Ericsson's 1st-Quarter Profit Beats Analyst Estimates
By: Administrative Account | Source: Bloomberg
April 22, 2005 6:02AM EST

April 22 (Bloomberg) -- Ericsson AB, the world's largest maker of mobile-phone networks, reported a better-than-expected 73 percent increase in first-quarter profit, helped by cost cuts and higher sales. The stock jumped as much as 6.7 percent. Net income climbed to 4.64 billion kronor ($660 million), or 0.29 krona a share, from 2.68 billion kronor, or 0.16 krona, a year earlier. Sales gained 12 percent to 31.5 billion kronor as the company took market share, Chief Executive Officer Carl-Henric Svanberg said at a press conference in Stockholm today. Ericsson shares had their biggest gain since July after the company said demand for base stations, switches and antennas rose in Latin America and Europe during the quarter. Stockholm-based Ericsson has benefited from improved demand after slashing the workforce by more than half from 105,000 at the end of 2000. Under Svanberg, ``the company is now executing instead of just making plans,'' said Mika Heikkinen, a fund manager at FIM Asset Management in Helsinki, which manages about $2.5 billion and bought more Ericsson and Nokia shares yesterday and today. ``Both sales and profitability were surprisingly strong.'' Profit was seen at 4 billion kronor on sales of 30.3 billion kronor, the average estimates in an SME Direkt poll of analysts. Shares of Ericsson shares rose as much as 1.4 kronor to 22.2 kronor, and traded at 21.7 kronor at 11:23 a.m. in Stockholm. Shares of Nokia Oyj, which reported better-than-expected earnings yesterday, rose 2.4 percent to 12.65 euros in Helsinki. Profitability Improves The gross margin rose to 48.5 percent from 44.7 percent a year earlier and increased from 45.6 percent in the previous three months. The 32 analysts in the SME Direkt survey had expected a gross margin of 44.8 percent. The growth in gross margin is a ``reflection of a favorable product mix with a higher share of software sales,'' Svanberg said in an interview. ``We also continuous to focus on cost reductions,'' Svanberg said in an interview. Ericsson lowered annual operating costs to 33 billion kronor by the end of the second quarter 2004, one quarter earlier than planned. Svanberg, 52, who became chief executive in April 2003, also initiated efforts to cut annual production costs by 8 billion kronor, which took full effect in the third quarter. The operating margin, or operating profit as a percentage of sales, grew to 21 percent in the quarter from 14 percent. Analysts had expected the margin to be 19.1 percent. ``In the coming quarters, I would expect price pressure to increase as Asian vendors will step up competition,'' said Wouter de Ridder, a fund manager at Kempen Capital Management in Amsterdam, which oversees $6 billion, including Ericsson and Nokia shares. Market Outlook Global handset unit sales may rise 5.3 percent this year, compared with 23.3 percent in 2004, California-based researcher iSuppli said on Feb. 1. After last year's recovery, Ericsson expects industry growth to slow this year, which may hurt prices as it fights rivals such as Nokia for orders. Ericsson today repeated its 2005 forecast of ``slight'' industry growth, defined as 2 percent to 5 percent. ``The increase in mobile infrastructure market share of two to three percentage points last year proves the strength of our strategy,'' Svanberg said in the statement. ``Maybe we can redo that trick'' this year, he said at the press meeting. The network-equipment market will grow ``slightly'' this year in euro terms, Espoo, Finland-based Nokia Oyj, Ericsson's main competitor in network equipment, reiterated in its first-quarter report yesterday. Nokia said its network unit sales rose 6 percent to 1.43 billion euros ($1.87 million), and operating profit increased 44 percent to 221 million euros in the first quarter. Europe, Latin America Sales grew 26 percent in Western Europe, led by Italy and Spain, Ericsson said. The market was driven by the rollout of so- called third-generation, or 3G, networks and upgrades to existing global system for mobile communications, or GSM, networks. ``Western Europe is way ahead of what we talked about before,'' Svanberg said in an interview after the press conference. ``It is in part a reflection that the pent-up demand last year hadn't taken off in the first quarter'' of last year. Brazil and Mexico led a 24 percent sales increase in Latin America ``through strong GSM sales,'' Ericsson said. In Latin America ``the number will come down a bit as the comparison will become more challenging,'' Svanberg said. In North America, sales fell 24 percent because of a temporary slowdown in spending following mergers among phone companies. North American ``sales should start to pick up as the 3G rollout starts later this year,'' Ericsson said. China Outlook In the Asia Pacific region, were sales grew 4 percent, India, Indonesia, Bangladesh and Pakistan contributed to the growth, Ericsson said in the statement. ``The development in China has been somewhat slower in the first quarter but we'll see a pickup in the second quarter,'' Svanberg said. ``Operators order more in certain quarters and less in others.'' Ericsson said Chinese operators are evaluating doing trials on different 3G technologies. A Chinese telecommunications reform is expected in the middle of this year and should trigger the issuing of 3G licenses, Ericsson said. ``Irrespective of license decisions we expect increased infrastructure spending going forward'' in China, the company said. Cost cuts and the return to profit led Moody's Investors Service, Fitch Ratings and Standard & Poor's to raise their ratings on Ericsson debt to investment grade this year. The upgrades were ``made very late,'' Anders Jarheim, a fund manager at Oehman Kapitalfoervaltning in Stockholm, which manages $2.5 billion including Ericsson stock, said before the report. ``It wasn't a day too soon.''

To contact the reporter on this story: Maria Tornlund in Stockholm at mtornlund@bloomberg.net Last Updated: April 22, 2005 05:24 EDT