turnaround efforts started to pay off Friday.
The Stockholm-based wireless giant posted a
blowout fourth quarter and raised guidance for 2004. Its shares jumped 13%.
"This was a very impressive quarter," says Harris Nesbitt Gerard analyst John Bucher, who has a neutral rating on Ericcson. "They're off to a great start. It looks like the new management team has put together a successful restructuring and they seem to be delivering on expectations."
For its fourth quarter ended Dec. 31, the Stockholm wireless gearmaker posted earnings of 100 million Swedish kronor ($13.6 million), translating to a penny-a-share profit on an adjusted basis. That's the company's best bottom line performance since its executive shake-up early last year.
Sales for the latest quarter soared to 36.2 billion kronor, or $5 billion. The quarter showed surprising strength, as many Wall Street analysts had projected a loss on $4.2 billion in revenue for the period.
Looking ahead to the current quarter, Ericsson said sales could be somewhere between 5% to 10% higher than the year-ago levels of $3.5 billion. Analysts had been looking for flat results. For the year, Ericsson projects revenue will be flat to slightly up. Consensus estimates call for a 4% annual growth rate, according to a Thomson First Call tally.
Executives on a conference call with analysts Friday said gross margins of 46% in the latest quarter likely would narrow slightly in the first half of this year, but they didn't expect a big pullback. Analysts said they will be expecting gross margins of 40% or better for the next couple of quarters.
CEO Carl-Henric Svanberg said the company was seeing some "catch up" spending by phone companies that had delayed their network expansion plans in recent quarters. The resumption of more normal spending patterns could help stabilize Ericsson sales for more than one quarter, but Svanberg warned that these trends are notoriously unpredictable.
But some bulls say Ericsson's caution is a ploy to keep targets low and subsequently keep relative performance high.
"I think Ericsson has purposely put a conservative spin on guidance," says Sanford Bernstein analyst Paul Sagawa, who rates the stock buy. "Svanberg knows the game of underpromise and overdeliver."
Ericsson, like nearly all networking suppliers, was crushed under a massive spending slowdown in the years after the telecom bust. Svanberg, who had previously run Swedish lock maker Assa Abloy, was hired to replace Ericsson CEO Kurt Hellstroem in April 2003. Restoring Ericsson to profitability was Svanberg's paramount objective, he said at the time.
Ericsson fans also point to the weak dollar, which hurt the company's performance. If the foreign exchange effects are taken away, it's clear there is more underlying strength, says Bucher. "All the more reason" to think the company has managed a successful turnaround, he says.