Ericsson Sales Miss Estimates Amid Focus on Profit Margins

Ericsson AB, the world’s biggest maker of wireless networks, reported sales that missed analysts’ estimates as it focused on more lucrative contracts to boost profitability. The stock slumped.

First-quarter revenue fell about 9 percent to 47.5 billion kronor ($7.2 billion), Ericsson said today. Analysts predicted 50.8 billion kronor, the average of estimates compiled by Bloomberg. Gross margin, a key measure of profitability, widened to 36.5 percent of sales from 32 percent a year earlier, compared with the average estimate of 34.4 percent.

Carrier spending in the U.S. and Japan is cooling after a wave of investments in speedier, fourth-generation networks, leaving Stockholm-based Ericsson and rivals Nokia Oyj, Alcatel-Lucent SA and Huawei Technologies Co. to compete for fewer deals. To respond, Ericsson is trying to win more profitable network contracts while expanding its services business.

“It needs to win new sizable projects in order to support the top line,” Mikko Ervasti, an analyst at Evli Bank Oyj in Helsinki, said in a note to clients. “Gross margin was very solid.”

Ericsson fell as much as 5.3 percent, the most in six months, and lost 4.6 percent to 82.25 kronor at 9:08 a.m. in Stockholm, giving the company a market value of $41 billion. The stock had risen 9.9 percent this year through yesterday.

Capacity Projects

Phone companies have limited budgets to spend on networks as competition weighs on prices and rivalry from Internet-based service providers such as Skype and WhatsApp eats into their revenue. Capital spending by communications-service providers will rise to $367 billion in 2019 from $340 billion in 2012, equal to growth of about 1 percent a year, Matt Walker, an analyst at research firm Ovum, said in a report last month.

Ericsson’s profitability improved year-on-year for the fourth consecutive quarter, helped by a focus on projects to increase carriers’ network capacity. Such deals are often more lucrative than labor-intensive network-modernization contracts. Ericsson’s gross margin, or the proportion of sales remaining after production costs, has rebounded from 30.2 percent in the fourth quarter of 2011, the lowest since at least 1989.

“Our focus on profitability is paying off,” Chief Executive Officer Hans Vestberg said in the statement. “The business mix in the quarter was predominantly driven by mobile broadband capacity projects.”

Contracts won will “gradually impact” sales and business mix, mainly in the second half, he said.

America Slump

Ericsson’s revenue in North America, its largest market with about a quarter of sales in 2013, slumped 23 percent as two large mobile-broadband coverage projects wound down. Revenue from northeast Asia fell 19 percent on lower demand in Japan. Sales rose in Latin America and parts of Europe.

Political unrest in parts of the Middle East and Africa is hurting revenue, while the tension between Ukraine and Russia didn’t affect sales in the first quarter, Ericsson said.

As phone carriers curb network spending, Ericsson is expanding its services business, aiming to be a partner who runs and maintains everything from phone networks to computer systems, while offering consulting and software.

The market for services used by telecommunications carriers will grow by as much as 7 percent annually over the next three years, Ericsson forecast in November. It was worth as much as $273 billion in 2012, almost half of which was made up of carriers doing the tasks themselves, Ericsson says.

Network sales in the quarter declined 13 percent to 24.4 billion kronor. Global services revenue fell about 5 percent to 20.4 billion kronor.

Another opportunity for equipment makers including Ericsson is to sell more gear to companies such as Inc. and Google Inc., which are investing in network infrastructure and data centers, Ovum’s Walker said.

Net income rose to 2.12 billion kronor from 1.21 billion kronor a year earlier, when Ericsson had 1.8 billion kronor of reorganization costs, mostly related to job cuts in Sweden.