Monday, October 15, 2007

Ericsson Cuts Financial Guidance, Shares Tumble

Citing weak mobile network upgrade sales, Ericsson trimmed its financial guidance for Q3, saying the it now expects sales of SEK 43.5 billion, an operating income of SEK 5.6 billion and a cash flow of SEK -1.6 billion. Sales for Q2 2007 were SEK 47.6 billion. The figures were below expectations. The decline in sales occurred most in Asia Pacific markets.

Ericsson shares on NASDAQ closed at $31.33, down 23% for the day.

"The unexpected development in the quarter is mainly due to a shortfall in sales in mobile network upgrades and expansions which resulted in an unfavorable business mix that also negatively affected Group margins," said Carl-Henric Svanberg, President and CEO of Ericsson. "All other businesses performed as expected. The effect of market dynamics is always a matter of judgment. This quarter we have underestimated the effects."

Ericsson said its networks business continues to develop most rapidly in regions where new network rollouts and break-in contracts are predominant. The company noted that margin pressures from these business activities have been offset by higher margin sales such as network expansions and upgrades. Such expansions and upgrades have a short sales cycle and builds during the quarter. This quarter, sales of these higher margin offerings did not materialize as much as in previous quarters. High margin software sales are also lower than normal.

Some additional highlights:

  • Gross margin for the quarter was 35.6%, down from 43.0% in Q2.

  • Sales in Professional Services grew by 26% year-over-year. Managed services grew by 50% year-over-year.

  • Growth in Multimedia was 31% year-over-year. Operating income in the quarter was slightly above breakeven level. The businesses Ericsson Mobile Platforms, Service Delivery Platforms, Tandberg Television and Charging are all showing strong growth with healthy margins. IPTV, IMS and Messaging are new business development areas with significant R&D investments but with limited sales.

See also