTE deployments and a larger share of
Networks sales in the South East Asia and Oceania increased year
over year in several countries, driven by 3G investments and
initial LTE deployments. The sequential improvement is due to
capacity investments in Indonesia and deployments in other markets.
Global Services reported an increase year over year driven by
network rollout and support services aligned with infrastructure
Margins and Balance Sheet
Gross margin for the quarter declined to 32.0% from 37.8% year
over year and 33.3% sequentially. The year over year decrease is
due to the increased Global Services share as well as a higher
proportion of coverage projects and network modernization projects
Approximately half of the year-over-year gross margin decline is
related to the increased services mix. The sequential gross margin
reduction is due to higher Global Services share and lower sales of
mobile broadband capacity than in the first quarter of 2012.
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Total operating expenses declined 5.1% year over year amounting to
SEK 15.0 billion. R&D expenses were flat year over year at SEK
8.1 billion while it increased marginally on a sequential basis due
to restructuring. Operating income for the quarter was severely
impacted due to lower profitability in Networks which was partially
offset by lower restructuring costs. Operating income for the
quarter was SEK 3.3 billion declining 34% year over year.
Cash, cash equivalents and short-term investments amounted to SEK
66.4 during the quarter. The net cash position decreased
sequentially to SEK 25.9 billion primarily due to payment of
dividends worth SEK 8.2 billion and negative operating cash flow.
Capital expenditure investments amounted to SEK 1.6 billion during
the reported quarter.
Cash flow from operations was negative SEK -1.4 billion compared to
a positive SEK 5.8 billion in the prior year period. The decline
was primarily attributable to late invoicing in the quarter.
On July 5, 2012, Ericsson completed the acquisition of French
company Technicolor's Broadcast Services Division for €19 million.
Ericsson intends to expand its broadcasting area by increasing its
current broadcast operations in terms of channels managed and
households reached. This deal was announced in March this year.
Ericsson currently has a Zacks Rank of #3, which implies a
short-term Hold rating on the stock.