Ericsson suffers Q4 profit and margin slump

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Ericsson suffers Q4 profit and margin slump

North American slowdown, shift to lower profit projects in Europe, and tough joint ventures all pile on the pressure

By CAROLINE GABRIEL

Published: 25 January, 2012

READ MORE: Financial | Ericsson

Ericsson suffered a fall of two-thirds in its fourth quarter profits as carriers in the US, its great growth driver last year after its Nortel acquisitions, slowed their spending. Revenue rose by just 1% year-on-year to SEK 63.7bn ($9.43bn) while profits were SEK1.5bn ($222m), hit by the US but also losses at the Sony Ericsson handset venture, which the Swedish giant is exiting.

For the full year, revenues rose by 12% over 2010 to SEK2126.9bn ($33.6bn) while net profit also rose by the same percentage to reach SEK12.6bn ($1.87bn). In 2011, gross margin declined from 38.2% to 35.1% as a result of a greater reliance on network modernization projects and coverage extensions, as well as 3G roll-outs in India, all of which carry lower margins than Ericsson's traditional deployments. The average modernization project lasts for 18-24 months, so this profit squeeze is expected to last for two more quarters.

"For the full year 2011, we had a strong sales growth and an increase in net income. In the fourth quarter, however, we saw weaker development in Networks, as well as an expected gross margin impact from a changed business mix with more coverage projects, modernization projects in Europe, and a higher services share," said CEO Hans Vestberg in his statement.

The company also referred to operator caution in north America and Europe, amid the economic slowdown, and in this respect, the focus on modernization and coverage expansion is important, despite the margin impact - these roll-outs are seen by operators as lower cost, lower risk ways to address the surge in data demand, and some are postponing more radical network upgrades until the economic and political climates pick up.

"Short term, we expect operators to continue to be cautious with spending, reflecting factors such as macro economic and political uncertainty. We will continue to execute on our strategy which means that the business mix, with more coverage and network modernization projects than capacity projects, will prevail short term," added Vestberg.#

In particular, said the Swedish market leader, north American customers slowed their spending, a factor which depressed analysts. "All the major numbers were disappointing," Robert Jakobsen of Jyske Bank in Denmark told reporters. "Operator spending is clearly reduced especially in areas that have been very good for Ericsson in the last couple of years. And they already indicated a slowdown, so the estimates reflected that, and still it was worse."

Meanwhile, Ericsson's joint ventures added to the pain. It is selling its stake in Sony Ericsson to its Japanese partner, but has stated its commitment "for the time being" to its chip JV with STMicro. But ST-Ericsson reported a fourth quarter loss of $231m on a 29% fall in sales to $409m, leading some observers to question how long the Swedish parent's loyalty will last.