Ericsson Cuts Jobs as H2 Bites

Ericsson AB (Nasdaq: ERIC) announced a significant headcount reduction Friday as it continues to experience a sluggish mobile infrastructure market that is not expected to grow during 2008.

The Swedish giant is axing 1,000 jobs in Sweden, where it employs 19,800 of its total 74,000 staff, and will reduce headcount elsewhere. On today’s conference call, CEO Carl-Henric Svanberg said the company doesn’t have a total number just yet, though Reuters reports that he told a Swedish TV station 4,000 positions will be affected globally.

All parts of the vendor’s business will experience reductions, though the main areas of focus will be sales, administration, sourcing, supply, and service delivery, with R&D to be affected the least.

Ericsson expects the cuts to save it 4 billion Swedish kroner ($628 million) per year, starting in 2009.

Ericsson predicts that the mobile infrastructure market, which generates two thirds of its revenues, will be flat in 2008.

“We are taking actions to retain our competitive position,” Svanberg said. He also identified the main source of Ericsson’s competition, but didn't refer to Huawei Technologies Co. Ltd. or ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) by name: “Our Asian [rivals] are getting increasingly strong.”

Nomura Securities analyst Richard Windsor, in a research note issued Friday morning, stated: “Unfortunately, consistent pricing pressure means that a flattish outlook is not enough to keep margins up, which is why Ericsson has announced some cost cuts.”

News of the cost reductions, fourth quarter results that just about met analyst expectations, and the announcement of a planned SEK0.5 ($0.08) dividend that will return around SEK8 billion ($1.23 billion) to shareholders, kept Ericsson’s share price on an even keel in early morning trading in Stockholm, where the vendor’s stock stood at SEK14.34 today.

Fourth quarter and full-year results
For the fourth quarter, Ericsson reported revenues of SEK54.5 billion ($8.56 billion), up slightly from a year ago, and a net income of SEK5.6 billion ($879 million), down 42 percent from the same time last year. Gross margin was 36.1 percent, down from 42.2 percent a year earlier.

For the full year 2007, the vendor reported revenues of SEK187.8 billion ($29.5 billion), up 4 percent over 2006, while net income was SEK21.8 billion ($3.4 billion), down 17 percent year-on-year. Gross margin for the year was 39.3 percent, down from 2006’s 41.7 percent.

In its earnings announcement, Ericsson noted that, after a healthy start to 2007 with mid-single digit growth, sales in the second half of the year were “affected by the shift from capacity expansions and software upgrades to new network buildouts. This shift in business mix, as well as the rollout of new switching technologies, has negatively affected gross margin.”

That shift gave Ericsson a nasty shock in its third quarter and lead to the departure of its CFO. (See Profit Warning Slams Ericsson and Ericsson CFO Steps Down.)

Divisional issues
Ericsson is organized into three divisions –- Networks, Professional Services, and Multimedia. And it’s the latter that is proving something of a drain on the vendor’s business.

Networks (mobile and fixed equipment) is the division most affected by the shift in carrier spending patterns in the second half of the year. Fourth quarter revenues there were down 4 percent from a year earlier at SEK37.5 billion ($5.9 billion), while full-year revenues of SEK129 billion ($20.3 billion) were up just 1 percent compared with 2006.

To compound Ericsson’s network equipment problems, edge router vendor Redback Networks Inc. , which Ericsson acquired for a whopping $2.2 billion about a year ago, appears to be struggling, leading to the replacement of CEO Kevin DeNuccio with one of his vice presidents, Georges Antoun.

Professional services revenues were up 15 percent to SEK21.1 billion ($3.3 billion) in the fourth quarter, and up 16 percent for the full year at SEK42.9 billion ($6.7 billion). Ericsson expects “continued good growth” for this division in 2008, noted the CEO.

Multimedia, which includes Ericsson’s software (billing), IPTV and IP Multimedia Subsystem (IMS) units, is the one division that is losing money. It reported an operating loss of SEK439 million ($69 million) from revenues of SEK4.9 billion ($769 million) in the fourth quarter. Analysts had, on average, been expecting revenues of SEK5.1 billion ($800 million).

For the full year, the Multimedia division reported an operating loss of SEK135 million ($21.2 million) from revenues of SEK15.9 billion ($2.5 billion).

Svanberg said the division has some areas of good growth countered by areas of intense development. The main drain is in telco TV and video, said the CEO. “Our biggest investment is IPTV –- that’s where a lot of the carriers are focusing for the future.”

Geographic split: APAC delivers
Asia/Pacific generated the most revenues of any region during 2007, delivering SEK54.6 billion ($8.6 billion) in sales, and grew by 14 percent compared with 2006, despite the political unrest and natural disasters that affected sales in Pakistan, Bangladesh, and Thailand towards the end of the year. (See table below.)

Table 1: Ericsson Financial Performance by Region, 2007 vs 2006
Revenues (billions of Swedish Krona) Full year 2007 Full year 2006 Change year-on-year Q4 2007 Q4 2006 Change year-on-year
Asia-Pacific 54.6 47.9 14% 13.7 14 -2%
Western Europe 52.7 53.2 -1% 15.4 17.2 -10%
CEEMA* 48.7 46.4 5% 14.3 14.3 -1%
Latin America 18.4 16.5 12% 6.8 4.8 41%
North America 13.4 15.9 -15% 4.3 4 9%
* Central & Eastern Europe, Middle East & Africa
Source: Ericsson

The region includes four of Ericsson’s top 10 markets –- China (where sales grew 16 percent in 2007), India, Indonesia, and Japan –- which, together, accounted for 19 percent of all revenues in 2007.

Latin America; Central and Eastern Europe; and Middle East and Africa (CEEMA) also delivered better full-year revenues (12 percent and 5 percent, respectively), but revenues in Western Europe dipped by 1 percent, while North American sales were down 15 percent.

— Ray Le Maistre, International News Editor, Light Reading

desiEngineer 12/5/2012 | 3:48:47 PM
re: Ericsson Cuts Jobs as H2 Bites I won't crow that ERIC is down because it doesn't bode well for the rest when the market leader is struggling.

I bring up this point in relation to ALU because while ALU's mobile revenues were uninspiring, it did pretty well in other areas. Not so ERIC w/ RBAK.

ALU bashing works the ennui off better than ERIC bashing, so Craig's article on the top turkeys of the year was a hit, but in a couple of quarters, ERIC is right where ALU fell, half the market cap, significant revenue drop, and layoffs.

gocowboys 12/5/2012 | 3:48:43 PM
re: Ericsson Cuts Jobs as H2 Bites It is clear that desiEngineer is an ALU employee. In the greatest turkey catagory, ALU has earned a place of distinction. The stock is down about 60% from the time of the merger. Russo is a horrific CEO; my sources indicate that there have been offers for a replacement but no takers. Hmmm, wonder why? Don't even get me started on the portfolio and middle management.

Ericsson may have its issues, but ALU is right at place next to the cranberry sauce. :-)
gocowboys 12/5/2012 | 3:48:42 PM
re: Ericsson Cuts Jobs as H2 Bites Wow...that diatribe just has me at a loss for words. NOT!

My point is that ALU deserves what it gets. Ericsson is a separate matter. You created the linkage, not I.

Frankly, I know much more about what is going on in your company than you do. ALU has charted a downward spiral and Ruso is happily applying the gas. If you want to be on that ride, it is your business.

Resorting to denegrating a good football team is just bad form. If you are going to call me out, at least make it somewhat of a challenge. :-)
bollocks187 12/5/2012 | 3:48:42 PM
re: Ericsson Cuts Jobs as H2 Bites The trouble with large companies is the very poor business acumen of the senior management.

They look at a business decision from the perspective - how will it advance my career, what is the no risk to me approach, who to blame if it fails, how to position if it succeeds. This mentality is ingrained in many, not all, top executives thats why many of them are unable to start a business on there own as they do not have the business acumen experience to succeed.

Case(s) in point if you look at the acquired compnaies the last 7+ years very few executives remain in the large corporations. They are 'killed off' by the "Exeticans - Executive Politicians"

desiEngineer 12/5/2012 | 3:48:42 PM
re: Ericsson Cuts Jobs as H2 Bites gocowboys: It is clear that desiEngineer is an ALU employee. ... Ericsson may have its issues, but ALU is right at place next to the cranberry sauce. :-)

Yeah, so what does it matter if I work for ALU or not? Does that negate my argument? Holding ALU to the fire and not subjecting everyone else to the same torch shows unwarrranted bias.

So, having dispensed with your irrelevant comment, let's get to your potent argument: Are you saying Ericsson MAY have problems, or are you saying Ericsson DOES have problems?

Do you mean to say that despite ALU going through a difficult merger, and having this to say about them (in your words):

"Russo is a horrific CEO; my sources indicate that there have been offers for a replacement but no takers. Hmmm, wonder why? Don't even get me started on the portfolio and middle management."

they are just about even in performance with ERIC? What does that say about ERIC? How the heck do you come up with ERIC MAY have problems?

PS. It's clear gocowboys is a Cowboys fan, even if they have a meddling owner, a flaky QB and a flatulent wide receiver :-)
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