Ericsson Slumps on China, Russia Weakness

Shares in Ericsson have fallen sharply in Sweden after the equipment maker blamed economic weakness in Brazil and Russia and a slowdown in China's 4G market for a decline in third-quarter sales on a constant-currency basis.

The company's share price had fallen by more than 7% by 11.30 a.m. in Stockholm over concern about the outlook in some of Ericsson AB (Nasdaq: ERIC)'s biggest markets, where a looming merger between rivals Nokia Corp. (NYSE: NOK) and Alcatel-Lucent (NYSE: ALU) could soon make life even harder for the Swedish equipment giant. (See Nokia Makes €15.6B Bid for Alcatel-Lucent.)

Despite facing a difficult sales environment, Ericsson said its restructuring program remained firmly on track and saw its net income rise by nearly a fifth, to 3.1 billion Swedish kronor (US$370 million), compared with the same period last year.

Ericsson is looking to reduce annual operating costs by around SEK9 billion ($1.06 billion) between 2014 and 2017 and said that overall employee numbers fell from 117,183 in June to 116,240 in September.

Thanks to favorable currency movements, reported revenues rose by 3% in the third quarter, to SEK59.2 billion ($7 billion), compared with the same period last year,, but sales were down by 9% in constant-currency terms.

Table 1: Ericsson's Headline Results (SEK Billions)

Q3 2015 Q3 2014 YoY change
Revenues 59.2 57.6 3%
− of which networks 28.8 30.0 -4%
− of which global services 27.1 24.5 11%
− of which support solutions 3.3 3.1 8%
Gross income 20.1 20.3 -1%
Gross margin 33.9% 35.2% -1.3 percentage points
Operating income 5.1 3.9 31%
Operating margin 8.6% 6.7% 1.9 percentage points
− of which networks 10.0% 11.0% -1 percentage points
− of which global services 9.0% 7.0% 2 percentage points
− of which support solutions 0.0% -4.0% 4 percentage points
Net income 3.1 2.6 19%
Source: Ericsson

"In markets where there has been pressure on currencies, purchasing power has come down and we've seen that in Brazil and Russia," Ericsson CEO Hans Vestberg told reporters during a press conference. "

Ericsson was also hit by weak spending conditions in China, where operators appear to have reined in their 4G investments in recent months, although Vestberg sought to reassure investors this was a temporary blip rather than a trend. "There is still tremendous demand for 4G in China and we've never seen such a quick rollout -- it's just that customers slowed down the pace in the third quarter."

The Swedish vendor had blamed a slowdown in North America's mobile broadband sector for difficulties earlier this year and has yet to see any significant improvement in this region, which accounts for about a quarter of overall sales and represents the company's biggest geographical market. (See Ericsson's Stock Rises on Q2 Margin Improvements and Ericsson Sinks on North American Slowdown.)

Sales in North America rose just 2% on a reported basis, to SEK14.4 billion ($1.7 billion), although Vestberg said there had been strong demand for Ericsson's OSS/BSS and TV and media products in the third quarter.

Those products form a critical part of Ericsson's strategic growth areas program, which also includes the segments of IP networks, cloud and industry and society.

Although Ericsson does not break out details of its performance in these specific areas, it claims to have grown revenues here by more than 10% in the third quarter. "That's faster than the market is growing and we'll provide more details on how they are performing individually at our upcoming capital markets day," said Vestberg.

Ericsson is likely to come under greater pressure in the IP networks market when Nokia completes its takeover of Alcatel-Lucent next year.

After subsuming Alcatel-Lucent's IP networks expertise, Nokia expects to be a "more complete player" than Ericsson, the Finnish vendor has previously told Light Reading. (See AlcaLu Deal Makes Us 'More Complete' Than Ericsson, Says Nokia CTO.)

Ericsson might see takeover activity as a way of bolstering its own position in the IP networks market and recently announced an acquisition of Envivio Inc. (NASDAQ: ENVI), a specialist in software-based video encoding, to strengthen its portfolio of TV and media products. (See Ericsson Beefs Up TV Biz With Envivio Buy, AT&T Deal.)

That perceived need for greater IP muscle has also resulted in Ericsson's name being linked to a possible bid for Juniper Networks Inc. (NYSE: JNPR). (See M&A Speculation Swirls Around Juniper.)

As well as highlighting improvements in growth areas, Vestberg told reporters that customers were increasingly raising the topic of 5G during contract discussions. "We started talking about 5G in the second quarter in South Korea but it is spreading to many other regions, including North America, Brazil, Latin America and China," he said.

Want to know more about 5G? Check out our 5G content channel here on Light Reading.

Another bright spot in the company's third-quarter results was the global services business, which saw reported revenues grow by 11%, to SEK27.1 billion ($3.2 billion), to account for about 46% of total sales. "We have never seen a stronger global services business," said Vestberg.

Thanks to greater profitability at the network rollout division, the operating margin at global services rose to 9% from 7% in the year-earlier quarter.

"We have break-even on network rollout and now it's about ensuring that is sustainable," said Vestberg. "But there are signs the cost program launched in Q4 [2014] is hitting the bottom line, with all segments improving in terms of profitability."

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

danielcawrey 10/26/2015 | 8:35:11 PM
Re: A negative trend? Both China and Russia are experiencing some serious economic issues. Russia's travails are certainly worse than that of China, and it's clear China will keep spending. 

Yet I am not surprised for the Chinese slowdown. Sure, China needs 4G, but apparently they don't see a rush in the face of reductions in infrastructure spending. 
[email protected] 10/23/2015 | 1:19:31 PM
A negative trend? Obvioulsy we will soon find out as other companies report, but I expect Ericsson won't be the only company impacted by less favorable trading conditions in major markets.   


How much margin is there left in selling hardware these days? Or is it still actually more profitable than the 'profesisonal services'?
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