Networks and JVs drag Ericsson profits down 92%

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Networks and JVs drag Ericsson profits down 92%

By CAROLINE GABRIEL

Published: 25 January, 2010

READ MORE: Financial | Ericsson | ST-Ericsson

In the darkest days of the downturn, Ericsson seemed to be the most recession proof vendor apart from Huawei. But in recent months it has started to show some vulnerability to the price wars and carrier delays in its key sectors, disappointing analysts with a 92% year-on-year fall in profits, plus continuing losses at its main joint ventures, Sony Ericsson and ST-Ericsson.

Ericsson posted its Q4 results this morning, falling short even of somewhat modest expectations. As some firms say the market is stabilizing, Ericsson pointedly refused to issue guidance, suggesting continuing uncertainty and poor visibility in its sectors. This is likely to be less about the recession, which is now better understood, and more about the possible stepped-up attacks from Huawei and ZTE this year, plus uncertainty over the speed of cellcos' HSPA+ and LTE plans, both important to the Swedish giant. LTE is unlikely to generate significant revenue until at least 2012, despite the credibility factor of early trial wins, but Ericsson is hoping that HSPA+ migrations will be an anchor of its hardware revenue growth, along with 3G build-out in new markets. Delays or pullbacks in carrier spending will continue to affect these plans in 2010, making services growth even more vital.

For Q4, net income fell to SEK314m ($43m) from SEK3.89bn. Excluding restructuring charges, the company earned SEK1.36 a share, down from SEK2. Ericsson's revenue was down 13% on last year to SEK58.3bn ($8.07bn), below Wall Street forecasts of SEK60.1bn. Gross margin, at 35.2%, also fell short of the consensus of 35.8%, while adjusted operated income of SEK7.5bn was under the Street forecast of SEK7.8bn.

In a research note, Nomura analyst Richard Windsor said the weak figures were "all about the revenue miss" in the networks unit. Here, revenue was SEK38.5bn, down 16% year-on-year, and this drop was not outweighed by major services successes such as the huge outsourcing deal with Sprint Nextel. Ericsson CEO Hans Vestberg said in its statement that "during the second half of 2009, Networks' sales were impacted by reduced operator spending in a number of markets", especially caution in central Europe, the Middle East and Africa. However, China, India and the US showed "good development".

Meanwhile, losses reported last week at Sony Ericsson and ST-Ericsson also depressed the bottom line, though results from both showed signs of improvement and of potential turnaround this year. STE reported a $125m net loss, bigger than Q3's $112m, and warned of further challenges in the current quarter. Its operating loss was $139m, wider than a pro forma operating loss of $127m in the same period last year. But net sales were up 2% on Q3, though down slightly on pro forma results a year earlier, at $740m. This figure was heavily driven by China, where STE has been making strong progress, especially in TD-SCDMA handsets, through its local subsidiary.

CEO Gilles Delfassy said in a statement: "For ST-Ericsson, the challenge was especially great in 2009...while medium term visibility is somewhat limited, first quarter 2010 is expected to be characterized by the usual market seasonal decline." He claimed restructuring plans are progressing on schedule, with the first $250m cost reducing tranche completed and the second one, worth $230m, on track for completion at midyear. A third stage, to save a further $115m a year, will be completed by the end of 2010.