Ericsson Spreads Q1 Joy

Ericsson provided a ray of hope for the beleaguered vendor community today by announcing better than expected first quarter results that sent its share price shooting up by nearly 25 percent in early trading on the Stockholm exchange. (See Ericsson Reports 1Q08.)

The news provided a welcome relief for the company after a rocky 2007. (See Ericsson Cuts Jobs as H2 Bites and Slideshow: Leading Lights Awards 2007 .)

The first three months are historically the toughest in the calendar year for vendors, including Ericsson. But despite that seasonality, and a number of factors that put pressure on the firm's profitability -– including a weak U.S. dollar, ongoing pricing pressures, a high proportion of sales in emerging markets, and M&A integration and restructuring costs -– the company managed to increase its year-on-year sales and improve its margins, much to the surprise of analysts and investors.

As a result, Ericsson saw its share price ramp up by 24.4 percent to 15.48 Swedish Kronor by midday on the Stockholm exchange.

But the company's CEO, Carl-Henric Svanberg, and his CFO, Hans Vestberg, were quick to remind the market that trading conditions are still very tough, and that sales growth is coming mostly from the less profitable emerging markets, which are adding tens of millions of new mobile subscribers each month.

Svanberg reminded attendees at this morning's earnings press conference that Ericsson expects the market for mobile network equipment to be flattish in 2008 compared with last year, while Vestberg repeatedly declined to offer any kind of guidance for the second quarter or the full year because of the unpredictable impact of global economic conditions and business from high growth markets.

On the bright side, though, Ericsson is expecting new business to come from North America now that the spectrum auctions have finished, and is encouraged by the support for 4G technology LTE, in which Ericsson is "investing significantly," the CEO said. (See 700 MHz: The $19.6B Question, AT&T & Verizon Make 700 MHz Plans, DoCoMo Takes LTE to 250 Mbit/s, DoCoMo Picks Ericsson LTE, Ericsson's Need for Speed, China Mobile Joins LTE Threesome, MWC Preview: LTE in the Limelight , Vodafone Plans LTE Powwow, and Verizon, Vodafone Head for LTE.)

First quarter results
Ericsson reported revenues of SEK44.2 billion ($7.4 billion), up five percent compared with a year earlier, while financial analysts, on average, had expected a fall in sales. Net income was SEK2.6 billion ($433 million), and while that was down 55 percent from the first quarter of 2007, it was about 10 percent better than expected.

The vendor's gross margin of 38.6 percent and operating margin of 9.7 percent also exceeded expectations.

"It's a challenging business environment, but stable," stated Svanberg. "This quarter was slightly better than expected but we continue to plan for a flattish mobile infrastructure market... and we expect the same mix [a higher proportion of lower margin new rollout business] for a few more quarters," said the CEO.

The CEO also commented on the pricing pressures that have been hitting the profit margins of all the major equipment manufacturers in the past year. (See AlcaLu: Pressure Is Still On.)

Responding to a comment about other vendors reportedly wanting to raise their prices to help boost sales and margins, Svanberg stated: "Pushing up prices in this industry doesn't happen, but you can push down prices less... price pressure from the traditional vendors isn't quite as strong as it was."

The company noted, though, in its press release that "competition is still intense, especially from Chinese vendors." (See Huawei Sets Bumper Sales Target and Heavy Reading Homes In on Huawei.)

A major boost to revenues came from North America, where sales were up 39 percent year on year to SEK4.3 billion ($719 million), thanks mainly to increasing sales of 3G network upgrades. Latin America also generated good growth, up 25 percent, while sales in Western Europe were down 7 percent year on year. Asia/Pacific has now overtaken Western Europe as the region generating the most revenues. See the table below for full details.

Table 1: Ericsson Revenues by Region, Q1 2008 vs Q1 2007
Region Q1 2008 revenues in SEK billions Q1 2007 revenues in SEK billions Year-on-year change
Western Europe 11.7 12.5 -7%
Central and Eastern Europe, Middle East and Africa 11.1 11 1%
Asia/Pacific 12.9 12.3 5%
Latin America 4.2 3.3 25%
North America 4.3 3.1 39%
Source: Ericsson

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