Ericsson sees net income rise 41% YoY despite sales drop

Despite seeing a decline in net sales, Swedish vendor Ericsson has announced a 41 per cent year on year increase in net income for the first quarter of 2014. Net income for the period stood at SEK1.7bn ($260m) in 1Q14, compared with SEK1.2bn in 1Q13,largely due to a focus on more lucrative deals such as capacity upgrades that have higher profit margins.

Net sales dropped from SEK52bn in 1Q13 to SEK47.5bn in 1Q14, which the firm attributed its decline in sales potential in North America and Japan. Ericsson said it saw lower revenues year on year from mobile broadband coverage projects in North America and Japan, which peaked in the first half of 2013. The firm saw a 23 per cent year on year drop in sales from North America and a 19 per cent year on year drop in sales in North East Asia as a result.

Ericsson also incurred losses in Europe over the past few years as a result of carrying out low margin network modernisation projects in the region, but added that those projects are now materially complete and the firm is seeing “normal business” in its European footprint.

It said it has also improved profitability by controlling project, supply chain and general and administrative expenses and is working on commanding a price premium for its solutions and services compared to its competitors.

The vendor added that its expects to grow revenue in 2014 as a result of winning 4G contracts in China with China Mobile and China Telecom. It has also won projects with operators in Japan and Taiwan as well as being a supplier for Vodafone’s Project Spring organic investment programme. The impact of these deals will begin to make an impact on the firm’s financial results in the second half of the year, according to CFO Jan Frykhammar.

“Mainland China is an important market for us; we’re in the middle of supporting customers with their 4G build outs and I’m sure 4G will be an important theme in China for a few years,” he said.

“It took about two and a half to three years to build basic 4G coverage in North America; it began in 2010 and at the end of last year we saw operators able to offer basic nationwide coverage, so it will be a theme in China for a few years.”

Frykhammar added that he sees an important opportunity across all emerging markets, noting that some markets are still in the GSM phase and many emerging markets have progressed in 3G rollouts as far as European operators have done in 4G.

“In Africa, the Middle East and parts of Asia, there will be build out of 3G and later on 4G networks. Fixed internet penetration is very low in many emerging markets so to be able to watch TV over the internet, it will be via your smartphone. So we are building our strategy based on having a strong local presence and looking at the long term. This year however, there is some currency volatility, so we are watching these markets carefully.”

Frykhammar also revealed that Ericsson spent around SEK31bn in research and development in 2013 and that the firm plans to increase that figure for 2014. He said that a priority for Ericsson is to invest in radio access technologies such as small cells and indoor solutions in order to maintain its market leading position in the space. The firm will also increase its R&D investment in technologies including SDN and NFV and has identified TV and video technologies as an important investment opportunity over the coming two years.