Ericsson Retrenches in Q1

Ericsson AB (Nasdaq: ERIC) more than doubled its net profits to 8.8 billion Swedish kronor (US$1.3 billion) in the first quarter of 2012, even though its revenues dipped 4 percent to SEK51 billion ($7.6 billion). (See Ericsson Q1 Profit Rises to SEK8.8B.)

But while that net income number looks impressive, it was swelled by the SEK7.7 billion ($1.15 billion) proceeds from the sale of its stake in handset joint venture Sony Ericsson, though also negatively impacted by a loss of SEK1.3 billion ($193 million) from the vendor's troubled chipset joint venture ST-Ericsson . (See ST-Ericsson Reports Q1 Loss of $312M, Ericsson Completes Handset Stake Sale and Euronews: Sony Buys Ericsson Out of Handsets.)

Table 1: Ericsson Q1 2012 Key Financials
In billions of Swedish kronor Q1 2011 Q1 2012 Y/Y change Q4 2011 Q/Q change
Revenues 53 51 -4% 63.7 -20%
Gross margin 38.5% 33.3% Decrease of 5.2 percentage points 30.2% Increase of 3.1 percentage points
Operating margin excluding joint ventures 11.9% 20.6% Increase of 8.7 percentage points 6.4% Increase of 14.2 percentage points
Net income 4.1 8.8 116% 1.5 490%
Source: Ericsson

Of greater importance is what is happening with the company's Networks division, which is still responsible for more than half of Ericsson's total revenues. Ongoing weakness in Europe and the continuing infrastructure hiatus in India resulted in a decline in infrastructure revenues of 18 percent (year-on-year and quarter-on-quarter).

Table 2: Ericsson Q1 2012 Revenues by Business Unit
In billions of Swedish kronor Q1 2011 Q1 2012 Y/Y change Q4 2011 Q/Q change
Networks revenues 33.2 27.3 -18% 33.3 -18%
Global Services revenues 17.4 20.6 18% 27 -24%
Support Systems revenues 2.3 3 33% 3.4 -11%
Total 53 51 -4% 63.7 -20%
Source: Ericsson

In Europe, reduced carrier spending in Russia and generally across Western and Central Europe hit sales volumes, while in India the impact of license cancellations and the delayed publication of the country's new National Telecom Policy has slowed spending to a near halt: Ericsson reported first-quarter network revenues in India of just SEK700 million ($104 million) compared with nearly SEK2.3 billion ($342 million) a year ago.

In technology terms, CDMA sales were down significantly, by 40 percent year-on-year, while HSPA and LTE demand was strong, especially in North America, where Ericsson is benefiting from renewed spending in the wake of the failed AT&T Inc. (NYSE: T) and T-Mobile US Inc. merger. (See AT&T Drops Bid to Acquire T-Mobile and T-Mobile's Race to Faster 4G.)

Ericsson also reported increasing LTE sales in Asia/Pacific, especially Australia, Japan and South Korea.

The good news for Ericsson is that it's involved in a number of network modernization and coverage expansion plans currently that will eventually result in higher-margin capacity expansion deals in the future.

CFO Jan Frykhammer explained on today's earnings conference call that Ericsson's gross margins have been squeezed by these modernization projects, but the biggest impact came in the fourth quarter of 2011, when gross margins slipped to 30.2 percent. (See Ericsson Suffers Margin Crunch.)

The CFO also explained that these projects can take up to two years to complete and that, because many of them started during 2011, the impact on gross margin levels will be felt throughout 2012. "It's important to get footprint [but] we have to live with the financial impact of those projects, which last 18 to 24 months. And we learn from these complex projects, in terms of execution and procurement [processes]."

As these projects mature, and as other mobile broadband capacity projects progress, the gross margin level is edging up, reaching 33.3 percent in the first quarter.

That margin uptick, in addition to cost-cutting moves at ST-Ericsson, pleased investors: Ericsson's share price was up by 2.3 percent on the Stockholm exchange to SEK65.05.

Telcordia Weighs In
There were also encouraging numbers from the Global Services and Support Systems divisions, which both recorded year-on-year sales increases. (See Ericsson Boards Its Own BUSS.)

Their revenue numbers were helped by the first reported sales from Service Provider Information Technology (SPIT) powerhouse Telcordia, which contributed revenues of SEK900 million ($133.7 million), split equally between the services and SPIT divisions. The Telcordia deal closed in early January, so that's nearly a full quarter of contributions from the OSS specialist. (See Euronews: Ericsson Seals Telcordia Deal.)

But even without the help of Telcordia, both divisions are in growth mode, which suits CEO Hans Vestberg. "Our strategic focus is on mobile broadband, services and OSS/BSS," he noted, stating that Ericsson is "creating a leadership position" in OSS/BSS, though "it's hard to measure."

Find out why Light Reading agrees with Ericsson that OSS and BSS are critical weapons in any major vendor's product arsenal by checking out The SPIT Manifesto 2.0 and see how OSS and BSS fit into the SPIT ecosystem by downloading our SPIT Infographic.)

— Ray Le Maistre, International Managing Editor, Light Reading

^Eagle^ 12/5/2012 | 5:35:11 PM
re: Ericsson Retrenches in Q1

it would be interesting to know the breakdown in infrastructure network equipment sales between Wireless RAN, Wireless Core, Wireless 3g compared to Wireless 4g network equipment sales, and also to know how the old Marconi group is doing inside Ericsson.

The Marconi group has an extensive portfolio of transport and switching gear.

Would be nice to see the break out as it would be more clear which businesses are declining and loosing market share (especially in markets where the overall opportunity space is growing) and which are at par or neutral in terms of market share, and which might actually be growing a bit.

Likewise, it would be nice to see the breakout of the sales of data switching and routing platforms.  For the same reason, to get a view on how they are REALLY doing.

It would also let us see the relative importance of the various divisions inside Ericsson and how much each really contributes.

The simple breakdown between handsets, services, and infrastructure does not really give us much of a picture. Only a tiny glimpse that provides no real valuable information.  Anyone could have predicted the problem due to India wireless spectrum regulation problems.

Maybe LR could do a little more investigation and give us a more granular insight into how each key sector or division might be doing?


digits 12/5/2012 | 5:35:10 PM
re: Ericsson Retrenches in Q1

Hi Sailboat

We asked that very thing on a call this morning. They don't break it out - the excuse is that it's 'all mobile broadband' even though it isn't.

I have asked on a number of occasions about getting greater visibility into optical, access (GPON), IP routing etc but the company does not provide it. Unless someone sends me information they are not supposed to then that level of granularity isn't going to come our way, unfortunately.

Ericsson isn't alone in this -- it's the same with the other major players.   

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