Light Reading
Networks sales are suffering in key markets and big services projects are still suppressing margins but CEO sticks with game plan

Ericsson Feels Networks Squeeze in Q3

Ray Le Maistre
10/26/2012
50%
50%

Global economic and telecom sector trends continue to put pressure on Ericsson AB (Nasdaq: ERIC)'s Networks division, which suffered a 17 percent year-on-year decline in revenues to 26.9 billion Swedish kronor (US$4 billion) during the third quarter.

Sales of network equipment are down in key markets such as China, South Korea, Russia and a number of other European countries. Strong sales in North America, despite the ongoing (and expected) slump in CDMA equipment sales, saved the division from even greater declines. That decline in overall network equipment revenues, in turn, is putting pressure on the vendor's gross margin level, which dipped to 30.4 percent in the quarter, down from 35 percent a year ago. The company's operating margin is also much lower than a year ago, as the table below shows, though it did improve on the previous quarter.

Investors were spooked by those margins, as Ericsson's share price dipped by 4.2 percent to SEK57.95 by late morning on the Stockholm exchange.

In total, Ericsson reported third-quarter revenues of SEK54.6 billion ($8.13 billion), down 2 percent from a year ago, and a net profit of SEK2.2 billion ($328 million).

Table 1: Ericsson Q3 2012 Key Financials

In billions of Swedish kronor Q3 2011 Q3 2012 Y/Y change Q2 2012 Q/Q change
Revenues 55.5 54.6 -2% 55.3 -1%
Gross margin 35.0% 30.4% Decrease of 4.6 percentage points 32.0% Decrease of 1.6 percentage points
Operating margin excluding joint ventures and sale of Sony Ericsson 11.3% 6.7% Decrease of 4.6 percentage points 5.9% Increase of 0.8 percentage points
Net income 3.8 2.2 -42% 1.2 81%




But CEO Hans Vestberg and CFO Jan Frykhammar, while recognizing that the numbers are of concern and profitability levels are "not satisfactory," are consistent in their explanation of what is happening with Ericsson's business.

As they have said previously and repeated today during the morning webcast press conference, the company made a strategic decision to take on board large network rollout and transformation projects that, in the case of the largest contracts, involve thousands of staff and contractors and generate low margin sales. (See Ericsson Sets Q2 Benchmark and Ericsson Retrenches in Q1.)

Those sorts of projects are still dominating Ericsson's business and will continue to do so in the near future. But the combined scale and longer-term potential of these projects is exciting Vestberg: "In my time at Ericsson I have never seen so many big projects ... the number is unprecedented," said the CEO. "I believe this is the right strategy," he added.

That's because Vestberg believes that higher-margin business, in the form of capacity and software sales, will follow once the network coverage and transformation projects are completed. And while the CEO and CFO are reluctant to pin down when the tide will turn, it seems that the shift away from low-margin projects should start in the coming months and then accelerate during 2013, so there will be a big spotlight on the execution of Ericsson's strategy next year.

In the meantime, the company is still the world's biggest mobile networks vendor, is still generating a profit and is investing in areas it regards as key for the future, such as OSS and BSS capabilities and edge routing (for service delivery and backhaul). It's also planting its flag in the software-defined networking (SDN) ground. (See Ericsson CTO: Let's Redefine SDN, The Lowdown on Service Provider SDN and Ericsson Buys More OSS Smarts .)

Ericsson is as much a Service Provider Information Technology (SPIT) company as a network infrastructure company these days. (See The SPIT Manifesto 2.0.)

There's a great deal of detail in the company's third-quarter report, which you can read in full here. Here are a few points of interest that caught our eye:

  • With lower network equipment sales, the Global Services and the Support Solutions divisions now collectively account for more than half of Ericsson's revenues.
  • CDMA equipment sales were down more than 50 percent year-on-year to SEK1.6 billion ($238 million).
  • The vendor signed 13 new contracts for its Smart Services Router products in the third quarter, compared with seven in the previous quarter. No financial details are given for this business line, though.
  • Ericsson's gross margin was lower in the third quarter than that of fierce rival Nokia Networks -- noteworthy as it is a first. (See APAC Boosts NSN's Q3.)
  • Ericsson believes its market share of 4G-related business in Latin America will be greater than 50 percent, much higher than its 3G share in that region. (See Ericsson Lands LTE Deal in Brazil.)
  • While rivals such as NSN and Alcatel-Lucent (NYSE: ALU) look to reduce the number of managed services deals they have, Ericsson continues to add more, with 11 deals (including 5 expansion or extension deals) signed in the July-September quarter.
  • Ericsson's headcount at the end of September was 109,214, of which 59,000 are in services roles. The company has been hiring more services staff for its Global Service Center in India to support its new managed services customers.
  • The Telcordia business contributed revenues of SEK1.1 billion ($164 million) in the third quarter. Recent acquisition ConceptWave will be integrated into the Telcordia team.
  • Ericsson believes that of the world's 6.4 billion mobile connections, 1.4 billion are mobile broadband connections.

    — Ray Le Maistre, International Managing Editor, Light Reading

    (0)  | 
    Comment  | 
    Print  | 
  • Newest First  |  Oldest First  |  Threaded View
    Flash Poll
    From The Founder
    It's clear to me that the communications industry is divided into two types of people, and only one is living in the real world.
    LRTV Interviews
    Liberty Global Sees Business Goldmine

    12|18|14   |     |   (0) comments


    Steen Sorensen, VP of business services for Liberty Global, explains where the giant international MSO sees growth potential.
    LRTV Documentaries
    EE: The Road to 5G

    12|16|14   |   16:02   |   (1) comment


    Andy Sutton, the principal network architect at UK mobile operator EE, explains how his company is using Wembley stadium as a wireless test bed and how that's helping EE to plan the evolution to 5G.
    LRTV Huawei Video Resource Center
    Highlights of Huawei's NFV Open Cloud Forum 2014

    12|16|14   |     |   (0) comments


    Huawei hosted its inaugural NFV Open Cloud Forum during the SDN & OpenFlow World Congress 2014 in Düsseldorf, Germany. The Forum brought together technology thought leaders, senior executives and telecom professionals from global carriers, industry associations, as well as other partner companies in the ecosystem, to exchange views on and collectively explore how ...
    LRTV Custom TV
    Realizing Operators' Digital Vision

    12|16|14   |   5:23   |   (0) comments


    Leveraging technology is fundamental to digital transformation but understanding customers and serving them really well is at the heart of digital businesses. TM Forum lists the following as the strategic pillars of the digital business: business agility and rapid innovation, operational agility and effectiveness, IT and data centricity, plus customer centricity. ...
    LRTV Documentaries
    US Cellular Injects Analytics Into LTE

    12|16|14   |   2:57   |   (1) comment


    US Cellular's Mario Vela explains how the operator uses analytics for network planning and what comes next as the carrier looks to eke more value out of its metrics.
    LRTV Interviews
    How Cox Biz Plans to Keep Growing

    12|15|14   |     |   (1) comment


    Steve Rowley, SVP of Cox Business, details how the third-biggest US MSO intends to boost its revenues to $2 billion and beyond over the rest of the decade
    LRTV Huawei Video Resource Center
    Interview With Bill Zhang, Director of SoftCOM Product Management, Huawei

    12|15|14   |   2:50   |   (0) comments


    Bill Zhang elaborated on Huawei's open philosophy in NFV solution development and network architecture design at the SDN & OpenFlow World Congress 2014.
    LRTV Huawei Video Resource Center
    Event Highlights: Huawei at SDN & OpenFlow World Congress 2014

    12|15|14   |   3:43   |   (0) comments


    Huawei joined the 2014 SDN & OpenFlow Congress as one of the key sponsors and contributors. At the event, Huawei reinforced the openness and flexibility of its network infrastructure strategies, and provided updates on its SDN and NVF innovations. Through participations at the exhibitions, forums and speeches, Huawei encouraged the industry to "think bigger and ...
    LRTV Interviews
    How Cable Biz Services Hit $10B Mark

    12|12|14   |     |   (1) comment


    Cable operators reached $10 billion in annual business services revenues by delving deeper into their vertical markets and expanding beyond the smallest firms.
    LRTV Documentaries
    Mediacom Aims to Test Connected Tractors

    12|11|14   |   05:07   |   (3) comments


    Cable business service provider is taking its services to the 'agribusiness' sector in partnership with farm equipment specialist John Deere and is getting involved in Gigabit Cities developments.
    LRTV Interviews
    TWC Business Looks Beyond $3B

    12|10|14   |     |   (0) comments


    TWC Business Services chief Phil Meeks explains how his unit has reached $3 billion in annual revenues and what its plans are for next year.
    LRTV Documentaries
    AT&T's New Security Strategy

    12|10|14   |   02:36   |   (1) comment


    AT&T's Chief Security Officer Ed Amoroso explains how his company is wrapping virtual security layers around micro network domains.
    Upcoming Live Events
    February 10, 2015, Atlanta, GA
    April 14, 2015, New York City, NY
    May 6, 2015, McCormick Convention Center, Chicago, IL
    May 13-14, 2015, The Westin Peachtree, Atlanta, GA
    June 9-10, 2015, Chicago, IL
    Hot Topics
    Vodafone to Ride T-Mobile Back Into US
    Dan Jones, Mobile Editor, 12/12/2014
    1-Gig: Coming to a Small Town Near You
    Jason Meyers, Senior Editor, Gigabit Cities/IoT, 12/17/2014
    T-Mobile, BlackBerry Flirt With Reuniting
    Sarah Reedy, Senior Editor, 12/17/2014
    Gardner's Departure a Cautionary Tale
    Carol Wilson, Editor-at-large, 12/12/2014
    Cisco Makes Big Analytics Push
    Mitch Wagner, West Coast Bureau Chief, Light Reading, 12/11/2014
    Like Us on Facebook
    Twitter Feed
    Upcoming Webinars
    Webinar Archive