Ericsson's Lower Margins In 2Q Due To Services, US Sales"
STOCKHOLM -(Dow Jones)- Telefon AB LM Ericsson (ERICY) executives said Thursday the company's falling gross margin reflects more services sales and unexpectedly high invoicing for a new order with low margins.
"Price pressure in the market is unchanged," said Chief Financial Officer Karl-Henrik Sundstroem to reporters at a press conference.
In the first quarter Ericsson reported a record high gross margin of 48.5% due to strong sales of software that carries very high such margins.
In the second quarter gross margin fell to 45.9% mainly as Ericsson saw very high growth in sales of services at 31% to SEK9.8 billion.
Sales of services such as rollout and management of telecom networks carry a lower gross margin than sales of hardware and software products.
But the operating margin, which is calculated after costs for research, development and selling expenses, are still "attractive," according to Sundstroem.
Ericsson managed to meet market expectations for its operating margin but saw it decline slightly in the second quarter to 21.6% from 22.2% a year ago.
Cingular Wireless (CIW.XX) in the U.S. is currently rolling out a major upgrade to its network and Ericsson has won a major part of that order in fierce competition with other vendors.
The invoicing to Cingular in the second quarter was unexpectedly large with SEK2 billion in sales reported that were originally planned for the third quarter.
Chief Executive Carl-Henric Svanberg said such orders initially carry a lower margin and that it "put a bit of pressure" on margins in the second quarter.
"It's still a good contract," Svanberg added.
He also claimed Ericsson was "gaining position" with Cingular.
A part of Cingular's order for the network upgrade is still not finally awarded and the different vendors can therefore lose or gain position.
Analysts have estimated the total Cingular order to be worth $4 billion to $5 billion over 4 years.
Svanberg and Sundstroem both stressed Ericsson's strong offering of a complete product and services portfolio as key advantage for the company.
Ericsson doesn't provide forecasts for gross margins, but the company raised its view of market growth for mobile systems for the full year 2005.
The company now sees growth of 6-9% instead of the previous 2-5%, when measured in dollar terms.
Svanberg warned market growth in the second half of the year will likely be slower than in the first half.
-By Magnus Hansson, Dow Jones Newswires;+46 8 545 130 91, magnus.hansson@dowjones.com
(END) Dow Jones Newswires"
Posted to the site on 21st July 2005