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Ericsson sacrifices Q1 sales for 41% profits hike

Markets disappointed by 7% fall in sales, but Swedish giant turns in strong profit and margin growth as shifts to capacity projects


Published: 23 April, 2014


Ericsson put its efforts into boosting profits in its first quarter, at the expense of revenues, which went down badly with investors. The stock slumped by over 5% - the worst in six months - as the firm reported a 7% year-on-year revenue decline, to SEK 47.5bn ($7.2bn), though net profit was up 41% to SEK1.7bn ($257m).

The worst hit regions in terms of sales were North America - the bulwark of Ericsson's LTE growth in recent years, but with major roll-outs now slowing - and Japan. These declines were offset partially by improved performance in China, where Ericsson is participating in the major TD-LTE deployments of the three cellcos this year, as well as Middle East and Latin America.

The decline in sales was seen in the Networks and Global Services divisions but all segments enjoyed improved operating margins. An increase in gross margins across the board - up to 36.5% of sales, from 32% a year earlier and ahead of analyst forecasts - indicated the success of Ericsson's recent attempts to shift its balance of network deployments from low margin modernization projects, which have dominated the past couple of years and squeezed the company's profits, towards higher value capacity-driven roll-outs.

Gross margin was also improved by lower restructuring charges, increased IPR revenues. Like all the big vendors, Ericsson is pursuing revenues from its large stores of patents more aggressively than in the past, when the assets have often been used mainly for cross-licensing and standards influence.

Ericsson said that some key contracts have been awarded, but their impact will mainly be felt only in the second half of the year. It added that results had been hit by political unrest in some regions, notably parts of the Middle East and Africa plus Russia and the Ukraine. The firm reported SEK5.9bn of sales from Russia/Ukraine last year though the current crisis had not yet impacted sales in Q114.

Mikko Ervasti, an analyst at Evli Bank in Helsinki, told Bloomberg: "It needs to win new sizable projects in order to support the top line. Gross margin was very solid."

"Our focus on profitability is paying off," said CEO Hans Vestberg in a statement. "The business mix in the quarter was predominantly driven by mobile broadband capacity projects."

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