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First-quarter revenues dip as network rollout projects in US and Japan tail off, but margins are better and sales are set to pick up in H2.

Ericsson Looks to Future as Q1 Sales Slump

Ray Le Maistre
4/23/2014
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Ericsson suffered a 9% slump in revenues during the first quarter of 2014 as major 4G network rollout projects in the US and Japan tailed off, but the vendor's management highlighted improving margins, and said sales will pick up later this year. (See Ericsson Reports Q1.)

CEO Hans Vestberg and CFO Jan Frykhammar also stuck to their oft-repeated analysis of business trends -- major network rollouts deliver higher revenues and lower margins, which are then followed by lower revenues and higher margins as operators add capacity -- and stressed that Ericsson AB (Nasdaq: ERIC)'s portfolio of mobile broadband infrastructure, video-related systems, OSS/BSS assets, and large services division is well suited to the long-term needs of communications service providers.

But it's the numbers that investors react to, and the 9% year-on-year dip in revenues to 47.5 billion Swedish kronor (US$7.24 billion) sent Ericsson's share price down by 4.5% to SEK82.35 in morning trading on the Stockholm exchange.

The numbers, though disappointing, do conform to the trends highlighted at the end of 2013 and are in line with the consistent story told by management, as gross and operating margins improved during the first quarter. (See Ericsson Flatlines in 2013, Trails Huawei.)

Table 1: Ericsson Q1 2014 Key Financials

In SEK billions Q1 2014 Q1 2013 Change Q4 2013 Change
Revenues 47.5 52.0 -9% 67.0 -29%
- Of which Networks 24.4 28.1 -13% 34.8 -30%
- Of which Global Services 20.4 21.5 -5% 27.2 -25%
- Of which Support Solutions 2.8 2.4 13% 5.1 -46%
Gross margin 36.5% 32.0% Increase of 4.5 percentage points 37.1% Decrease of 0.6 percentage points
Operating margin 5.5% 4.0% Increase of 1.5 percentage points 13.5% Decrease of 8.0 percentage points
Net income 1.7 1.2 42% 6.4 -73%
Source: Ericsson

CEO Vestberg also noted that, as a result of new network rollout contracts won by Ericsson (some announced, some not), revenues would improve during the second half of 2014, but this would probably result in lower margins.

Some of that growth is likely to be coming from Europe, where Ericsson has been awarded a significant deal as part of Vodafone's Project Spring program. (See Euronews: Ericsson Lands 'Project Spring' Deal.)

China is also a very active market currently, as the country's three main operators continue to build out their 3G and 4G networks. Ericsson noted that its revenues from China rose by 46% year-on-year during the first quarter, but that was from a very low base last year.

The company's main message to the market is that it believes it is well placed to be "very relevant" to the market for the long term, given its focus on mobile broadband, video systems, OSS/BSS, routers, and smartphone modems. (See Ericsson Bags Azuki Systems.)

That portfolio, along with the company's R&D work in SDN and NFV, is in line with what network operators are looking for, said Vestberg. The CEO said that in his conversations with customers, the main topics they talk about are: network performance, and the need to optimize for data traffic, which plays to Ericsson's Service Provider Information Technology (SPIT) assets; the potential of SDN and NFV to improve service creation and delivery and reduce operating costs; and the need to manage and deliver video traffic efficiently across multiple platforms to multiple devices. (See Ericsson Broadcasts its TV Anywhere Message, Ericsson Commits to OpenStack With Mirantis , and Ericsson CTO Bangs SDN Drum.)

He pointed to Ericsson's inclusion in AT&T's Domain 2.0 project, boasting of the company's presence as the only major equipment vendor involved in the carrier's plan to revamp its network around SDN and NFV. (See AT&T's Cloud Future Takes Shape.)

Vestberg also said that Ericsson is now involved in "all major OSS/BSS transformations," a major step forward from a year ago. The business impact of such engagements, though, is slower and less dramatic than the radio access network (RAN) deals that drive the majority of Ericsson's sales. The OSS and BSS projects "take a long time… these are major IT projects," noted Vestberg. "These will be big in the industry," he added, and have a positive impact on the professional services part of the vendor's business. (See CenturyLink, Ericsson Leverage Legacy for Agile IT.)

By "big," though, Vestberg does not mean such deals will generate RAN-type revenue streams: The greater value for Ericsson, beyond services and software sales, is the deeper relationship with carriers that such engagements deliver. That's hard to show on a spreadsheet, though, so Vestberg and Frykhammar will need to press home the overall value story of Ericsson's broad portfolio play at every opportunity to win the confidence of investors who feel more comfortable with numbers and statistics.

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, Light Reading

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Gabriel Brown
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Gabriel Brown,
User Rank: Light Sabre
4/23/2014 | 7:59:29 AM
Re: Mobile broadband still good for a while yet
It's going to be interesting to see how much carriers actually spend on SDN and NFV over the next few years, and how much of that goes to telecom vendors.

I'd argue that the big LTE deployments in China and Europe (well, biggish) will be much more meaningful for Ericsson this year.
Ray@LR
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Ray@LR,
User Rank: Blogger
4/23/2014 | 7:49:15 AM
Mobile broadband still good for a while yet
As the mobile broadband infrastructure market leader, and unlikely to be far from the top of the RAN tree any time soon, Ericsson has time to make its multiple (and significant) acquisitions in video, OSS/BSS and IP work. And so far, that mobile networks position has enabled Ericsson to get by, retaining scale and making money.

But as we have seen with Nokia and Blackberry, market leaders are never safe and not guaranteed future success, which is why Ericsosn has diversified and is scrambling to ensure it has at least the perception of being at the vanguard of carrier SDN and NFV developments.

It's going to be very interesting to see if Ericsson has its business mix right. The large vendors need to be able to rely on the majority of its operations performing well if parts are strugling, and so far Ericsson has achieved that balancing act. But it's a tightrope, and one that Nortel has already fallen from.

IN the same that it's interesting now to look back and see which companies have made the cut from 2004 to 2014, it'll be even more interesting to see which names are leading the pack (or have even survived) as comms networking systems vendors in 2024. 
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