Wednesday, April 29, 2009

Ericsson Sees Limited Impact from Global Downturn, Sales up 5%

Ericsson's ales in Q1 2009 increased 12% year-over-year and 16% for comparable units, i.e. excluding Ericsson Mobile Platforms and PBX operations. Excluding currency exchange rate effects, growth amounted to 5% for comparable units.

"We have started the year with good growth ahead of the market and a positive margin trend but with a weaker cash flow," said Carl-Henric Svanberg, President and CEO of Ericsson. "Sales of network infrastructure are stable and the demand for professional services is growing. We have won several strategic contracts during the quarter, including 3G for China Unicom, 4G for Verizon Wireless and managed services for Vodafone UK."

"The effects of the global economic recession on the global mobile network market are so far limited. We have seen operators, in a few markets where local currencies have depreciated dramatically, postpone investments. Some operators are also more cautious with longer-term investments in fixed networks, such as rollout of fiber networks. Most operators, however, have healthy financial positions, there is a strong traffic growth and the networks are fairly loaded."

Ericsson noted that worldwide mobile subscriptions grew by some 181 million in the quarter to a total of 4.16 billion. The number of new WCDMA subscriptions is accelerating and grew by 27 million in the quarter to a total of 319 million. In the twelve-month period ending December 31, 2008, fixed broadband connections grew by 18% year-over-year to close to 400 million, adding nearly 60 million subscribers.

Some additional highlights from the quarterly report:

  • Ericsson's cost reduction activities are running according to plan, targeting annual savings of SEK 10 b. from the second half of 2010.

  • Networks sales increased by 12% year-over-year, positively impacted by a weaker SEK. Sales, excluding network rollout, were up with especially strong performance in China, India and the US. Sales of network rollout services decreased 38% sequentially, reflecting a lower proportion of turnkey projects. The increase in operating margin was a result of the weaker SEK, business mix and lower costs, despite a negative impact from the ongoing large rollouts in China and India.

  • Professional Services sales increased by 28% year-over-year. Growth in constant currencies amounted to 10%. Managed services continued to grow substantially and were up 34% year-over-year. The growing interest for managed services is driven by operators' increased focus on cost, especially in the current market environment. Operating margin in the quarter reached 15% (14%) due to continued efficiency gains.

  • During the quarter, five new managed services contracts were signed, including key contracts with T-Mobile and Hutch for their shared network in UK and with Vodafone UK. The total number of subscribers in managed operations is now 275 million, of which 60% are in high-growth markets.

  • Multimedia sales increased by 25% year-over-year for comparable units, i.e. excluding divestment of the PBX operations and Ericsson Mobile Platforms. Revenue Management and IPX (multimedia brokering) continued to show good growth. Some cable and satellite operators are postponing TV investments. Operating margin in the quarter for comparable units was 2% (-9%).

  • Ericsson's joint ventures, Sony Ericsson and ST-Ericsson, are affected by the economic downturn and the dramatic decline in consumer demand for handsets.

  • Sony Ericsson shipped 14.5 million mobile phones in the quarter were 14.5 million, a decrease of 35% year-over-year. Sales in the quarter were EUR 1,736 million, a decrease of 36% year-over-year. Sales decreased primarily as a result of continued weak consumer confidence and de-stocking in the retail and distribution channels. Gross margin declined both year-on-year and sequentially, reflecting a change in the product mix, material write-offs, and exchange rate volatility.

  • ST-Ericsson, which was formed in February 2009 by merging STMicroelectronics' wireless business and Ericsson Mobile Platforms, was significantly affected by the slowdown in the handset market and ongoing de-stocking among operators. A cost adjustment program of USD 250 m. was launched in the fourth quarter 2008, and is under execution. An additional cost reduction program of USD 230 m. has been launched to adapt to current market conditions.

  • In terms of regional patterns, Ericsson said Asia Pacific sales increased by 26% year-over-year. The company describes the mobile broadband rollout in China as the largest ever in the world and notes that it is being done in record time.

  • Deliveries are high also to India, Indonesia and Vietnam. The development is strong also in Japan, where operators are building mobile broadband networks and the consumer demand for subscriptions bundled with laptops has quickly created a new market. Operators in Bangladesh and Pakistan are slowing investments due to difficult local business environment.

  • Latin American sales increased by 5% year-over-year with continued expansions of 2G networks as well as rollout of mobile broadband. Brazil and Mexico showed good development while some countries in the region were slower. In addition, there is a growing demand for managed services across the region.

  • North American sales increased by 21% year-over-year. The rollout of mobile broadband continues and the underlying growth is good. The contract with Verizon Wireless for a nationwide 4G/LTE network was especially encouraging as Verizon Wireless is a new customer to Ericsson. Revenue from this contract will mainly affect 2010. There is an emerging interest for managed services also in this region.