Parts Problems Hurt Ericsson's Q2

Ongoing carrier caution, supply chain issues, and procurement problems in India all contributed to a less than stellar second-quarter performance from Ericsson AB (Nasdaq: ERIC), which today reported an 8 percent year-on-year dip in revenues to 48 billion Swedish kronor (US$6.6 billion). (See Ericsson Reports Q2.)

Cost controls, though, helped the vendor to increase its gross margin to 39 percent and report a 154 percent increase in net income to SEK2 billion ($275 million).

Table 1: Ericsson Q2 2010 Key Financials
In billions of Swedish kronor Q2 2009 Q2 2010 Y/Y change Q1 2010 Q/Q change
Revenues 52.1 48.0 -8% 45.1 +6%
Gross margin 36% 39% +8% 39% 0%
Operating margin excluding joint ventures 12% 11% -8% 10% +10%
Net income 0.8 2.0 154% 1.3 +59%

But those positives were outweighed by the technology sales pressures Ericsson is experiencing.

  • Many markets have yet to recover from the impact of the global economic downturn. Only North America, where Ericsson is benefiting from its acquired CDMA assets and strong demand for mobile broadband infrastructure, generated higher year-on-year revenues.(See Nortel Wireless Winner: It's Ericsson!.)

  • The components shortage that hit Ericsson's first-quarter sales, and which has also affected Alcatel-Lucent (NYSE: ALU) and Nokia Networks , had a greater impact in the second quarter. (See NSN's 2010 Confidence Slips.)

    CEO Hans Vestberg noted on today's earnings conference call that the components in question are generic across multiple vertical markets (white goods, electronics, etc.), so competition is fierce to source them. Ericsson estimates that it was unable to fulfill orders worth SEK3 billion to SEK4 billion ($411 million to $549 million) during the second quarter because of the resulting supply chain issues. The situation is easing, stated Vestberg, but will continue to have an impact in the coming quarters.

  • Security clearance issues in India held up orders, resulting in revenues (mostly from services) of just SEK1.4 billion ($192 million) in the second quarter, down 63 percent compared with a year ago, and down 41 percent from the first quarter. Vestberg said it's "a very long time since our sales have been so low in India." The same situation is also affecting rivals such as Nokia Siemens. (See India Holdups Smack NSN's Q2.)

    Again, the situation is easing, and Ericsson expects to see initial 3G infrastructure business during the second half of the year following the completion of the spectrum auction. (See India's 3G Players Ready for Swift Launch and India's 3G Auction Ends, Raises $14.6B.)

    Overall, these business constraints hit Ericsson's Networks and Multimedia divisions, but had less of an impact on the Global Services division, where revenues from managed services and professional services increased, but network rollout services (which are linked to infrastructure deliveries and deployments) decreased.

    Table 2: Ericsson Q2 2010 Revenues by Division
    In billions of Swedish kronor Q2 2009 Q2 2010 Y/Y change Q1 2010 Q/Q change
    Networks division revenues 28.8 25.5 -12% 24.7 +3%
    Global Services division revenues 20.0 20.1 0% 18.1 11%
    -- Professional Services 14.1 14.8 +5% 13.3 +12%
    -- Managed Services 4.6 5.6 +23% 4.9 +15%
    -- Network Rollout Services 5.9 5.2 -12% 4.8 +8%
    Multimedia division revenues 3.3 2.4 -27% 2.3 +5%
    Total revenues 52.1 48.0 -8% 45.1 +6%

    In terms of geographic performance, North America was the big bright spot in the second quarter, where sales grew 128 percent year-on-year and 37 percent sequentially. The Sprint Corp. (NYSE: S) outsourcing deal, the addition of CDMA sales, demand for WCDMA 3G capabilities, and some Long Term Evolution (LTE) shipments all contributed to second-quarter revenues of SEK13.1 billion ($1.8 billion) in the region. (See Ericsson, Sprint in $5B Managed Services Deal.)

    Ericsson says it now has 50 LTE trials worldwide, and claims to be the market leader in terms of actual deals awarded. (See Ericsson, Huawei Land Vodafone LTE Gig.)

    The big challenge in the coming years is going to be in the LTE access infrastructure market, where Ericsson expects many operators to replace their legacy base stations with new-generation radio access network equipment, such as its RBS 6000, which supports all radio technologies and all frequency bands. (See LTE Base Station Strategies.)

    The vendor estimates that, of the 5 million base stations deployed globally, about 1.5 million will need to be upgraded in the coming years, many of them in Europe. That's a lot of potential business, with associated services, that can be won -- or lost.

    — Ray Le Maistre, International Managing Editor, Light Reading

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