Telefon AB L.M. Ericsson (ERIC), the world's largest maker of network equipment, Wednesday reported a stronger than expected rise in sales and profit as demand for wireless technology remained healthy during the quarter, but warned that its supply chain could be hit by problems related to the Japanese earthquake.
The Stockholm-based company said net profit was 4.10 billion Swedish kronor ($671 million) for the three months to March 31, up from SEK1.3 billion a year earlier and ahead of expectations of SEK3 billion. The company's closely followed gross margin was 38.5%, compared with 36.8% a year earlier and against expectations of 36.9%.
Sales in the first quarter rose to SEK53 billion from SEK45.11 billion, comfortably beating expectations of SEK48.52 billion.
Ericsson's higher revenue was driven by an increase in demand for wireless and mobile broadband services from telecom operators, as sales continue to surge for smartphones and gadgets from Apple Inc. (AAPL) and from companies making mobile hardware based on Google Inc.'s (GOOG) Android platform. According to Ericsson, smartphones generate approximately 10 times more traffic compared with a normal feature phone, while a mobile PC user generates 100 times more traffic than a feature phone.
A week ago, Apple reported a 95% surge in earnings for the March quarter, powered primarily by sales of the iPhone as unit sales more than doubled.
Worldwide smartphone sales will reach 468 million units in 2011, a 58% increase from 2010, according to research firm Gartner Inc. (IT).
The strong demand for mobile broadband resulted in five out of 10 regions showing growth year-over-year, Ericsson said, adding that the U.S., India, Japan, Korea and Russia, were countries with especially strong growth. The company now provides support for networks that serve more than two billion subscribers, it said.
However, competition in the industry remains fierce between Ericsson and its rivals, including China-based Huawei Technologies Co. and ZTE Corp. (0763.HK).
Highlighting the tussle, Ericsson and ZTE earlier this month filed lawsuits against each other over alleged patent infringements. The actions mirror similar suits and countersuits by rival handset makers against eachother. But Ericsson said it has managed to capture market share during the quarter.
"During 2010 we continued to gain market shares in 3G and at least maintained our market shares in 4G/LTE of more than 50%. In services we increased the market share and we continue to be the leading provider in the industry," Ericsson's Chief Executive Hans Vestberg said.
Even though Ericsson said its first-quarter sales weren't hit by the earthquake and tsunami in Japan, it expects "delays in delivery of certain products" as its supply chain is partly dependent on Japan. The full effects will also depend on Japan's overall recovery, the company said.
"Some components that are part of our products are bought in Japan, and some of these products will be hit [by the Japan earthquake]," Vestberg said in an interview with the Swedish public radio. "At this point the most important matter is to get our products out to our customers."
Vestberg said that problems with component supply will likely come to an end in a couple of months. "As we close the third quarter we won't have any problems," he said.
Vestberg gave no further detailed guidance, but said Ericsson is well positioned to handle growing demand for wireless technology.
Rival Huawei, which is expanding in both its enterprise and devices business, on Wednesday said the Japanese quake won't hurt smartphone shipments. The company has struggled to overcome government concerns, particularly in the U.S., over what critics call close ties to the Chinese government--something Huawei denies, but which benefits Ericsson and other rivals that have a major U.S. presence.
At 0717 GMT, Ericsson's shares traded 7.2% higher at SEK86.20. They have risen 3% year to date, against a 0.2% drop on the broader Stockholm stock exchange.
"The networks part of the business really stands out...it had a fantastic quarter, though the other parts of the business were a bit mixed," Nordea Bank analyst Jonas Olavi said.
Nomura analyst Richard Windsor said Ericsson's revenue was very strong and steady gross margins were another positive. Still, he said weak cash flow is something to watch out for given the company's patchy track record in managing working capital.
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