Managed Services

Ericsson Sets Q2 Benchmark

Following profit warnings from two network systems vendor rivals during the past few days, Ericsson AB (Nasdaq: ERIC) showed Wednesday morning that with the right scale and business mix it's possible to ride the storm. (See AlcaLu Issues Full-Year Profit Warning and ZTE Issues H1 Profit Warning.)

Ericsson reported second-quarter sales of 55.3 billion Swedish kronor (US$7.94 billion), slightly better than a year ago and 9 percent better than in the first quarter. Those revenues were helped by the addition of Telcordia to the group, though. Without the contribution of the Service Provider Information Technology (SPIT) specialist, which generated revenues of SEK1.1 billion ($158 million), and the positive impact of non-operational factors (such as shifting currency exchange rates), Ericsson's revenues would have been down by about 6 percent compared with a year ago.

Table 1: Ericsson Q2 2012 Key Financials
In billions of Swedish kronor Q2 2011 Q2 2012 Y/Y change Q1 2012 Q/Q change
Revenues 54.8 55.3 1% 51.0 9%
Gross margin 37.8% 32.0% Decrease of 5.8 percentage points 33.3% Decrease of 1.3 percentage points
Operating margin excluding joint ventures and sale of Sony Ericsson 9.2% 5.9% Decrease of 3.3 percentage points 5.5% Increase of 0.4 percentage points
Net income 3.2 1.2 -63% 8.8 -86%
Source: Ericsson

What is key to Ericsson is its scale and scope. It has a significant international presence -- in fact CEO Hans Vestberg claimed on the Wednesday morning earnings conference call that it is now the only telecom vendor "showing up" in all markets, a claim that could be contested by Huawei Technologies Co. Ltd. I'd imagine -- and isn't reliant on one line of business.

For example, Ericsson has been hit by the same pressures that have been hurting Alcatel-Lucent (NYSE: ALU) and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) in recent months, especially a slowdown in orders from China, a dramatic dip in CDMA network infrastructure business and, to some extent, the ongoing uncertainty in India. (See India Suffers From Policy Hiatus.)

Along with depressed investments in Europe, these factors contributed to a 17 percent year-on-year decline in revenues at its Networks division, a dip that Vestberg described as "very much a CDMA issue." CDMA network sales declined by almost 50 percent year-on-year to SEK2 billion ($287 million) and the company expects the decline to continue through the rest of this year (see table below).

But Ericsson, which currently employs 108,000 staff around the world, isn't a one-trick pony. Its Global Services division reported a 26 percent increase in year-on-year revenues, while its Support Solutions division (SPIT and video systems) reported a 47 percent increase. CEO Vestberg noted that Ericsson is picking up a lot of new consulting and systems integration work thanks to its expanded telecom software portfolio (from Telcordia) and that managed services deals are still coming in thick and fast (17 new deals signed during the quarter). (See Say Goodbye to Telcordia and Ericsson: We're No. 2 in OSS.)

Together, these divisions to some extent mitigated the impact of lower network infrastructure sales.

Table 2: Ericsson Q2 Revenues by Division
In billions of Swedish kronor Q2 2011 Q2 2012 Y/Y change Q1 2012 Q/Q change
Networks revenues 33.4 27.8 -17% 27.3 2%
Global Services revenues 19.0 24.1 26% 20.6 17%
Support Solutions revenues 2.4 3.5 47% 3.0 15%
Total 54.8 55.3 1% 51.0 9%

A greater reliance on services does come at some cost, though, as this depresses Ericsson's gross margin, which slipped by 32 percent in the second quarter. That margin level is unlikely to improve much during the next couple of quarters while so many mobile operators undertake modernization programs that involve the supply of lower-margin products, a process that is ongoing and which was discussed in some detail when Ericsson reported its first-quarter results. (See Ericsson Retrenches in Q1.)

The vendor does expect margin improvements in 2013, though, when those operators that have updated their networks require more capacity, a higher-margin opportunity for the vendor.

Despite the impact on its margins, and the negative impact of its stake in loss-making chip vendor ST-Ericsson , the company is still profitable, and continues to invest in new developments such as Long Term Evolution Time Division Duplex (LTE TDD). Vestberg said that while 2G investments have slowed considerably in China, "there are large LTE TDD field trials," though it's hard to say when commercial 4G will arrive in the country.

Where 4G has taken hold, though, Ericsson claims to have grabbed the lion's share of the business, stating that, up to the end of 2011, it had shipped 60 percent of the LTE equipment volumes, with the U.S. and South Korea as the two significant markets, though others are expected to become meaningful in the current quarters.

Vestberg is committed to making sure the vendor has a leading market share in LTE and believes that investments made during the past few years, in terms of acquisitions and winning network modernization deals that may have suppressed profits, will pay off in the years to come at the expense of its main rivals. "We see a very tough time for our competitors," said the CEO.

Second-quarter results for Nokia Networks will be announced July 19 as part of Nokia Corp. (NYSE: NOK)'s earnings announcement, while AlcaLu reveals its numbers on July 26.

— Ray Le Maistre, International Managing Editor, Light Reading

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macster 12/5/2012 | 5:27:41 PM
re: Ericsson Sets Q2 Benchmark

Following profit warnings from two network systems vendor rivals during the past few days,Ericsson AB (Nasdaq: ERIC) showed Wednesday morning that with the right scale and business mix it's possible to ride the storm. (See AlcaLu Issues Full-Year Profit Warning and ZTE Issues H1 Profit Warning.)

Interesting statement (and choice of words), given that E/// is reporting a 64% drop in income.

timmyd 12/5/2012 | 5:27:40 PM
re: Ericsson Sets Q2 Benchmark

you might ask Huawei where they appear in the US network market when you doubt Ericsson's claim to be in ALL geographies.....

digits 12/5/2012 | 5:27:39 PM
re: Ericsson Sets Q2 Benchmark

Well,  a profit warning is where a company announces that it isn't going to achieve the profits it said it was going to.

Ericsson's net profit is down 63% compared with a year ago but it has explained until it's blue in the face that its margins are depressed currently and why - this is no shock. That's why its share price is up 2.8% today, not tanking.

And it is still making money -- it is generating operating profits and net profits. 

In this market I'd say that is something any company would be happy with.

digits 12/5/2012 | 5:27:39 PM
re: Ericsson Sets Q2 Benchmark

I don't doubt Ericsson's claim to be in all markets --- just questioning whether it is the only vendor to be 'showing up' in all markets these days.

As far as I am aware Huawei has 'shown up' in the US market and has provide network infrastucture to Cricket Communications and is selling smartphones, though it's obviously not engaged in the same way as its main rivals, including Ericsson.

But just as clearly, there is no way Huawei is going to shortlisted for the Tier 1 deals, granted.  

Pete Baldwin 12/5/2012 | 5:27:39 PM
re: Ericsson Sets Q2 Benchmark

Fair point. Maybe the headline should have been, "Ericsson Q2 Sucks Less Than Others'" ...

paolo.franzoi 12/5/2012 | 5:27:38 PM
re: Ericsson Sets Q2 Benchmark


Pretty low bar Ray....see Apple. :)




digits 12/5/2012 | 5:27:37 PM
re: Ericsson Sets Q2 Benchmark

Ericsson is quite conservative in making forecasts but makes the effort to explain what it is trying to achieve and the reasons for shifts. They did the same when profits were unexpectedly high too in 2010 (often from currency gains).


The point is - Ericsson has not issued any profit warnings. If it does you can be sure everyone, including Light Reading, will be reporting it.

And for sure Ericsson has hit some rough patches in the past few years.

Right now, in this market, it appears to be weathering the market storm in a way that many others wold like to be doing.

If other publically-listed (reporting numbers under accounting rules) network infrastructure companies can show the same level of resilience then that would be very much to their credit.

But it doesn't look like that is going to happen. At the moment.

It wold be great for the market if there were stuill four or five global suppliers in 3-5 years time providing real alternatives to network operators. Particularly in the mobile infrasucture space I can't see that happening. But I think -- I would hazard a guess currently - that Ericsson will be one that is still around, still afloat and supplying hardware, software and services to Tier 1 carriers.

 But as we have all seen in the past year, companies that look like they are doing well and which have been strong market leaders can find themselves in trouble pretty quickly.

And will Apple always be the darling of the public and the markets? I bet not.

macster 12/5/2012 | 5:27:37 PM
re: Ericsson Sets Q2 Benchmark


End 2011:

1. What did Ericsson say they would do (if they said anything)? 

2. What did analysts estimate?

3. What did they actually do?

Oh, what was the word used at the end of last year? That's right - "shocked". If I remember right, it was a third of what was expected/forecasted.

July 2012. Did E/// make a forecast? Earnings of 1.1bn Kr. What did analysts expect (1.5bn?)?


Maybe ALU shouldn't make any forecasts, so there'll be no need for any warnings. Can then *surprise* everyone - lol!



digits 12/5/2012 | 5:27:37 PM
re: Ericsson Sets Q2 Benchmark

OK, I was pointing towards telco network systems rather than spreading the net wide in this respect.... For sure there are plenty of companies in the broader market that 'just making some money - any money!' would not constitute 'doing OK'.

I don't envy any of these infrastructure companies their task, to be honest and it's clear that Ericsson has seen where  this market is going. There's a reason it has built up such a large services division and has been buying into video and software... 


jepovic 12/5/2012 | 5:27:31 PM
re: Ericsson Sets Q2 Benchmark

"But I think -- I would hazard a guess currently - that Ericsson will be one that is still around, still afloat and supplying hardware, software and services to Tier 1 carriers."

Not a wild guess, I think. To make a profit and have a relatively secure future is also a huge advantage on the sales side. Choosing a network vendor is a bit like signing a 5-10 year contract on the supplier's future development. To be stuck with equipment from a vendor who sudenly halts development & upgrades is a nightmare for operators. Ericsson is the only traditional, broad-prortfolio vendor left whom the operators can trust to be around in 5 years. This is more important than many technical features.

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