Swedish vendor is building a backlog of new business and has landed a $230M optical deal, says CEO in Q3 earnings report

October 19, 2006

4 Min Read
Ericsson Plugs Marconi Progress

Ericsson AB (Nasdaq: ERIC) says its acquired Marconi business has reached breakeven, that an order backlog is building, and that its fixed-line business is picking up, especially in Europe.

That assessment came from Ericsson CEO Carl-Henric Svanberg during a third-quarter earnings press conference Thursday morning. Ericsson's numbers -- net income of 6.5 billion Swedish Kronor (US$883 million) from revenues of SEK40.8 billion ($5.54 billion) -- were slightly below market expectations but roughly in line with guidance. (See Ericsson Reports Q3.)

But the Swedish vendor is still counting the cost of its bold takeover, announced about a year ago, as Ericsson recorded SEK2.2 billion ($299 million) in restructuring charges in the third quarter related to 1,600 Marconi job cuts and terminating IT and facilities contracts. (See Ericsson Buys Bulk of Marconi.)

Ericsson also recorded a further SEK0.7 billion ($95 million) charge related to a voluntary redundancy scheme aimed at staff aged between 35 and 50 (the classic mid-life crisis years for men), but all these restructuring costs were offset by a SEK3 billion ($407 million) gain from the recent sale of its defense business. (See Ericsson Sells Defense Unit.)

Svanberg, though, is focused on new business and upcoming opportunities. Today's earnings report was accompanied by news of a major optical equipment contract worth $230 million over three years with Australian carrier Telstra Corp. Ltd. (ASX: TLS; NZK: TLS), which is already a major wireless infrastructure customer for Ericsson. (See Ericsson Wins Telstra Contract, Ericsson Powers Telstra, and Telstra Unveils Switch to IP.)

Telstra is upgrading its long distance, regional, and rural networks with SDH/DWDM optical equipment and wireless PDH/SDH gear that will increase the capacity between Telstra's core Cisco Systems Inc. (Nasdaq: CSCO) IP routers to a potential 10 Gbit/s.

And the CEO believes the deal is down to Ericsson's punching its weight. He told this morning's press conference, that he doubted "Marconi could have won that deal on their own."

Svanberg also noted that Ericsson is "more positive about prospects in Europe than some other companies" because of the potential capacity upgrades that carriers need to make, and he's confident his firm's new fixed-line portfolio can capture a fair amount of that business.

That confidence, and the current order backlog, has forced Ericsson to double the production capacity for its transmission equipment, said the CEO.

And his CFO, Karl-Henrik Sundström, noted that Ericsson's 19 percent year-on-year rise in third-quarter revenues in Europe, to SEK11.4 billion ($1.55 billion), was largely down to sales generated by the former Marconi business.

The company also reported decent revenues growth in Asia/Pacific, up 38 percent to SEK10.6 billion ($1.44 billion), and Central and Eastern Europe, Middle East, and Africa, where revenues were up 24 percent to SEK11.7 billion ($1.59 billion).

The Americas pooped on the party, though. Third-quarter sales in Latin America were down 18 percent to SEK4.2 billion ($570 million), a blip caused by consolidation disruption and new strategy decisions, according to Ericsson, though better quarterly revenues are expected in 2007.

And in North America, third-quarter revenues were SEK2.9 billion ($394 million), down 36 percent compared with a year earlier. This dramatic drop is mainly due to Cingular Wireless , said the CEO, which has been using up its mobile infrastructure inventory instead of buying new gear.

Still, Ericsson managed to report wireless infrastructure revenues of SEK28 billion ($3.8 billion) -- compared with fixed-line gear revenues of SEK2.5 billion ($340 million) -- and claims to be the market leader in 3G with its gear in 60 WCDMA networks and 30 HSPA (high-speed packet access) networks. (See FarEasTone Deploys Ericsson and Telkomsel Selects Ericsson.)

Svanberg boasted that Telstra's HSPA network, which provides connections at up to 3 Mbit/s, was built and switched on in just 10 months. (See Ericsson Powers Telstra.)

The company has high hopes for HSPA sales in Africa and Asia/Pacific, where, said the CEO, wireless broadband is likely in many regions to be the only way to get broadband to the majority of people.

Ericsson has also built a significant professional services business with 23,000 staff that has doubled its sales in the past four years. That business generated revenues of SEK7.9 billion ($1.1 billion) in the third quarter, up 31 percent compared with a year earlier.

And, as usual, the CEO had a word for some of his competitors, though without naming them. He attributed a particularly sharp period of mobile infrastructure price erosion in the past year to the desperation of other vendors "that have now been acquired" to win market share. (See Nokia, Siemens Create Networks Giant.)

He also had time to reference Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) "It will be interesting to see where the Chinese are," he noted, saying that when those two companies had no market share to lose they were entering tenders with rock bottom pricing. But now that they have some business, "they need to be more careful -- they need to survive." (See Huawei Wins V'fone HSDPA Deal, Huawei Leaps Into US 3G, Huawei Builds Uruguay UMTS, Mobily Uses HSDPA, Huawei Wins Contract, ZTE Wins in Morocco, and ZTE Wins in Tajikistan.)

It seems, though, that Ericsson knows how to aim low, too. (See Ericsson, Nokia Bid Low for BSNL.)

— Ray Le Maistre, International News Editor, Light Reading

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