A decline in global CDMA equipment sales, a weaker Chinese market and a slackening in demand for GSM and 3G products in Russia combined to hit Ericsson’s net profit for the second quarter of 2012, the company announced today (18 July 2012).
Net income fell by 63% year on year to SEK (Swedish Kroner) 1.2bn (£110m) from SEK 3.2bn (£295m). Net income for Q1 2012 was SEK 8.8bn (£812m), but this was inflated by the sale of Ericsson 50% share in the Sony Ericsson joint venture to Sony Corporation, which added a £680m boost to the quarter.
The company posted net sales of SEK 55.3bn (£5.1bn), down 1% on Q2 2011, but up 9% on sales of SEK 51bn (£4.7bn) in Q1 2012. The Global Networks division accounted for SEK 27.8bn (down 17% year-on-year), Global Services – SEK 24.1bn (up 26% year-on-year) and Support Solutions – SEK 3.5bn (up 47% year-on-year).
The company’s gross margin slipped from 37.8% a year ago to 32%, while EBITA margin (excluding JVs) dropped from 11.4% to 8%.
Hans Vestberg, president and CEO of Ericsson, commented: ‘In the quarter, demand for Global Services and Support Solutions was strong, while Networks sales decreased year on year mainly due to the expected decline in CDMA equipment sales as well as lower business activity in China, including weaker sales of GSM and lower 3G sales in Russia.
‘In Global Services all areas showed good growth in the quarter due to operators’ focus on operational efficiency and high project activities. The strong development for Support Solutions was driven by billing systems and TV solutions. Global Services and Support Solutions together represented about half of the Group’s revenues. The growing Global Services business has a dilutive impact on gross margin.’
Vestberg said that the fundamental drivers for increased data traffic are unchanged and he estimated that the more than 700 million current smartphone subscriptions will increase to three billion in 2017. ‘Based on these drivers, we see an increasing focus from our customers on network performance and quality of service. This will require continuous operator investments in hardware, software and services,’ he observed.
He added that the company’s ST-Ericsson joint venture ‘is still in a challenging situation due to a significant drop in sales of new products to one of the largest customers and continued decline in legacy products’. Net income for Q2 2012 showed a loss of US$318m (£204m) compared with a loss of $221m (£141.5m) in Q2 2011 – an increased loss of 44% and a further 2% loss on Q1 2012’s figure of -$312m. Vestberg said the company is focusing on lowering its break-even point.
‘In 2010 we made a conscious decision to gain market share and increase technology and services leadership, well aware of the short-term profitability pressure. Our focus is now on translating these gains into sustainable profitable growth,’ concluded Vestberg.
By revenue, North America remains Ericsson’s largest region for both Networks and Global Services and showed 5% year-on-year growth despite the decline in CDMA sales, which have been partially offset by the rise in LTE equipment sales.
China and North East Asia is the company’s second largest region by revenue, but sales were down 7%. The Mediterranean showed 12% growth and Latin America 6%. Sales in Northern Europe and Central Asia fell by 26% and were down 6% in Western and Central Europe.