Thursday, July 22, 2010

Ericsson Cites Operator Caution, Component Shortages & Bottlenecks

Ericsson's sales for Q2 2010 were down -8% year-over-year but up 6% sequentially, reaching SEK 48.0 billion compared to SEK 52.1 billion a year earlier. Gross margin, excluding restructuring, improved slightly sequentially and improved year-over-year to 39% (36%) due to business mix and efficiency gains. However, Ericsson said operators in a number of developing markets remain cautious in their network upgrade plans..

Cost reduction activities have reduced Ericsson's operating expenses, but the company incurred costs in integrating the recently acquired CDMA and GSM businesses from Nortel, as well as incurring higher investments in certain R&D areas and growing number of 4G/LTE trials.

"Operators showed a continued good demand for mobile broadband driven by smartphone and laptop usage. Sales were however impacted by continued industry component shortages and supply chain bottlenecks. We estimate that this
had a negative impact on our sales in the quarter by SEK 3-4 b," stated Hans Vestberg, President and CEO of Ericsson.

Some highlights for the quarter.


  • Networks' sales in the quarter declined by -12% year-over-year. Voice related sales, such as 2G access
    and circuit switched core continued to decline.

  • Increased mobile broadband sales (3G), including radio, backhaul and packet core, partly offset this impact. CDMA continued to develop favorably. Similar to the first quarter segment sales were negatively impacted by continued component shortages and supply chain bottlenecks.

  • The strong data traffic uptake is creating transmission bottlenecks and demand for microwave based backhaul solutions was strong in the quarter.

  • EBITA margin in the quarter increased year-over-year to 17% (14%) despite lower sales, positively impacted
    by continued efficiency gains and business mix with a high proportion of network expansions.

Global Services

  • Global Services sales were flat year-over-year, but increased 11% sequentially. Global services sales
    account for some 42% of total Group sales.

  • Professional Services sales increased 5% year-over-year and in local currencies growth amounted to 9%
    year-over-year. Managed Services sales in the quarter increased by 23% year-over-year.

  • Network Rollout sales decreased -12% year-over-year.

  • The year-over-year slow-down in growth in Global Services sales is primarily an effect of lower network
    rollout activity driven by fewer turnkey projects, continued component shortages and supply chain

  • There is a continued good demand for services targeting the operational efficiency of operators,
    such as managed services, systems integration and consulting. Operators also show growing interest in
    network optimization services, driven by mobile broadband build out, as well as revenue assurance
    services. Services related to 2G voice sales developed unfavorably also this quarter.

  • During the quarter, nine managed services contracts were signed of which six were extensions or
    expansions of existing customer agreements.


  • Multimedia sales in the quarter decreased by -27% year-over-year due to continued weak demand for
    revenue management solutions in regions India, Middle East and Sub-Saharan Africa. Sales grew 5%
    sequentially, driven by TV and Multimedia Brokering.

  • The TV business continued to show good development with strong demand for compression technology.

Ericsson reported mixed results geographically, with some regions growing quickly and others decreasing.

  • North America sales increased 128% year-over-year and 37% sequentially. The strong mobile data growth was further spurred by the launch of smartphones by all leading carriers. In the quarter, Ericsson started volume deliveries of 4G/LTE.

  • Latin America sales decreased -12% year-over-year and grew 6% sequentially. Operator consolidation is
    ongoing in the region. Lower cost smartphones has created continuous growth in mobile broadband usage,
    pushing operators for investments in networks and services.

  • Northern Europe and Central Asia sales decreased by -7% year-over-year and increased
    16% sequentially. Sales of mobile network infrastructure increased sequentially, mainly driven
    by major 2G expansions and 3G build-outs in the Eastern part of the region.

  • Western and Central Europe sales decreased -19% year-over-year and -16% sequentially due to cautious operator investments in parts of the region. Development in the region showed large variations, parts of Western Europe developed favorably while Central Europe in general was slow. Services represented two thirds of the sales in the
    quarter, and operators' focus on efficiency continued to drive a strong interest in exploring business models
    such as network sharing and network transformations leading to opportunities both in services and networks.

  • Mediterranean sales decreased -17% year-over-year and increased 11% sequentially. Operator investments
    in Spain and Greece were low due to overall economic environment.

  • Middle East sales decreased -20% year-over-year and by -4% sequentially. Services sales showed a
    continued growth in the quarter driven by demand for managed services. Services represented 46% of the
    business in the region this quarter.

  • Sub-Saharan Africa sales decreased by -19% year-over-year and increased 22% sequentially. The region
    continued to be impacted by the global economic downturn with a tight credit environment. Operator
    consolidation is also taking place in the region, which temporarily reduced investments. Mobile subscriptions
    are developing positively with net additions for both voice and broadband services. New mobile licenses
    are being selected in certain countries.

  • India sales decreased -63% year-over-year and -41% sequentially due to cautious operator investments in
    the lead up to the 3G auctions as well as the ongoing government initiated security clearance process. The
    decline in business volumes mainly affected mobile infrastructure sales while recurring services business
    maintained its good development.

  • China and North East Asia sales decreased -36% year-over-year and by -7% sequentially. The year-over-
    year decline is related to timing of roll-out for 3G/WCDMA in mainland China. In 2009 a majority of
    network rollouts took place during the first half of the year.

  • South East Asia and Oceania sales decreased -36% year-over-year and increased 4% sequentially. Sales
    of network equipment were weaker overall due to cautious investment in a number of markets.

See also