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Ericsson Spies Networks Payoff

Ray Le Maistre
1/31/2013
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Ericsson AB believes it will start to reap the benefits of its network modernization strategy during 2013 following more than a year of squeezed margins in the division that still delivers the majority of its revenues. In 2011, Ericsson committed to a number of major upgrade projects with customers, knowing that such a strategy would involve labor-intensive, lower-margin business for up to two years. The impact of that decision, coupled with a dip in the value of the network equipment market in general during the past 12 months, can be seen clearly in the company's full-year 2012 financial report issued Thursday: Ericsson's Networks division reported full-year revenues of 117.3 billion Swedish kronor (US$18.5 billion), down 11 percent compared with 2011, while the division's operating margin sank to just 6 percent from 13 percent during the previous year. Those pressures also dragged down Ericsson's full-year gross margin figure to 31.6 percent from 35.1 percent the previous year. Now, though, Ericsson's management team can smell the payback: The hope was always that the low-margin network modernization projects would in turn lead to higher-margin capacity expansion deals that would boost margins noticeably. CFO Jan Frykhammar noted Thursday morning, during a webcast earnings presentation, that "as we go into 2013 we will see the lessening of the impact of those projects … by the second half [of the year] we will see a change to more capacity [deals]." The good news for Ericsson is that while it has taken a hit on its Networks business, its other two divisions have performed better during 2012, with both Global Services (managed and other professional services) and Support Solutions (OSS, BSS and media/video products) recording sales growth of 16 percent and 26 percent respectively. Global Services recorded a slight dip in operating margin to 6 percent while Support Solutions turned an operating profit compared with a loss in 2011. For the full details of the full year and the fourth quarter, take a look at this extensive financial report. The bad news, though, is that while Ericsson's total sales were roughly in line with 2011, up very slightly to SEK227.8 billion ($35.84 billion), its full-year net profit dipped by more than half to SEK5.9 billion because of ongoing losses and impairment costs at comms chip venture ST-Ericsson. (See Euronews: Ericsson Takes $1.2B Hit.) Frykhammar and CEO Hans Vestberg (who was formerly the company's CFO) are convinced that the chip business should be retained (though a new partner is needed -- see Ericsson Seeks New ST-Ericsson Partner). And they're also wary of letting Ericsson's costs and profitability getting trapped in a downward spiral: That's why they are constantly looking for ways to cut costs, even though the company is turning a profit. Ericsson announced a new wave of job cuts in November 2012 as part of its efforts to curb operating expenses. (See Ericsson Sheds 1,550 Staff in Sweden.) The company, though, is constantly gaining staff as it strikes ever more managed services deals that involve the transfer of employees into Ericsson's Global Services division. The company is constantly signing new managed services contracts (15 in the fourth quarter) and ended the year with 110,255 staff, up from 104,525 at the end of 2011. And finally … CEO Vestberg noted during his presentation that mobile packet core business is driving demand for the vendor's Smart Services Router (SSR) products that are built around the Redback assets that cost a fortune (more than $2 billion) in early 2007. Ericsson bagged 19 new router deals during the fourth quarter, bringing the total to 39, so it basically doubled its number of router customer engagements in the final three months of last year. Let's see if that sets a trend for 2013. — Ray Le Maistre, International Managing Editor, Light Reading

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