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US slowdown hits Ericsson's quarter

Revenue up 13% but profits down by the same amount, with China and OSS/BSS solutions driving growth

By CAROLINE GABRIEL

Published: 27 October, 2014

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Ericsson' third quarter revenues came in above expectations, but were overshadowed by concerns about its performance in north America, which has been its powerhouse region since it acquired the bulk of Nortel Networks in 2009.

Once a difficult market for Ericsson, the company changed that situation around when it acquired much of Nortel out of bankruptcy and laid the foundations of a strong US presence, fortified by big wins in the early LTE roll-outs at Verizon and AT&T. North America is now the company's largest region by revenue.

Overall, Ericsson's net income fell by 13% year-on-year to SKr2.65bn ($365m), hit by higher R&D expenses and the impact of currency hedge contracts. However, total sales were up 8.7% on the year-ago quarter, reaching SKr 57.6bn ($7.94bn), and one of the most important metrics, gross margin, held steady, rising from 32% to 35.2%, in line with analyst forecasts.

In the Networks unit, sales were up 13%. As in Q214, and at Nokia Networks, this was helped by a shift in carrier spending from upgrades, modernizations and coverage extension, to high capacity mobile broadband contracts, which are more lucrative and profitable in general. Ericsson saw its best mobile broadband growth in the Middle East, China and India rather than its traditional European and US territories.

Sales in north America fell by 3% year-on-year and 8% compared to Q214. In contrast to more emerging markets and newer LTE deployers, the north American carriers are cutting back on network quality and capacity projects, said Ericsson, and focusing on "cashflow optimization". It added that the change in operator spending patterns in the region made it hard to forecast near term sales. "I think that is the main uncertainty for Q4," CFO Jan Frykhammar said on the earnings call.

CEO Hans Vestberg commented: "But we're not seeing any change in the underlying market demand in the US. Demand for new smartphones remains high." However, investors were concerned that Nokia had reported a 53% leap in north American revenues, admittedly from a far lower base, especially in LTE, where the Finnish firm only recently secured major contracts, notably with T-Mobile and Sprint (Ericsson is also a Sprint supplier).

In north America and globally, the strongest area of growth was support solutions, particularly OSS/BSS, in which Ericsson has made important investments and acquisitions in the past couple of years - most recently Metratech. Support solutions rose by 30% year-on-year in revenue terms, while global services, including outsourcing, were up just 2%.

"The trend is clear: Ericsson's biggest customers in North America and Japan have largely completed their large roll-out programs of LTE, and revenues are to an increasing level coming from other markets, among them Middle East and China," Bengt Nordstrom, CEO of telecoms consultancy Northstream, told Reuters. "It will be increasingly important to grow market share in China which by far will be the biggest LTE market for the coming three to four years." Sales in north east Asia were up 16% year-on-year, boosted by China and Taiwan but offset by lower spending in Japan and South Korea.

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