By Simon Johnson
STOCKHOLM (Reuters) - A sales recovery at Ericsson's key networks unit raised hopes on Thursday the world's top mobile telecom gear maker is beginning to shake off the global downturn.
Ericsson's biggest business, which builds mobile networks, showed fourth-quarter sales growth - the first rise in more than a year - helping the company as a whole to post year on year sales up 5 percent. Margins in the unit also rose from the previous quarter.
The telecom equipment industry is under stress from price pressure and lower orders as the operators that are their clients battle a slump in consumer spending, even though increased smartphone surfing is driving demand for higher-capacity and higher-speed networks.
Ericsson's recent poor business mix in its networks unit of more hardware products and fewer software sales has also hurt the company, which is fighting tough competition from Chinese rivals Huawei and ZTE Corp, as has its focus on gaining market share with an eye on future contracts for network capacity upgrades against a short-term margin squeeze in Europe.
But the fourth-quarter results showed a recovery in networks, supporting hopes of a turnaround, with high-speed, 4G networks in North American business and Japan driving growth.
Ericsson's turnaround fits a trend predicted by market research group Gartner which forecasts sales of network equipment to carriers to rise 2.3 percent to $79 billion in 2013, after falling 6.6 percent to $77.3 billion last year. North America and Latin America will grow by 4 percent, while Asia excluding Japan will be up 3.6 percent.
"It is encouraging, with a solid gross margin, Networks back to growth and a margin improvement," said Alexandre Peterc, analyst at Exane BNP Paribas, regarding Ericsson's figures. "They guide for capacity project increasing in the second half, which is bound to be good for margins."
Increasing capacity in networks requires new software which has bigger margins than the hardware Ericsson sells when operators build geographical network coverage.
Ericsson shares surged on the earnings news, gaining 8.9 percent by 3:14 a.m. ET to 74.90 crowns, the highest share price since August 2011.
Ericsson was hit by a 8 billion-crown charge for loss-making chip set joint venture ST-Ericsson, which pushed it into a net loss of 6.3 billion crowns for the quarter.
Ericsson's earnings before interest and tax, excluding joint ventures and including restructuring charges, rose to 4.8 billion crowns from 4.1 billion to beat a mean forecast of 4.3 billion in a Reuters poll. Group sales reached 66.9 billion crowns, against a forecast 65.3 billion.
Ericsson is looking at its options for ST-Ericsson, which could include a sale, though it is likely to keep the modem business. Its partner, STMicro, plans to exit.
BETTER BUSINESS MIX
With revenue and profit growth at telecoms operators stalled, some analysts have wondered whether margins and network sales would recover at Ericsson or stay depressed.
The earnings report could ease such doubts. Ericsson expects the impact of less profitable network contracts in Europe to wash out in 2013, part of a market share push, and a shift broadly to more profitable contracts this year.
"With present visibility of customer demand, and with the current global economic development, (the) underlying business mix is expected to gradually shift towards more capacity projects during the second half of 2013," Ericsson CEO Hans Vestberg said.
The results chime in with a turnaround at rival Nokia Siemens Networks. The 50-50 joint-venture between Nokia and Siemens reported a strong increase in sales and profits for the fourth quarter.
Like Ericsson, Nokia Siemens is fighting to reduce costs to offset the global slowdown, aiming to find 1 billion euros in cost savings.
Ericsson has said it would cut 1,550 staff, mainly in networks, adding on Thursday it would keep a focus on costs.
Rival Alcatel-Lucent is cutting around 5,000 jobs and exiting unprofitable markets to find 1.25 billion euros ($1.5 billion) in savings.
China's second-largest telecom equipment maker ZTE Corp issued a profit warning in January. Huawei Technologies Co Ltd, the world's No.2 telecom equipment maker, bounced back from a disappointing 2011 with a 33 percent rise in net profit for 2012.
(Additional reporting by Olof Swahnberg, Johannes Hellstrom and Veronica Ek; Editing by Sophie Walker)