Services Save Ericsson in Q2

Where would the telecom sector's large traditional vendors be without their services divisions? Up a creek without a paddle, if the second quarter financial results from Ericsson AB (Nasdaq: ERIC) and Nokia Networks (NSN) are any indication of current trends.

NSN revealed last week how reliant it has become on its services business. (See Slump Slams Nokia Siemens and Services Now 45% of NSN Revenues.)

Today (ahead of its bidding war with its Finnish/German rival), Ericsson presented its latest financials, revealing how the global economic downturn has impacted sales. (See The Spoilers of War and Ericsson Bids for Nortel Wireless Assets.)

However, the vendor's management highlighted the growth in demand for professional and network rollout services, which, during the second quarter, accounted for about 38 percent of its total revenues.

Ericsson reported revenues of 52.1 billion Swedish Kronor ($7 billion) and net income of SEK800 million ($107 million) for the three months ending June 30.

The revenues, helped by favorable exchange rate movements, were 11 percent better than a year earlier for "comparable units" (discounting the enterprise operation sold and the wireless chip business spun off into the ST-Ericsson joint venture during the past year). (See table below.)

Table 1: Ericsson Q2 2009

However, with currency exchange changes stripped out, revenues were down 3 percent.

Carl-Henric Svanberg, now in his last half year as CEO, told Friday morning's media conference call that Ericsson is now seeing "more notable effects" of the global economic downturn, especially in emerging markets where currency fluctuations are impacting carriers' purchasing power. (See Ericsson Names New CEO.)

He picked out Eastern Europe, Africa, and Latin America as regions negatively affected by exchange rate changes at the moment.

Net income dipped by 61 percent year-on-year, hit hard by losses at its joint ventures, Sony Ericsson Mobile Communications and ST-Ericsson, and restructuring charges of SEK3.6 billion ($481 million) associated with Ericsson's cost-cutting strategy announced in January. (See ST-Ericsson Reorganizes, Reports Q2, Device Depression for Nokia, Sony Ericsson, and Ericsson Soars on Strong Q4, Outlook.)

While revenues were roughly in line with expectations, and operating profits (excluding the impact of the joint ventures and restructuring charges) were higher than expected, up 49 percent at SEK6.9 billion ($921 million), the recession's impact on sales in emerging markets, which are set to provide a great deal of the telecom infrastructure market's growth in the coming years, sent Ericsson's share price down by more than 7 percent to SEK72.00.

Services growth
For Ericsson, "services" comprises its Professional Services division plus the "network rollout" portion of its Networks division, which it reports separately when presenting its quarterly earnings.

("Network rollout" is kept separate, the vendor says, because it relates to services directly linked to infrastructure sales and relates only to Ericsson equipment, whereas the Professional Services division generates sales from multivendor engagements.)

In the second quarter, revenues from Professional Services were SEK14.1 billion ($1.89 billion), while "network rollout" services generated revenues of SEK5.9 billion ($790 million).

The Professional Services division's revenues grew by 28 percent compared with a year earlier, and even once the positive impact of currency exchange changes are stripped out, the growth was still an impressive 16 percent. Managed services engagements generated SEK4.6 billion ($616 million) of revenues, up 34 percent year-on-year.

In total, services (Professional Services plus network rollout) generated revenues of SEK20 billion ($2.68 billion), or 38.4 percent of total sales. Svanberg said that compares with 33 percent of total revenues a year ago, and added that the services business is the fastest growing part of Ericsson.

He highlighted recent wins with Sprint Corp. (NYSE: S), Zain Group in Nigeria, and Telefónica UK Ltd. as proof points of continuing growth, with the Sprint and Zain deals likely to generate further business. (See Ericsson Bags $5B Deal, Ericsson, Sprint in $5B Managed Services Deal, Ericsson Win Zain Deal, and Ericsson Wins O2 Deal.)

The CEO also noted that Ericsson now has 7,000 staff devoted to "consulting and integration" services, an area of particularly strong growth as carriers implement network transformation strategies. The company recently closed a targeted acquisition to strengthen its position in Turkey, Svanberg noted. (See Ericsson Buys Turkish Integrator.)

The Networks (infrastructure) division (including network rollout services) reported a 4 percent increase in revenues, to SEK34.7 billion ($4.65 billion). However, once currency factors are taken out, the Networks division's sales were down year-on-year by an unspecified amount.

The Multimedia division, which includes Ericsson's telecom software, applications, and video systems, grew its revenues by 23 percent to SEK3.3 billion ($442 million), with the CEO noting a strong performance by its billing systems specialist, LHS Group . (See LHS Reports Q2.)

In terms of geographic regions, Svanberg noted that China (the largest single market during the quarter) and India were still driving growth in Asia/Pacific, while North America has been growing due to demand for mobile Internet services and because Verizon Wireless 's aggressive timetable to migrate to LTE (Long Term Evolution) has prompted increased activity from its rivals. (See Verizon Wants LTE ASAP, Verizon to Complete LTE Network by 2014?, and MWC 2009: Verizon Picks LTE Vendors.)

Table 2: Ericsson Q2 2009 Sales by Region

Overall, the CEO noted that Ericsson has been able to perform relatively well in an increasingly tough market. "We are taking market share all the time, and we're strong in the markets with the greatest business activity," he concluded.

Ericsson noted in its earnings press release that "fundamentals for longer-term positive development for our industry remain solid," as mobile subscriptions continue to grow (up 149 million in the second quarter to about 4.3 billion), WCDMA (3G) demand is still strong, with 40 million new subscriptions taking the total to 377 million worldwide, and mobile data traffic volumes continue to increase.

The outlook for further growth in demand for professional services is also encouraging, noted the vendor, "fueled by operators' desire to reduce operating expenses and improve efficiency in network operation and maintenance... [while] the move toward all-IP and increased network complexity will create further demand for systems integration and consulting."

— Ray Le Maistre, International News Editor, Light Reading