Ericsson says effects of recession remain "limited"
Published: 30 April, 2009
READ MORE: Ericsson
Ericsson's first quarter doesn't make it look quite as recession-immune as it has done before - or as its most dangerous challenger, Huawei - but the Swedish giant maintained a fairly optimistic outlook, with CEO Carl-Henric Svanberg claiming "the effects of the global economic recession on the global mobile network market are so far limited". Tell that to Nortel, which is now looking to sell its 50% stake in the LG-Nortel venture as it tries to hit a new deadline of July 30 to exit bankruptcy protection.
The main drags on Ericsson's profitability were restructuring charges and continued losses at the Sony Ericsson handset venture. But the reorganizations have been largely pre-emptive, not reactions to the downturn and sales declines, which have not materialized as yet. First quarter sales were up 12% year-on-year to SEK49.57bn ($6.17bn), just below analyst forecasts, but net profit was down 35% to SEK1.72bn ($212.4m), just exceeding analyst expectations of SEK1.66bn. Some of the sales gain was down to currency changes. Gross margin was ahead of expectations at 36.3%, and even in the networks unit, where price competition with Huawei has been intense, operating margin was up from 9% last year to 10%.
Svanberg was cautious about whether operators would continue to show the resilience they have so far, especially if the downturn proves to be prolonged - Deutsche Telekom issued a profit warning last week, with the T-Mobile mobile arm being the main culprit rather than the usual wireline suspects; and France Telecom said yesterday that it would cut capex spend if the economy worsened further.
But Svanberg said the investment in wireless infrastructure largely continues on track, and some markets are actually speeding up, notably with 3G expansion and the start of 4G in the US, plus GSM and 3G in China and GSM in India. Most importantly, Ericsson pointed out that most operators have strong net cashflow positions, even if their quarterly results are being squeezed.
Sony Ericsson's €293m first quarter loss and restructuring plans continued to drag its co-parent down, but the Swedish firm is refusing to quit the venture and said recently that it was prepared to inject more cash if necessary. Ericsson said its plan for SEK10bn in annual savings by the second half of 2010 is on track, though cashflow from operations was negative SEK2.9bn, because of restructuring and pension payments and a $1.1bn bill to set up the ST-Ericsson chip joint venture with STMicro.
Alexandre Peterc, an analyst with Exane, told The Wall Street Journal: "The bulls will like the unchanged outlook, while the bears will look at the weak cash generation."
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