Ericsson has reported that its second-quarter profit fell 70 percent because of costs to cut jobs and falling sales of phones made by its Sony Ericsson joint venture. Net income fell to SEK1.9 billion (US$320 million) from SEK6.4 billion (US$1.07 billion) a year ago. Revenue rose 2 percent to SEK48.5 billion (US$8.1 billion) in the quarter.
"The overall business activity shows stable development," said Carl-Henric Svanberg, President and CEO of Ericsson. "With no major changes in the market environment, we still find it prudent to plan for a flattish mobile infrastructure market in 2008 and our focus on adjusting our cost base remains.
The company reported that gross margin amounted to 37.0% (43.0%) and declined year-over-year, mainly due to the shift in business mix with a high proportion of new network buildouts. Sales related to software and IPRs were back to a more normal level after last quarter's slightly higher level
Sales in Networks were down 1% year-over-year. The continued USD decline contributed negatively to the sales development. Ericsson says that there is a steady demand for GSM equipment in high-growth markets, especially in Asia, which drives the growth for network rollout services. The margins improved slightly sequentially. Still, the proportion of buildouts of new networks in high-growth markets, including accelerating volumes in India, remains high and puts pressure on Networks' margins. Sales related to software and IPRs in the quarter returned to a more normal level.
Managed services sales increased both year-over-year and sequentially, despite the reduced scope of the 3 UK contract announced in the fourth quarter 2007. During the quarter, six new contracts were signed. The total number of subscribers in managed operations now amount to 210 million, of which more than 50% are in high-growth markets.
Regional Performance
Sales in Western Europe declined year-over-year. Operators launching HSPA are experiencing strong traffic growth but most have not yet exhausted the initial capacity installed during the coverage buildout. The continued tariff competition drives fixed-to-mobile broadband migration. The Nordic and Baltic region showed good sales growth while the rest of Western Europe showed mixed development, with lower business activity in markets such as the UK and Spain offsetting the growth in other countries.
Sales in Central and Eastern Europe, Middle East and Africa declined somewhat year-over-year. The business activity is high with continued buildout of mobile communications throughout the region. In the period, however, sales were down in parts of Eastern Europe and Middle East. The region is characterized by continued roll out of 2G network coverage in rural areas combined with increasing deployments of 3G in urban areas. In addition, there is a growing interest in managed services.
Asia Pacific sales were down 5% year-over-year. Excluding Australia and Japan, sales were up 6%. Australia was down due to completion of major network deployments last year. In Japan, the network rollout continues although sales vary between quarters. The business activity is generally high in the region with particularly strong growth in India, where rollout of new networks accelerates. Sales in China showed stable development and the decline year-over-year reflects a tough comparison with a strong second quarter 2007.
Latin American sales were up 21% year-over-year with particularly strong development in Brazil, Mexico and Chile. The region is driven by continued 2G expansions, 3G rollouts and increased demand for managed services. In parallel, there is a growing wireline modernization, including investments in optical and fiber access.
North American sales were up 47% year-over-year as a result of increased operator spending on triple play and HSPA. Consumers show a quickly growing interest in fixed and mobile broadband and related services. The strong growth also reflects the lower sales volumes previous year.
Market Developments
The company says that there is continued strong underlying growth in fixed and mobile broadband subscriptions. There is good momentum for HSPA, with ongoing rollouts across the world, and the support for LTE has been further strengthened with Chinese operators committing to the standard.
The industry consolidation among operators and our competitors continues and the price competition is intense. Large mergers and network sharing result in short-term effects on operator investments. During the quarter, the Chinese telecom reform was announced and it is expected that 3G licenses will be issued once the reform is implemented. The tariff competition among operators continues to be strong in many markets, with price plans moving toward bundles and flat plans.
Posted to the site on 22nd July 2008
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