Carrier Caution Cuffs Ericsson in Q1

The fallout from the global economic crisis is still hitting Ericsson AB (Nasdaq: ERIC)'s financial performance, with the mobile infrastructure market leader suffering a 9 percent dip in year-on-year revenues, to 45.1 billion Swedish kronor (US$6.26 billion), in its first quarter.

What's more, if the (unspecified) boost to the top line from the recently acquired Nortel Networks Ltd. CDMA assets and currency exchange fluctuations are stripped out, like-for-like revenues during the first three months of this year were down by 16 percent compared with a year ago. (See Ericsson Kickstarts Nortel Integration Plans.)

The magnitude of the dip in revenues is very similar to that reported by Nokia Networks Thursday, but while NSN forecast a double-digit growth in sequential sales for the second quarter, Ericsson is much more cautious about how the market is behaving and did not provide any guidance during its conference call early Friday morning. (See NSN Shrinks Again, But Q2 Looks Rosier.)

Ericsson's CEO, Hans Vestberg, said the lower than expected first-quarter sales were due to a continuation of the trends experienced during the second half of 2009. (See Ericsson Keeps Its Distance From Huawei .)

The primary reasons for the dip, which comes mainly from the Networks division, are: ongoing caution and delayed purchasing decisions among carriers in growth markets, such as India; a decline in sales in China, because the initial rush to roll out 3G networks quickly is over; an ongoing fall in demand for 2G gear that's not yet being offset by higher demand for 3G equipment; and supply chain issues, specifically issues around sourcing semiconductors from suppliers that are also facing heavy demand from other industry verticals.

Ericsson's net profit is also down, by 30 percent, to SEK1.3 billion ($180 million), as the company continues to record restructuring charges. And, for once, the parent company wasn't dragged down by losses at its device joint venture, Sony Ericsson Mobile Communications , though chipset joint venture ST-Ericsson is still dragging on Ericsson's profits. (See Sony Ericsson's Transformation Takes Shape and ST-Ericsson Reports Q1.)

But the company improved its gross margins to 39 percent from 36 percent a year ago, thanks to lower operating costs and a higher proportion of software sales (upgrades) in its Networks division, and retained its operating margin at 10 percent. Investors liked that particular trend, and Ericsson's share price rose by 5 percent, to SEK84.75, on the Stockholm exchange in morning trading.

Table 1: Revenues In Decline: Ericsson Q1 2010
In billions of Swedish kronor (unless margins) Q1 2009 Q1 2010 change Q4 2009 change
Revenues 49.6 45.1 -9% 58.3 -23%
Gross margin 36% 39% -- 35% --
Operating margin (excluding joint ventures) 10% 10% -- 13% --
Restructuring charges (excluding joint ventures) 0.7 2.2 -- 4.2 --
Net income 1.8 1.3 -30% 0.7 76%

Services still rising, North America booming
While the Networks division is suffering, and Multimedia hit a sticky patch as revenue management software sales faltered in the key Middle East and Sub-Saharan Africa markets, the Services unit is thriving, with Ericsson recording an increase in revenues from all three lines: professional services, managed services, and network rollout services (which was formerly included in the Networks division's results).

Table 2: Ericsson Q1 2010: Networks Takes a Hit
In billions of Swedish kronor Q1 2009 Q1 2010 change Q4 2009 change
Networks division revenues 28.8 24.7 -14% 31.8 -22%
Global Services division revenues 17.5 18.1 +3% 23.1 -22%
-- of which professional Services 12.8 13.3 +4% 16.5 -20%
-- of which Managed Services 4.2 4.9 +17% 5.1 -4%
-- of which Network Rollout 4.7 4.8 +3% 6.7 -27%
Multimedia revenues 3.2 2.3 -29% 3.4 -31%
Total revenues 49.6 45.1 -9% 58.3 -23%

The vendor has struck some major deals in the past year, including a large managed services contract at Sprint Corp. (NYSE: S), and such deals are helping to boost the division's top line. (See Ericsson, Sprint in $5B Managed Services Deal.)

The Sprint deal, along with the new stream of CDMA infrastructure and services sales, also helped make Ericsson's North American business look very healthy.

The story was different in other geographies, though, with spending in India suppressed (though hardly nonexistent) during the build-up to the ongoing 3G spectrum auction; sales in China unable to live up to last year's 3G blowout, though again there are still significant deals to be won (or lost); and business in Sub-Saharan Africa still being hit hard by the economic crisis. (See Ericsson Scores Bharti Deal and Ericsson Boasts Major China Deals.)

Table 3: Ericsson Q1 2010 by Geography
In billions of Swedish kronor Q1 2009 Q1 2010 change Q4 2009 change
North America 4.8 9.5 99% 6.7 +41%
Latin America 4.4 4.0 -9% 5.9 -32%
Northern Europe and Central Asia 2.9 2.3 -20% 3.5 -34%
Western and Central Europe 5.4 5.2 -3% 6.1 -15%
Mediterranean 6.1 5.1 -17% 7.1 -28%
Middle East 4.0 3.9 0% 5.0 -22%
Sub-Saharan Africa 4.7 2.4 -48% 3.8 -37%
India 4.0 2.3 -43% 3.4 -33%
China and Northeast Asia 5.8 5.0 -15% 7.4 -33%
Southeast Asia and Oceania 5.2 3.5 -32% 5.2 -32%
Other 2.3 1.9 -19% 4.2 -54%
Total 49.6 45.1 -9% 58.3 -23%

Vestberg expects the planned acquisition of a majority stake in LG-Ericsson Co. Ltd. to help boost sales in South Korea, the third-largest market in the Asia/Pacific region after China and Japan. "Ericsson's presence there is very limited," he noted during today's conference call. (See Ericsson Snaps Up LG-Nortel Stake.)

Overall, Ericsson is still confident that there is future growth in the mobile infrastructure market, driven by increasing volumes of data traffic, and that, over the long term, Ericsson can grow at a faster rate than the market. The vendor believes global mobile data traffic has grown by 280 percent during the past two years and will double in volume each year for the next five years. Those increasing volumes of data are leading carriers, in mature markets in particular, to focus much more on network quality and efficiency issues.

That's a trend that's set to drive further demand for all sorts of services (network planning, managed operations, and so on), and (in Light Reading's view) to drive demand for sophisticated Service Provider Information Technology (SPIT) capabilities that can help operators manage their infrastructure and traffic flows. (See The SPIT Manifesto.)

— Ray Le Maistre, International Managing Editor, Light Reading

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