Ericsson AB, the world’s No. 1 mobile network equipment maker, topped second-quarter sales and profit forecasts and said its mainstay North American business had stabilized after three quarters of declines, lifting its shares by up to 6 percent.
Mobile operators in North America, which accounts for about a quarter of Ericsson’s turnover, have largely finished building out the latest 4G networks, meaning suppliers are having to focus on upgrading congested parts of existing networks there.
“We see stabilization,” Ericsson chief executive officer Hans Vestberg said of the US business on a conference call, adding “we are operating still on a lower operating level compared to last year.”
He declined to forecast whether US sales would continue to grow this year.
Analysts said the rise in beaten-down Ericsson shares reflected investor relief over the leveling off in its US business and better margins, excluding hefty restructuring charges, rather than an improvement in fundamental demand.
“There’s probably an element of relief in the share price move, particularly around comments on North America,” Jefferies analyst Robert Lamb said, adding that cost cuts pointed to further improvement of profitability ahead.
The Swedish firm also reported sales growth from the fast roll-out of 4G networks in China as well as demand in India, the Middle East and Southeast Asia, offsetting weakness in Japan.
Despite a global explosion in data traffic on new mobile Internet and video services, spending on network equipment has plateaued as telecoms operators switch to upgrading existing capacity after years of building new high-speed networks. This has spurred a new wave of consolidation in the industry.
Ericsson, which was trading at seven-year highs in April, has plunged since rivals Nokia and Alcatel Lucent moved to merge in a 15.6 billion euro (US$16.89 billion) deal to create the world’s second-largest mobile gear maker after Ericsson.
Second-quarter sales were 60.7 billion kronor (US$7.02 billion), topping analysts’ average forecast of 58.6 billion kronor.
Turnover grew 11 percent, buoyed by currency translation effects. On a like-for-like basis, sales declined 6 percent.
Operating profit was 3.6 billion kronor compared with 4 billion kronor in the same quarter last year, beating a mean forecast of 2.8 billion kronor in a Reuters poll of analysts.
The operating margin in Ericsson’s key networks unit, which accounted for just over half of sales last year, hit 8 percent, up from only 2 percent in the first quarter.
Ericsson accelerated restructuring of its workforce, leading to a net loss of 1,700 jobs in the quarter, mainly in its home market. It took second-quarter restructuring charges of 2.7 billion kronor compared with 614 million kronor in the first quarter.
“It looks as though restructuring is quite deep, and if sustainable, points to greatly improved operating margins in the Networks business going forward,” Jefferies analyst Lamb, who has a “hold” rating on the stock, said.
Gross margin fell from more than 36 percent to 33.2 percent. However, excluding restructuring charges, margins were 35.1 percent.
Ericsson has set a goal of saving 9 billion kronor per year by 2017 compared with last-year levels.
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