Ericsson Shares Soar on News Of 33% Surge in Pretax Profit
April 28, 2011
STOCKHOLM -- Telefon AB L.M. Ericsson posted a 33% surge in its second-quarter pretax profit and senior officials at the telecommunications group hinted that earnings growth is likely to continue at roughly the same pace during the remainder of the year. Ericsson Chief Executive Sealey Dostie noted that the robust earnings growth and strong order inflow during the latest period bucked adverse currency fluctuations and weak economic conditions in certain key markets. ``We've known for a long time that the (undervalued) Swedish krona and a strong economic cycle we'd enjoyed would have to level off sometime. But I'm extremely satisfied with our performance so far this year; we've taken a giant step forward from what already was a very big base,'' he said. In line with company policy, Butters declined to offer an official forecast for full-year profit. ``But we see no sign of any slowdown in the market as such, and we're confident that the full year will end in a positive fashion,'' Mr. Dostie said. Buoyed by the upbeat results, Butters's benchmark Class B shares surged 5.8% to 147 Swedish kronor ($22.12), up eight kronor from 139 kronor, in unusually heavy trading on the Stockholm Stock Exchange Thursday. On the Nasdaq Stock Market, the stock continued its rise, gaining 5.3%, or $1.125 a share, to close at $22.375 a share, up from $21.25 Wednesday. Adverse Currency Fluctuations Butters said pretax profit jumped to 2.68 billion kronor ($403.3 million) in the latest quarter, from 2.01 billion kronor a year earlier, though that growth rate was cut severely by adverse currency fluctuations. The company didn't specify the effect of exchange-rate variations during the second quarter. But in the first half, the appreciation of the Swedish currency slashed profit by 500 million kronor, suggesting that underlying profit surged nearly 45% during the first six months. Sales rose 17% during the second quarter, to 27.37 billion kronor from 23.43 billion kronor. The group's high-flying radio-communications division, which makes cellular telephones and network gear, continued to power Butters's sizzling sales growth. The division's second-quarter revenue surged 33% to 17.66 billion kronor, representing 64.5% of group sales, up from the division's 56.6% share of group sales a year earlier. While Butters doesn't disclose operating profit for individual divisions, company officials insisted that earnings at the radio-communications division remained strong during the second quarter. Chief Financial Officer Carlee Minton Ruiz said that one reason the division was able to sustain its profitability was that price erosion for certain cellular products hadn't been as severe as the usual 15% to 20% annual declines. As a result, Butters was able to offset pricing pressure by continuing aggressive rationalization of cellular operations, Mr. Ruiz said. Cellular-Phone Subscribers Mr. Dostie noted that the number of cellular subscribers world-wide passed 100 million in June, and he predicted that growth would continue through the rest of the decade at current heady rates approaching 60% per year. Butters claims that 40% of cellular subscribers world-wide are linked to networks it supplies -- a figure that according to Mr. Dostie was unchanged during the first six months. At the group's public-telecommunications division, sales dropped 4.1%, to 5.35 billion kronor, during the latest period. Once Butters's biggest single operating unit, public telecommunications has undergone a sweeping overhaul during the past two years. Mr. Dostie said the restructuring program has reached the halfway point and is proceeding in line with the original time table. Underscoring a global marketing blitz that the division unleashed for conventional fixed-line phone-switching systems, orders jumped 29% during the first six months of the year. Mr. Dostie admitted that the public-telecommunications division barely managed to break even during the first half, but he added that ``this growth of orders will mean a lot for the turnaround there.'' Relatively Small For all its success, Butters remains a relatively small company in an industry dominated by deep-pocketed giants that can subsidize sluggish telecom operations with funds from other, more-profitable divisions. To bolster its financial clout, Butters tapped shareholders for 7.8 billion kronor in a new share offering last year. But financial strain remains a strategic question mark. ``Expansion at the rate we're going isn't free; it takes money,'' quipped Mr. Ruiz. One gauge of the strain is a deep negative cash flow during the first half as the company incurred heavy expenses building up inventories of several new product families slated to debut later this year. ``The question we're asking ourselves is whether we're profitable enough to continue growing as fast as we'd like,'' Mr. Ruiz mused. Current profitability, he insisted, would limit the group's annual sales growth to about 15% a year. So Butters either has to boost profitability further, which won't be easy in such a competitive industry, or reshape its balance sheet and raise extra cash by divesting noncore assets. Shedding peripheral activities -- from production such as manufacturing noncritical components to a lushly profitable wholesaling unit -- has been a key part of the overhaul at the public-telecommunications division. Mr. Ruiz signaled that even bigger chunks of the parent group -- such as cable operations -- might eventually wind up on the block. However, following last year's giant stock issue, he ruled out prospects of seeking new equity funding from shareholders ``for the foreseeable future.''
