LM Ericsson Telephone Company (ERIC) reported results for the third quarter of 2011, with a net income of SEK 3.8 billion ($575.8 billion) compared to net income of SEK 3.6 billion in the prior-year quarter.
Ericsson reported earnings of 22 cents a share which was two cents above the Zacks Consensus Estimate.
Revenues in the quarter were up 17% on a year-over-year basis to SEK 55.5 billion ($63.9 billion) and were up 1% sequentially. Comparable sales after adjusting for currency effects increased 24% compared to the prior-year quarter. Revenues were primarily driven by the strong growth in mobile broadband equipment and growth in the services segment.
Segments
Sales in Networks increased 25% year-over-year, but was down 3% sequentially. The sequential was primarily attributable to reduced CDMA sales in North America and seasonality.
Global Services sales grew 7% year-over-year and sequentially.
Professional Services sales increased 7% year over year and 9% sequentially. Currency adjusted sales grew 13% year over year. The increase was primarily driven by increased sales of systems integration projects. In addition, during the third quarter, the company acquired four significant contracts in the domains of OSS/BSS, Service Delivery Platforms and data center build projects.
Revenues in the Managed Services division increased 1% year- over- year and 12% sequentially, driven by gains in Brazil, Germany, Italy, UK and the U.S. After adjusting the currency impact sales increased 8% year over year. The sequential growth was driven by 24 new managed services contracts signed during the second quarter. During the third quarter, the company won 14 new managed services contracts.
Network Rollout sales increased 7% year over year and 3% sequentially driven by high volumes of network modernization.
Revenues in the Multimedia segment increased 11% year over year and improved 8% sequentially driven by efficient revenue management. TV solutions improved sequentially driven by IPTV which fetched several contracts during the quarter.
Joint Ventures
The company’s joint venture (JV) Sony-Ericsson also had profitable third quarter driven by higher sales. In addition, the shift towards android-based smart phones continued during the quarter and represented almost 80% of the total sales during the quarter.
According to the estimate by the JV, Sony Ericsson’s Android-based smart phones command a 12% market share in terms of volume and 11% in terms of value. The JV’s cash flow from operating activities was €53 million while its income before tax was SEK 0.1 billion ($0.12 billion).
Revenues at ST-Ericsson declined 27% year over year but increased 7% sequentially. For the third quarter of 2011, the company reported a net loss of $121 million or 74% year over year.
Regions
In North America sales decreased 6% year-over-year and 2% sequentially. However, growth in the services and OSS/BSS businesses could not fully offset the impact from a slower networks business. Further, CDMA sales also declined sequentially although it increased year- over year.
Sales in Latin America increased 64% year-over-year and 22% sequentially driven by growth across all segments. Operators have been investing in mobile broadband coverage as well as GSM to meet up with the increased data traffic. During the quarter, the company also signed new IPTV deals.
Northern Europe and Central Asia sales increased 49% year-over-year although it declined 23% sequentially. The sequential decline was primarily attributable to slower infrastructure and network rollout sales, mainly in Russia, following strong operator investments in network capacity and coverage during the first half of 2011.
In the Western and Central Europe sales increased 7% year-over-year and 6% sequentially, mainly due to increased volumes related to network modernization projects as well as the managed services business.
Revenues in the Mediterranean region increased 4% year-over-year and decreased 6% sequentially. Network modernization projects are in process across the region. Year-over-year, network rollout and system integration showed a good development, reflecting ongoing modernization projects. On a sequential basis, Spain and Greece were impacted by macroeconomic instability and Northern Africa reported lower sales due to political unrest.
Middle East sales increased 34% year-over-year and 3% sequentially. The year-over-year comparison is easy due to a slow market in Q3 2010 following supply constraints. Mobile broadband sales continued to develop positively across the region.
Operators are looking into opportunities to reducing their operating expenses, resulting in a positive development for managed services both year-over-year and sequentially. Political unrest continues to impact sales development in the region with operators being cautious on infrastructure investments.
Sub-Saharan Africa sales grew 40% year-over-year and 14% sequentially, driven by both networks and multimedia.
India sales increased 7% year-over-year and decreased 19% sequentially. Networks sales decreased sequentially due to slower 3G investments.
China and North East Asia sales increased 39% year-over-year and 7% sequentially across all segments and with especially strong demand in services and multimedia. Operator investments in the region are mainly driven by the broad introduction of smartphones which has lead to continuous growth in mobile broadband subscriptions and usage. Ericsson has successfully completed the first phase of the large-scale TD-LTE trial with China Mobile.
Japan showed strong development in the quarter with a high degree of capacity investments. In Korea, the LTE contracts with LGU+ and SKT have both moved into deployment phase and LG-Ericsson is also implementing a WCDMA/HSPA capacity expansion project in the Seoul metropolitan area.
South East Asia and Oceania sales decreased 3% year-over-year and increased 23% sequentially, with contribution from the Telstra LTE project which is now in deployment. Data traffic growth is only 10% in the region and smartphone penetration is also low. Overall profitability for operators is declining due to diminishing voice and sms revenues.
Margins
Gross margin in the quarter, excluding restructuring, declined year over year to 35.0% and was down 37.8% sequentially. A higher proportion of coverage projects along with accelerating network modernization projects in Europe impacted gross margin.
On a sequential basis, the increased share of services business had a negative impact. It si expected that the network modernization projects in Europe, coupled with their lower margins, will continue to accelerate in the fourth quarter. The average project duration is expected to be 18-24 months.
Operating income for the quarter, excluding joint ventures increased to SEK 6.3 billion, while the operating margin decreased to 11.3% year over year. The operating margin was impacted by a restructuring charge related to activities in Sweden.
Balance Sheet
Cash, cash equivalents and short-term investments amounted to SEK 76.9 billion ($11.9 billion).
Trade receivables increased sequentially to SEK 65.6 billion ($10.2 billion), while Days sales outstanding increased from 99 to 106 days sequentially, due to longer payment terms.
Our Take
There is continued growth in mobile subscriptions, although the current growth rate is lower than in the prior year. Traffic in mobile networks is accelerating, which creates need for new and expanded mobile networks and corresponding professional services. Data traffic, as part of operator revenues, continues to increase.
Although the credit environment is still tight in several emerging markets, there is good development in other markets, including the world's leading economies such as China, India, the US and Japan.
The company is going ahead with its cost reduction program and expects a smooth transition to IP technologies. We currently maintain a Neutral rating on Ericsson on long term basis (3-6 months). Short term (1-3 months) the company has a Zacks #3 Rank, which implies a Hold rating.
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