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Ericsson Holds Up in Q1

Today's headline numbers from Ericsson AB (Nasdaq: ERIC) might look discouraging for the telecom sector at first glance -- the Swedish giant's first-quarter net income is down 30 percent from last year to 1.8 billion Swedish Kronor (US$223 million), and its share price fell 8 percent to 71 Swedish Kronor in Thursday morning trading in Stockholm.

But those headline figures were affected by: restructuring costs of SEK700 million ($86.8 million); the poor performance of joint venture companies Sony Ericsson Mobile Communications and the recently formed wireless chip firm ST-Ericsson ; and pension fund contributions of SEK1.5 billion ($186 million). (See ST-Ericsson Is Born and Sony Ericsson Reports Q1.)

But Ericsson's core business -- selling network infrastructure and professional services to telecom operators -- held up well in the current challenging climate, with revenues and operating margins rising.

Table 1: Ericsson Q1 2009
In Swedish Kronor Q1 2009 Q1 2008 Change
Revenues 49.6 billion 44.2 billion +12%
Operating margin excluding joint ventures 9.5% 7.6% Improved
Net income 1.8 billion 2.6 billion -30%
EPS 0.54 0.83 -35%

Revenues were up by 12 percent from a year earlier to SEK49.6 billion ($6.2 billion), and up 16 percent 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 Ericsson Joins Mobile Chip Challenger and Ericsson Sells PBX Business.)

Those gains, though, were helped by favorable exchange rate movements. But even at a constant exchange rate (that is, with fluctuations in currency conversion rates stripped out from the past 12 months), Ericsson's revenues for its comparable units were still 5 percent better than a year ago.

By contrast, rival Nokia Networks recently reported a 12 percent fall in revenues and a quarterly loss. Alcatel-Lucent (NYSE: ALU) reports its first-quarter numbers next week. (See Nokia's Cellphone Hope.)

Steady progress in core divisions
Operating margins (which exclude restructuring charges) improved in all three of Ericsson's core business units -- Networks, Professional Services, and Multimedia.

Table 2: Ericsson Q1 2009 by Division
In Swedish Kronor Q1 2009 Q1 2008 Change
Networks revenues 33.5 billion 30 billion +12%
Networks operating margin 10% 9% Improved
Professional Services revenues 12.8 billion 10 billion +28%
Professional Services operating margin 15% 14% Improved
Multimedia revenues* 3.2 billion 2.6 +25%
Multimedia operating margin* 2% -9% Improved
* Excluding operations divested or spun off into ST-Ericsson joint venture

Ericsson says its Network division sales were particularly strong in the U.S., India, and China, where the vendor is already booking revenues from the 3G rollout at China Unicom Ltd. (NYSE: CHU), and that network traffic growth is driving demand for transport and routing products, such as Redback's SmartEdge platform. (See China Unicom Does 3G With Ericsson and China Unicom Plans Massive Capex Hike.)

CEO Carl-Henric Svanberg noted during today's earnings conference call that Ericsson was involved in Bharat Sanchar Nigam Ltd. (BSNL) 's initial 3G rollout in India, and was excited about the recently-announced "very strategic" involvement at Verizon Wireless , which is a new customer for the vendor. (See BSNL Does 3G With Ericsson and MWC 2009: Verizon Picks LTE Vendors.)

Svanberg also noted that the impact of the global downturn on the network infrastructure business was still quite limited, "but we see signs. Operators are delaying long-term investments in fixed-line networks, such as fiber rollout," while spending in some markets, like Russia and Ukraine, has been hard hit by currency movements that make it uneconomic for carriers to buy equipment from overseas. There, carriers have had to delay investments even though their network traffic is still growing, noted the CEO.

He also identified Bangladesh, Pakistan, and Spain as weaker markets.

Other areas, though, showed strong growth during the first quarter, including Italy, Turkey, Japan, Indonesia, Vietnam, Brazil, and Mexico.

This could all change, however. Svanberg said that, while operators generally are financially strong and are investing in their networks, particularly mobile broadband, it's still too difficult to predict how carriers will react in the short-term.

One thing unlikely to change, though, is the need for operators to cut their costs, and that trend is driving demand for managed services deals. That's helping to boost revenues at Ericsson's Professional Services division: The vendor now runs networks that have, in total, 275 million subscribers.

— Ray Le Maistre, International News Editor, Light Reading

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