Managed Services

Ericsson Gets the Margin Jitters

Ericsson AB took a minor beating on the stock market Thursday morning after its muted margin and profits recovery during the second quarter failed to appease the investor community.

The Swedish vendor reported revenues of 55.3 billion Swedish kronor (US$8.4 billion), just as it did a year earlier. Ericsson says, though, that if changes in foreign currency exchange rates were discounted, its like-for-like sales would show a 7 percent year-on-year increase.

Its gross margin crept up slightly to 32.4 percent, from 32 percent a year ago, but its operating margin excluding joint ventures dipped to 4.5 percent from 5.9 percent. Net income was SEK1.5 billion ($228 million), up 26 percent compared with a year ago. (Full financial details can be found here.)

But its stock slid by nearly 4 percent to SEK 77.05 on the Swedish stock exchange by late morning (having dipped by about 6 percent initially) as investors showed signs of impatience.

That's because Ericsson has been talking for a few years about how it has been laying the ground for improved margins and profitability by engaging in long-term network modernization projects that deliver lower margins in the lengthy initial stages but deliver improved profitability once the projects mature. (See Ericsson Still Under Margin Pressure.)

Both CEO Hans Vestberg and CFO Jan Frykhammar noted in an early morning earnings presentation Thursday that some of those projects are starting to result in higher-margin "capacity business," but clearly that shift is still at a very early stage and is not happening fast enough for investors' liking, even though the management team has previously stated that notable improvement would likely start during the second half of 2013.

In addition, Vestberg said that two major mobile network rollouts in North America had "peaked," meaning that the impressive year-on-year sales growth experienced in that region in recent quarters is now unlikely to be sustained.

Vestberg, naturally, remains confident and believes it was the right choice to be heavily involved in lower-margin mobile network rollout projects to gain market share and lay a foundation for higher-margin business.

And while margin improvements might not be happening fast enough for some, there are still plenty of encouraging developments for the vendor. The Global Services division signed eight "significant" consulting and systems integration deals during the second quarter and 19 new managed services deals: Ericsson now manages networks that service more than 1 billion end-user customers worldwide.

The CEO also talked up progress by the Networks division's IP router business line (still referred to by many as Redback). Vestberg said 15 new deals for the SSR routers had been signed during the quarter, taking the total to 66.

An ongoing area for concern, though, is the vendor's Support Solutions division, which includes its not inconsiderable Service Provider Information Technology (SPIT) assets and its video-related business, which will soon include Microsoft's Mediaroom IPTV unit. (See Ericsson Buys Microsoft's IPTV Unit.)

That division reported a 33 percent year-on-year decline in revenues to SEK 2.3 billion ($350 million) and a negative operating margin of 12 percent. With much of the division's operations and business in North America -- particularly since the acquisitions of Telcordia and ConceptWave and with Mediaroom to come -- Ericsson today announced that Per Borgklint, the head of Support Solutions, is relocating to Silicon Valley. (See Ericsson Buys More OSS Smarts.)

— Ray Le Maistre, Editor-in-Chief, Light Reading

Carol Wilson 7/18/2013 | 1:45:31 PM
re: Ericsson Gets the Margin Jitters Is this a classic case of near-term investor jitters impacting long-term strategy?Should any telecom equipment vendor manage quarter to quarter, the way Wall Street seems to want?
Ray Le Maistre 7/18/2013 | 11:11:17 AM
re: Ericsson Gets the Margin Jitters Still a lot of work for Vestberg to do before he can brush away questions about the company's strategy, not just in terms of the heavy involvement in network transformation projects (which DO look likely to pay off ultimately....just not yet) but also in terms of the M&A strategy. The Support Systems division is still the wild child of the Ericsson family --- can it be tamed?
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