For the quarter ending March 31, the Stockholm, Sweden-based company recorded a net profit of SEK 4.61bn ($609m), down 1% from SEK 4.64bn ($613m) in the year-ago quarter. The markets had been expecting earnings in the region of SEK 5.3bn ($700.4m), and shares in the company fell 4.6% on opening on Nasdaq to $36.21 following the announcement.
Sales however grew a healthy 24% to SEK 39.2bn ($5.18bn) from SEK 31.5bn ($4.16bn) in the year-ago quarter. Sales were up 15% if Marconi is excluded.
Ericsson said its gross margins fell from 48.5% to 43.3% due partly to the integration of former Marconi operations. The company said that excluding Marconi, gross margin would have stayed in line with the previous quarter. Operating margins decreased from 21% to 16.9% as the equipment maker experienced tough competition for new contracts in the networks business.
Ericsson had agreed last October to purchase the majority of Marconi’s assets and its name. Under the terms of the deal, it paid 1.2bn pounds ($2.14bn) for approximately 75% of Marconi, which translated to most of its telecoms equipment business. The remaining 25% of Marconi was spun off into a separate entity, Telent Plc.
Ericsson’s rationale for the acquisition was that it would help it meet the growing global demand for mobile and fixed broadband internet access. Under the leadership of chief executive Carl-Henric Svanberg, Ericsson has undergone a successful turnaround in recent years. The Swedish company is perhaps best known as the one of the largest makers of equipment for mobile phone networks.
Marconi on the other hand could trace its roots back to the company founded in 1897 by Guglielmo Marconi, the Italian inventor of the radio. The business became part of the industrial giant General Electric Company in 1968. However, in the 1990s the firm sold off its defense assets and changed its name to Marconi in an attempt to become a major player in the telecoms market, but it was brought to its knees by an over-ambitious acquisition spree, and the dramatic downturn in carrier spending from 2000 to 2003.
Ericsson’s profits were essentially hit by the costs of integrating the Marconi business, as well as expenses associated with winning new contracts in the growing services business. Marconi made an operating loss of SEK 600m ($79m) during the first quarter on sales of SEK 2.9bn ($383m).
Ericsson’s Svanberg insisted the Marconi acquisition had been well received by its customers, but hinted that cost-cutting measures the integration of the Marconi business had been delayed during the first quarter, because it did not want to jeopardize delivery of new contracts it had won. Svanberg warned however that accelerated activities for cost savings would start in the second quarter, which will see a possible headcount reduction of between 1,600 to 1,700 people. Looking forward, Svanberg now believes the Marconi acquisition will achieve earnings neutral run rate by the first quarter of next year.
Svanberg was upbeat about the mobile market, however. Only a few years ago, we talked about 2 billion as saturation, he said. We will probably pass 3 billion over the next year and it is clear that is going much beyond that. He pointed to the roll-out of 30 HSPA networks across four continents, as the evolution mobile broadband accelerated. Essentially, HSPA technology dramatically improves the consumer experience of new mobile multimedia services such as music and mobile TV.
Svanberg was also pleased with the performance of the Professional Services business during the quarter, with a 58% rise in business excluding Marconi. The company saw particular strong take-up of managed services, alongside its traditional support service operations. Ericsson currently has 30 managed operations, where it manages the network of behalf of the operator, covering nearly 60 million subscribers. In December, it signed a managed-services contract worth more than SEK 15bn ($1.98bn) with UK mobile operator 3. It also won 50 hosting contracts, and now provides 24/7 support facilities for nearly 700 million subscribers.
During the quarter, North America provided the bulk of its growth with sales up 58%, despite the ongoing consolidation, as operators gear up for the forthcoming spectrum licenses in the summer. Asia-Pacific was the next busiest region with sales 48%, followed by Central and Eastern Europe and EMEA, after it experienced strong demand for second-generation GSM technology which helped boost its sales growth in the Middle East and Africa.
Looking forward to the rest of the year, Ericsson maintained its moderate growth forecast in the global mobile systems market. It also predicted the market for managed services would show good growth as telecoms operators seek to slash the costs of running their networks. Ericsson said long-term industry growth drivers remain solid
This comes at a time when speculation surrounds the long-term prospects of equipment suppliers after a frenetic couple of years of mergers and acquisitions in the telecoms and mobile space. The recent merger between Alcatel SA and Lucent Technologies Inc has prompted talk of a possible move by Ericsson for the troubled North American equipment supplier Nortel Networks Corp.
However, Svanberg played down the prospect of Ericsson pairing with a rival, and seems content with the Marconi deal for the time being. Yet it remains to be seen whether market concerns about the prospects of Ericsson will force his hand, especially because some fear that there is little scope for Ericsson to improve its overall profitability. Svanberg has spent the past couple of years heavily restructuring the company, and there is very little he can now do, restructuring-wise, to boost the bottom line.
