Recession hits Ericsson at last, as it boosts services challenge
Published: 22 October, 2009
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Ericsson disappointed the markets with a profits drop of over 70%, even as it set out its path towards new revenue streams, including an audacious bid to challenge PayPal in mobile payments.
The Swedish giant said its third quarter profits fell 71.5% year-on-year to SEK810m ($117.6m), as the global recession - from which the market leader had previously claimed virtual immunity - hit demand for its products at last, forcing it to compete aggressively on price. Sales fell by 5.6% to SEK46.4bn.Though shiny compared to Nokia Siemens' awful Q3 the results were lower than expected by analysts, who had been looking for a fairly robust quarter from Ericsson to indicate recovery in the infrastructure segment, to match that in handsets.
Ericsson, which has previously only suffered limited effects of the global downturn, said the network market is now being hurt by the crisis, and also by a drop in GSM sales, as the 2G technology finally starts to decline as operators shift to 3G and mobile broadband.
"Sales of network equipment declined due to lower demand in the current tougher market environment," said outgoing CEO Carl-Henric Svanberg in his final quarterly statement before he hands over to Hans Vestberg. "The economic climate affects the global mobile infrastructure market and the credit environment is still tight in several emerging markets."
He was still fairly upbeat about medium term prospects for the industry, particularly with 2010 growth expected in China and India for GSM expansion and 3G, and in the US and Japan for mobile broadband.
However, analysts were not much comforted, saying the results were far worse than expected, showing, as Greger Johansson at Redeye put it: "The downturn in the economy is now affecting Ericsson as well, mainly in Europe, Africa and maybe Latin America." The Swedish firm also suffered from the strengthening of the kroner and wider losses at its handset joint venture, Sony Ericsson.
Another JV, the chip firm ST-Ericsson, also weighed on its parent's quarter with a loss of $112m and Ericsson took restructuring charges, excluding joint ventures, of SEK2.7bn, which should generate SEK10bn in savings from the second half of 2010.
Meanwhile, the shift to convergence and higher value services - mainly outsourced carrier networks but also a widening range of web apps platforms for operators - proceeds apace. Ericsson has been creating hosted services to enable carriers to implement 'Telco 2.0' offerings such as branded stores, social network aggregation and location-based apps. Now it is moving into the territory of PayPal and Google Checkout with plans for a mobile payment system, that will initially be targeted at the hot area of newspaper content and ebooks.
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