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Managed Services

Pressure Tells on Ericsson's Q3

There may be signs that the worst of the global economic downturn is over, but its impact looks set to linger in the telecom equipment market as Ericsson AB (Nasdaq: ERIC) has joined rival Nokia Networks in announcing a disappointing third quarter. (See Ericsson Reports Q3 and No Sign of Recovery for Nokia Siemens.)

Sales and profits slid -- and this time around, even Ericsson's Professional Services business couldn't help keep its numbers afloat. (See Services Save Ericsson in Q2.)

The giant Swede reported third-quarter revenues of 46.4 billion Swedish Kronor (US$6.7 billion), down 4 percent (for comparable units) compared with a year ago. Once currency exchange changes are stripped out, though, that decline in like-for-like sales was 12 percent.

Net income also took a big hit, falling 74 percent to SEK800 million ($115.7 million). The poor performance of Ericsson's joint ventures, Sony Ericsson Mobile Communications and ST-Ericsson , during the third quarter were major contributors to that decline, accounting for SEK1.5 billion ($217 million) in net losses. (See ST-Ericsson Reports Q3 and Sony Ericsson Reports Q3.)

Table 1: Ericsson on the Slide in Q3 2009
In SEK billions Q3 2008 Q3 2009 % change
Revenues 49.2 46.4 -6%
Revenues for comparable units 48.2 46.4 -4%
Gross margin 37% 36.2% -2%
Operating income excluding joint ventures 5.6 5.5 -3%
Net income 2.9 0.8 -74%




The company's operating income excluding the joint ventures was down only slightly, by 3 percent, to SEK5.5 billion ($796 million).

The news disappointed investors: Ericsson's share price fell 7.84 percent on the Stockholm exchange to SEK68.20.

Network sales squeezed
The main issues are in the vendor's Networks division, which saw its revenues decline 8 percent to SEK30.3 billion ($4.4 billion). That includes associated network rollout services valued at SEK5.8 billion ($840 million), putting network equipment sales at SEK24.5 billion ($3.55 billion), down 13.4 percent from a year ago.

CEO Carl-Henric Svanberg, who is soon to hand over the reins to his CFO, Hans Vestberg, said that, while there are encouraging signs in some major markets, such as the U.S., China, Japan, and India (Ericsson's single largest market in the third quarter), certain regions, particularly Latin America, Central Europe, the Middle East, and Africa, are still suffering from "tight credit markets." New projects that had been planned 9 or 12 months ago have been shelved, he stated, and though "we are into safer territory, it will still take a while for operators to put those plans back on the drawing board." (See Ericsson Names New CEO.)

The CEO also noted a sharp shift in the nature of mobile infrastructure investments. Earlier this year, 2G (GSM) investments were accounting for 70 percent of mobile infrastructure revenues, while 3G (WCDMA/UMTS) accounted for 30 percent. That ratio is now equal, with 3G sales set to dominate soon, stated Svanberg.

Even the Professional Services division had its disappointments during the quarter. While revenues were up 9 percent to SEK12.8 billion ($1.86 billion), that growth would have been in double digits if it weren't for the revision of a major managed services contract with 3 Italia , announced in June.

Including the network rollout services reported as part of the Networks division, services accounted for 40 percent of Ericsson's total revenues in the third quarter.

Ericsson didn't provide any guidance for the fourth quarter, but CFO Vestberg noted that, while the acquisition of wireless assets from Nortel Networks Ltd. was still awaiting some approvals, that deal could close in the next few months and could deliver some additional revenues before the end of the year. (See Ericsson: Why We Want Nortel's Wireless, Ericsson Delivers Knockout Blow to NSN, and Nortel Wireless Winner: It's Ericsson!)

— Ray Le Maistre, International News Editor, Light Reading

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