World number one mobile network gear maker Ericsson beat expectations for earnings and margins in the first quarter raising hopes that recent market weakness has bottomed out.
The telecoms equipment market recovered strongly in 2011 as operators invested to catch up with a surge in traffic from smart phones and tablets, but the final quarter saw renewed concern about global growth and, for Ericsson, a shift in business that cut deeply into margins.
With global economic growth likely to be modest this year and with the company saying that low margin projects would continue to dominate, analysts had fretted Ericsson was facing an extended downturn.
First-quarter results brought some relief for Ericsson, which is double the size of its nearest competitors – China’s Huawei HWT.UL and Nokia Siemens Networks NOKI.UL – in market share.
Ericsson’s underlying earnings before interest and tax reached 2.8 billion crowns ($416 million) excluding loss-making joint ventures but including restructuring charges.
That was down 56 % on the year before but topped a mean forecast of 2.5 billion in a Reuters poll.
The group’s gross margin rose to 33.3 % in the quarter from 30.2 % in the final three months of 2011, a trend the company pinned on seasonal effects, a greater share of higher-margin capacity expansion projects and a smaller share of lower-margin services business.
Ericsson shares were up 1.6 % at 64.45 crowns at 1142 GMT, in line with a 1.6 % rise in European technology stocks .SX8P.
While there were positive signs on the gross margin, sales in the key networks unit were down 18 %. Total sales were 51.0 billion crowns, versus a forecast of 52.9 billion, as Reuters stated.
Ericsson said operators remained cautious due to the macroeconomic environment.
Ericsson’s caution chimed with that of rivals Huawei and Nokia Siemens Networks which have warned the soft global economic outlook could prompt telecom carriers to cut investments.
In the medium to longer term, however, the outlook is more positive. Hardware heavy, modernization projects should start to wash out of results after this year, helping margins, and Ericsson hinted at a pick up in the key North American market after six months of slack demand.
“I don’t see the cautious operators there,” Ericsson Chief Executive Hans Vestberg said.
Furthermore, growth in smartphones and tablets will drive investment in capacity while new 4G networks across much of the world and a wave of network upgrades in Europe is expected in the next couple of years.
Having gained market share in Europe in 2011 at the expense of margins, Ericsson is a good position to capitalize on a recovery in spending in the region.