Ericsson (ERIC) reported non-IFRS earnings of SEK 1.11 (15 cents) in the third quarter of 2014, falling short of the Zacks Consensus Estimate of 17 cents by 11.8%. Earnings marked a decline of 15% year over year from the prior-year figure of SEK 1.31. Following the earnings release, Ericsson‘s shares declined about 2.9% on Oct 24 to close at $11.47.
The bottom line was affected by the reduced business activity in the North American region owing to lower operator investments. This apart, higher operating expenses and adverse impact from hedge contracts continued to weigh on the company’s earnings.
Revenues and Margins
Revenues in the quarter rose 9% year over year and 5% sequentially to SEK 57.6 billion. In U.S. dollar terms, revenues came in at $7,937 million marginally lagging the Zacks Consensus Estimate of $7,946 billion.
Sales were driven by strong growth in regions like China, India, the Middle East and Russia. However, continued sluggish performance in the North America region proved to be the dampener.
Ericsson’s gross margin was 35.2%, up from 32% in the prior-year quarter. However, the operating margin declined to 6.7% from 8% reported in the in the year-ago quarter.
Margins benefited from a favorable business mix and efficiency improvements, with more focus on mobile broadband capacity solutions in advanced LTE markets. Along with these, an improved business mix, lower restructuring charges and increase in IPR revenues drove the results in the quarter.
Segment Details
Sales in Networks increased 13% year over year to SEK 30 billion ($4.13 billion). Further, the segment’s operating margin increased to 11% from 10% in the third quarter of 2013.
Global Services sales inched up 2% year over year to SEK 24.5 billion ($3.38 billion). The segment’s operating margin declined to 7% from 8% reported in the prior-year quarter.
Support Solutions sales for the quarter surged 30% year over year to SEK 3.1 billion ($0.43 billion). The segment’s operating margin came in at a negative 4% compared with negative 5% recorded in the year-ago quarter.
Revenues from the Modem segment came in at SEK 0.1 billion ($0.01 billion).This is the segment’s first quarter of revenue generation, after its integration in Aug 2013.
Other Financial Details
Cash flow from operating activities during the quarter came in at negative SEK 1.4 billion (- $0.19 billion), compared with a positive SEK 1.5 billion reported in the prior-year period.
Ericsson’s net cash at the quarter-end amounted to SEK 29.4 billion ($4.05 billion), an increase from SEK 24.7 billion in the prior-year quarter.
Looking Ahead
Ericsson 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 expected to perform well. Management also hopes to benefit from the ongoing developments in the ICT industry. Presently, the company is focused on the development of radio business and as such has stalled further development of modems in order to relocate a part of Research and development (R&D) resources from Modem to the Networks segment.
However, Ericsson’s business has been negatively impacted by the prevailing political strife in the Middle East and North African regions.
Zacks Rank
Ericsson presently has a Zacks Rank #4 (Hold). Some better-ranked wireless equipment stocks worth mentioning include QUALCOMM Incorporated (QCOM), Aruba Networks, Inc. (ARUN) and ZTE Corp. (ZTCOY). While, QUALCOMM Inc. sports a Zacks Rank #1 (Strong Buy), both Aruba Networks and ZTE Corp. hold a Zacks Rank #2 (Buy).
Note: 1 SEK = $0.1378 (period average from Jul 31, 2014 to Sep 30, 2014)
One Ericsson ADR corresponds to one Ericsson share.
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