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Ericsson Suffers Margin Crunch

Ericsson AB (Nasdaq: ERIC) suffered a significant hit to its margins during the fourth quarter of 2011, with the company attributing the squeeze to a shift in the mix of its business.

The mobile networks market leader reported fourth-quarter revenues of 63.7 billion Swedish kronor (US$9.43 billion), up 1 percent compared with a year earlier thanks to a much stronger performance from its Global Services division, which reported revenues of SEK27 billion ($4 billion), up by 18 percent year-on-year.

But its gross margin slipped 6.8 percentage points to 30.2 percent, while its operating margin excluding joint ventures dipped by 7 percentage points to 6.4 percent.

The vendor blamed "weaker development in Networks, as well as an expected gross margin impact from a changed business mix with more coverage projects, modernization projects in Europe, and a higher services share" for its gross margin slump. Revenues for the Networks division were down by 9 percent year-on-year to SEK33.3 billion ($4.9 billion).

And the ongoing financial woes at the vendor's joint ventures, handset firm Sony Ericsson Mobile Communications (soon to be offloaded) and chip-maker ST-Ericsson , contributed to a 66 percent slump in Ericsson's fourth-quarter net income to SEK1.5 billion ($222 million). (See ST-Ericsson Loses $231M in Q4, Sony Ericsson Reports Q4 Loss and Euronews: Sony Buys Ericsson Out of Handsets.)

Table 1: Ericsson Q4 2011 Key Financials
In billions of Swedish kronor Q4 2010 Q4 2011 Y/Y change Q3 2011 Q/Q change
Revenues 62.8 63.7 1% 55.5 15%
Gross margin 36.6% 30.2% Decrease of 6.4 percentage points 35.0% Decrease of 4.8 percentage points
Operating margin excluding joint ventures 13.4% 6.4% Decrease of 7 percentage points 11.3% Decrease of 4.9 percentage points
Net income 4.4 1.5 -66% 3.8 -61%
Source: Ericsson




There's little hope of margin improvement any time soon. In the company's earnings press release, CEO Hans Vestberg noted that in the short term, "we expect operators to continue to be cautious with spending, reflecting factors such as macro economic and political uncertainty. We will continue to execute on our strategy which means that the business mix, with more coverage and network modernization projects than capacity projects, will prevail short-term."

The vendor added: "All modernization projects that Ericsson has won have started by the fourth quarter 2011. The network modernization projects in Europe, with their lower margins, fully impacted the fourth quarter. Since average project duration is expected to be 18-24 months, the impact is expected to prevail for a couple of more quarters."

That assessment, and the fact that fourth-quarter revenues and margins were all below market expectations, sent investors running: Ericsson's share price slumped by 14.3 percent to SEK 58.7 in morning trading on the Stockholm exchange.

In terms of regional sales, revenues from North America suffered a 20 percent year-on-year dip due to lower network equipment sales. "The networks business developed slower in the second half of 2011 after a period of high operator investments in network capacity along with operators focus on cash flow management as well as negative impacts from operator consolidation," the vendor noted.

Table 2: Ericsson Q4 2011 Revenues by Region
Revenues in billions of Swedish kronor Q4 2010 Q4 2011 Change
North America 14.1 11.2 -20%
Latin America 6.1 7 16%
Northern Europe and Central Asia 4.8 3.8 -22%
Western and Central Europe 5.9 5.3 -11%
Mediterranean 6.9 8.2 19%
Middle East 4.6 5.2 12%
Sub-Saharan Africa 2 3.2 59%
India 2.8 1.5 -46%
China and North-East Asia 9.5 10.9 15%
South-East Asia and Oceania 3.9 4 2%
Other 2.2 3.3 57%
Total 62.8 63.7 1%
Source: Ericsson




For the full year, Ericsson reported a 12 percent increase in revenues to SEK226.9 billion ($33.5 billion) while net income grew at the same rate, though gross and operating margins took a hit.

Table 3: Ericsson Full Year 2011 Key Financials
In billions of Swedish kronor 2010 2011 Y/Y change
Revenues 203.3 226.9 12.0%
Gross margin 38.2% 35.1% Decrease of 3.1 percentage points
Operating margin excluding joint ventures 12.0% 9.6% Decrease of 2.4 percentage points
Net income 11.2 12.6 12%
Source: Ericsson




The company noted that its focus on mobile broadband, services and Service Provider Information Technology (SPIT) had paid off during 2011. "We have further strengthened our market position in mobile networks. With 70 new managed services contracts during 2011 we are confident of our strong offering and market leadership. With the acquisition of Telcordia, now concluded, we have also gained a leadership position and skilled people in the important areas of operating and business support systems," stated Vestberg.

Revenues were boosted by stronger regional sales in China and North-East Asia, Latin America and Northern Europe and Central Asia in particular.

Table 4: Ericsson Full Year 2011 Revenues By Region
Revenues in billions of Swedish kronor 2010 2011 Change
North America 49.5 48.8 -1%
Latin America 17.9 22.0 23%
Northern Europe and Central Asia 12.2 15.2 25%
Western and Central Europe 19.9 19.0 -4%
Mediterranean 22.6 23.8 5%
Middle East 15.1 15.5 2%
Sub-Saharan Africa 9.2 10.2 11%
India 8.6 9.8 13%
China and North-East Asia 26.0 38.2 47%
South-East Asia and Oceania 14.9 13.9 -7%
Other 7.4 10.6 41%
Total 203.3 226.9 12%
Source: Ericsson




— Ray Le Maistre, International Managing Editor, Light Reading

yike 12/5/2012 | 5:44:40 PM
re: Ericsson Suffers Margin Crunch profit is important。
Mark Sebastyn 12/5/2012 | 5:44:39 PM
re: Ericsson Suffers Margin Crunch

Not a good sign when your services business (supposedly the high margin business you want) grows this much, yet your top line margins go down. Either the service margins aren't what they are cracked up to be, or pricing on hardware took a big hit.

digits 12/5/2012 | 5:44:36 PM
re: Ericsson Suffers Margin Crunch

I'm not sure Ericsson has hit any high-margin Services business yet.... and again, the Services division comprises a number of services strands (managed, professional, network rollout) that likely deliver variable average operating margins.


 


From where I am sitting (as a journalist and not an analyst), Services delivers a more constant and predictable revenue stream but with lower average margins than, for instance, network capacity upgrade business, which appears to be at a premium at the moment.


 


But whether it's services or equipment/technology, aren't companies such as Ericsson destined for a lower margin future (as in, lower than historical averages)? I'd be gobsmacked if any of the major vendors can continue being large companies (with annual revenues of $15-20 billion and above) AND grow their margins unless they manage to discover totally new business lines that are beyond the currently recognized 'adjacencies' (such as enterprise tech).


The rather worrying thing for the industry is that Ericsson is healthier financially than most (again, in my view as a non financial analyst). 

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