Shares of Ericsson (ERIC) are up more than 10% this morning after the world’s largest telecom equipment maker beat analysts’ expectations for the fourth quarter and reported a turnaround in its networking business.
“The highlight is really that the networking business is showing growth again, which is good,” said Ericsson CFO Jan Frykhammer. “It’s not super high growth but it’s good.” Ericsson’s networking group reported fourth quarter sales of 35.3 billion Swedish krona, or $5.5 billion, up 6% from the year ago quarter. That represented just over half of Ericsson’s overall fourth quarter sales of or 66.9 billion krona, or $10.5 billion.
For the full year, Ericsson’s revenue was $35.8 billion, roughly the same annual revenue reported earlier this month by rival Huawei. But Huawei also sells mobile devices, chipsets, and routers, while Ericsson remains focused exclusively on telecom networking equipment. Still, Frykhammer said the Chinese giant has emerged as a top competitor. “They are a global competitor,” he said. “Some of the other competitors may not be global anymore, but Huawei we meet all over the place.”
4G investment drives 3G growth
Frykhammer said operator investments in 4G and LTE are driving the growth of Ericsson’s networking business, even though they still account for a smaller share of revenue than do investments in legacy networks.
“What we’re seeing is that when an operator decides to build an LTE or 4G network they obviously make a big push on marketing and new devices and services, and that in turn makes [for] a continued investment in 3G,” he said. “LTE is still a smaller part of the top line, the big element is 3G and HSPA. What’s been coming down is GSM. There are still GSM investments in parts of the world, [like] Africa and China. But 3G is major right now.”
Outlook for 2013
Asked about the outlook for the year ahead, Frykhammer said that he is hopeful that operators around the world will follow the lead of those in North America and South Korea by investing in LTE.
“If you look at other parts of the world it’s been slower recovering,” he says, noting that Ericsson did see growth pick up in Africa and Southeast Asia last year, but that those gains were offset by declines in Russia and China. “So the growth is really about continuing a strong position in North America, and hoping operators in other parts of the world invest in LTE as North American operators are already doing,” he said.
ST-Ericsson
Ericsson took a $1.3 billion charge in the fourth quarter as it wrote down the value of its investment in ST-Ericsson, a chipmaking joint venture that Ericsson and STMicrolectronics entered in 2009. Each company owned half the joint venture, but STMicroelectronics decided to abandon the venture late last year.
“We had decided not to acquire ST-Micro’s 50% of the jv and that in turn triggered an impairment of our investment,” said Frykhammer. “For Ericsson what we have done is put all the books to zero, we don’t have any exposure [to ST-Ericsson] on the balance sheet.”
Last spring, ST-Ericsson cut about 1,700 jobs and said it would narrow its focus to integrated modem plus application processor (ModAp) solutions for smartphones and tablets. “The modem asset [in ST-Ericsson] is important for the wireless industry,” Frykhammer said. “We think that is an important element of the asset.” He said that Ericsson is evaluating its options for ST-Ericsson. “We have a set of options that we are negotiating and discussing. We will come back and talk about our strategic options once we have something tangible to talk about.”
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