Electronics Production |
Increased profit in 2Q for Ericsson
Ericsson's net sales for the second quarter amounted to SEK 52.1 (48.5) billion, up 11% for comparable units, down 3% adjusted for currency effects; operating income before JVs amounted to SEK 6.9 (4.7) billion, including capital gains of SEK 0.8 (0.2) billion.
President and CEO Carl-Henric Svanberg comments: "There are different trends in the current market environment. The effects of the global economic climate on the mobile infrastructure market are now more notable, especially in markets with currencies under pressure and tougher credit environment. At the same time the consumer demand for new services and broadband capabilities are quickly accelerating and rollout of new technologies is ongoing in the world's leading economies. There is also an increasing demand for professional services from operators across the world."
"Our early decision to reduce costs is giving results and margins improved across all segments. Our target to reduce costs by SEK 10 b. from the second half of 2010 remains, and significant restructuring charges were made in the quarter. We continue to focus on our capital structure and have added long-term loans on favorable conditions. Our net cash position was further strengthened by a strong cash flow in the quarter," concluded Carl-Henric Svanberg.
Financial Highlights
Sales in the quarter increased 11% year-over-year for comparable units, i.e. excluding Ericsson Mobile Platforms and PBX operations, but decreased 3% when adjusted for currency exchange rate effects and hedging.
In the quarter, gross margin, excluding restructuring charges, decreased year-over-year to 36.3% (37.0%), but was flat sequentially. Services sales have grown from 33% to 38% of total sales year-over-year. The margin decline is attributable to this mix shift and the transfer of Ericsson Mobile Platforms to ST-Ericsson.
Operating expenses amounted to SEK 13.6 (14.0) b. in the quarter, excluding restructuring charges. The year-over-year improvement is primarily a result of ongoing cost reduction activities, despite negative impact from currency exchange rate effects. Operating expenses as a percentage of sales declined to 26% (29%).
Operating income, excluding joint ventures, restructuring charges and capital gains of SEK 0.8 (0.2) b., amounted to SEK 6.1 (4.5) b. in the quarter resulting in an improved operating margin of 11.7% (9.3%). All three segments showed a positive margin development during the quarter. A weaker SEK affected income positively but was partly offset by a currency hedging loss.
Cost reductions
In January, 2009, cost reduction activities were announced that target annual savings of SEK 10 b. from the second half of 2010, with an equal split between cost of sales and operating expenses. Restructuring charges are estimated to SEK 6-7 b. Restructuring charges related to activities launched in the second quarter amounted to SEK 3.6 b. At the end of the quarter, cash outlays of SEK 4.2 b. remain to be made.
Segment Results
Networks
Networks sales increased in the quarter by 4% year-over-year but were down when adjusted for currency exchange rate effects. The EBITDA-margin of 15% was flat year-over-year despite the higher level of network rollout in the quarter, reflecting the cost improvement actions. The cost reduction activities announced at the beginning of this year are running according to plan.
WCDMA shows strong growth, reflecting the accelerating consumer demand for broadband services and the ongoing rollouts in China, Japan and the US. Meanwhile volumes of GSM equipment decreased from an all-time high in 2008, primarily as a result of operators' increased cautiousness in several emerging markets.
In July, mobile broadband with MIMO technology enabling speeds of 28 Mbps, was commercially launched in Telecom Italia's network. The continued traffic growth is driving upgrades of IP networks and transmission. As a result, SmartEdge, Packet Core and MiniLink products are all showing strong growth.
Ericsson has completed the world's largest upgrade of a live mobile network for Vodafone Essar India in record time. Ericsson replaced more than 10,500 GSM radio sites, reaching a peak rate of one site every minute. This was achieved in just 13 months, two months ahead of schedule.
Professional Services
Professional Services sales increased 28% year-over-year. Growth in local currencies amounted to 16% with managed services and systems integration growing the most. The demand for managed services is strong in the present economic environment and sales increased by 34% year-over-year.
EBITDA-margin in the quarter reached 17% (16%) as a result of continued efficiency gains. This excludes a capital gain of SEK 0.8 b. for the divested TEMS operation.
A groundbreaking 7-year services agreement has been made with Sprint in the US at a total value of USD 4.5 - 5 b. The contract includes the transfer of approximately 6,000 employees. The first major managed services contract in Africa was signed with Zain, Nigeria. Both contracts will commence during the third quarter and, as in previous large services contracts, there will be some transition and transformation costs which will impact margins. The agreement with 3 in Italy, signed 2005, has been renewed with a smaller scope which will impact sequential quarterly growth.
Including these contracts, the total number of subscribers in managed operations is now 350 million, of which 50% are in high-growth markets.
Multimedia
Multimedia sales increased by 23% year-over-year for comparable units, i.e. excluding the divested PBX operations and Ericsson Mobile Platforms. Revenue Management and multimedia brokering (IPX) continued to show good growth. EBITDA-margin in the quarter for comparable units was 17% (8%), reflecting a higher proportion of software license sales and positive effects from cost reduction activities. Margins may still vary between quarters.
Regional Overview
Western Europe sales were up 4% year-over-year for comparable units, i.e. excluding Ericsson Mobile Platforms and the PBX operations. Italy and the Netherlands showed good growth while Spain remains weak. UK showed positive development driven by good growth in managed services.
In Central and Eastern Europe, Middle East and Africa, sales increased by 12% year-over-year but with significant variations between countries reflecting the economic development. Several countries in Eastern Europe are weak although Russia improved in the quarter. Egypt, Saudi Arabia and Turkey showed good development, while sales in Middle East overall was slightly down.
Asia Pacific sales increased 10% year-over-year. China remains strong and was Ericsson's largest market in the quarter. The ongoing nationwide 3G rollout is progressing well, with the first phase already completed. The activity in the Indian market remains high, even though sales were slightly lower year-over-year due to project phasing. Australia, Indonesia and Japan were also strong, while operators in Bangladesh and Pakistan have reduced investments dramatically due to tough local business conditions. Republic of Korea is another country signing up for LTE technology as part of a strategy to build an intelligent sustainable society.
Latin American sales were also affected by the economic slow-down and decreased by 3% year-over-year. Central America, Brazil and Mexico were weaker, while Chile and Argentina showed good growth.
North American sales increased by 34% year-over-year, driven by demand for mobile broadband and currency exchange rate effects. Ericsson signed its first network services deal in the region on July 9 with Sprint. Ericsson is now a strategic supplier to the four largest mobile operators in the US.
Market Development
Growth rates are based on Ericsson and market estimates. The global economic slowdown is affecting all parts of the society. However, we believe that the fundamentals for longer-term positive development for our industry remain solid. The need for telecommunication continues to grow and plays a vital role for the development of a sustainable and prosperous society. Ericsson is well positioned to drive and benefit from this development.
There is continued growth in mobile subscriptions, although the current growth rate is lower than in 2008. Mobile subscriptions grew by some 149 million in the quarter to a total of 4.3 billion. The number of new WCDMA subscriptions is accelerating and grew by 40 million in the quarter to a total of 377 million. In the first quarter, fixed broadband connections grew to 408 million, adding 13 million subscribers.
The traffic in the mobile networks is accelerating, which creates need for new and expanded mobile networks and corresponding professional services. GSM/WCDMA/LTE is the dominating technology track. WCDMA is growing strongly and currently surpasses GSM in deliveries. The build-out of telecommunications in emerging markets continues, and although they represent less than one third of global GDP they represent significantly more of the market for mobile network equipment.
Data traffic, as part of operator revenues, continues to increase. Mobile operators' data revenues have increased from 20% in the first quarter to some 25% of total revenues and in some markets mobile data is now more than 30% of total revenues. In addition to capacity enhancements, operators face the challenge of converting to all-IP broadband networks. This will include increased deployments of broadband access, routing and transmission equipment along with next-generation service delivery and revenue management systems.
There is continued strong growth in services, fueled by operators' desire to reduce operating expenses and improve efficiency in network operation and maintenance. The move toward all-IP and increased network complexity will create further demand for systems integration and consulting.
Sales in the quarter increased 11% year-over-year for comparable units, i.e. excluding Ericsson Mobile Platforms and PBX operations, but decreased 3% when adjusted for currency exchange rate effects and hedging.
In the quarter, gross margin, excluding restructuring charges, decreased year-over-year to 36.3% (37.0%), but was flat sequentially. Services sales have grown from 33% to 38% of total sales year-over-year. The margin decline is attributable to this mix shift and the transfer of Ericsson Mobile Platforms to ST-Ericsson.
Operating expenses amounted to SEK 13.6 (14.0) b. in the quarter, excluding restructuring charges. The year-over-year improvement is primarily a result of ongoing cost reduction activities, despite negative impact from currency exchange rate effects. Operating expenses as a percentage of sales declined to 26% (29%).
Operating income, excluding joint ventures, restructuring charges and capital gains of SEK 0.8 (0.2) b., amounted to SEK 6.1 (4.5) b. in the quarter resulting in an improved operating margin of 11.7% (9.3%). All three segments showed a positive margin development during the quarter. A weaker SEK affected income positively but was partly offset by a currency hedging loss.
Cost reductions
In January, 2009, cost reduction activities were announced that target annual savings of SEK 10 b. from the second half of 2010, with an equal split between cost of sales and operating expenses. Restructuring charges are estimated to SEK 6-7 b. Restructuring charges related to activities launched in the second quarter amounted to SEK 3.6 b. At the end of the quarter, cash outlays of SEK 4.2 b. remain to be made.
Segment Results
Networks
Networks sales increased in the quarter by 4% year-over-year but were down when adjusted for currency exchange rate effects. The EBITDA-margin of 15% was flat year-over-year despite the higher level of network rollout in the quarter, reflecting the cost improvement actions. The cost reduction activities announced at the beginning of this year are running according to plan.
WCDMA shows strong growth, reflecting the accelerating consumer demand for broadband services and the ongoing rollouts in China, Japan and the US. Meanwhile volumes of GSM equipment decreased from an all-time high in 2008, primarily as a result of operators' increased cautiousness in several emerging markets.
In July, mobile broadband with MIMO technology enabling speeds of 28 Mbps, was commercially launched in Telecom Italia's network. The continued traffic growth is driving upgrades of IP networks and transmission. As a result, SmartEdge, Packet Core and MiniLink products are all showing strong growth.
Ericsson has completed the world's largest upgrade of a live mobile network for Vodafone Essar India in record time. Ericsson replaced more than 10,500 GSM radio sites, reaching a peak rate of one site every minute. This was achieved in just 13 months, two months ahead of schedule.
Professional Services
Professional Services sales increased 28% year-over-year. Growth in local currencies amounted to 16% with managed services and systems integration growing the most. The demand for managed services is strong in the present economic environment and sales increased by 34% year-over-year.
EBITDA-margin in the quarter reached 17% (16%) as a result of continued efficiency gains. This excludes a capital gain of SEK 0.8 b. for the divested TEMS operation.
A groundbreaking 7-year services agreement has been made with Sprint in the US at a total value of USD 4.5 - 5 b. The contract includes the transfer of approximately 6,000 employees. The first major managed services contract in Africa was signed with Zain, Nigeria. Both contracts will commence during the third quarter and, as in previous large services contracts, there will be some transition and transformation costs which will impact margins. The agreement with 3 in Italy, signed 2005, has been renewed with a smaller scope which will impact sequential quarterly growth.
Including these contracts, the total number of subscribers in managed operations is now 350 million, of which 50% are in high-growth markets.
Multimedia
Multimedia sales increased by 23% year-over-year for comparable units, i.e. excluding the divested PBX operations and Ericsson Mobile Platforms. Revenue Management and multimedia brokering (IPX) continued to show good growth. EBITDA-margin in the quarter for comparable units was 17% (8%), reflecting a higher proportion of software license sales and positive effects from cost reduction activities. Margins may still vary between quarters.
Regional Overview
Western Europe sales were up 4% year-over-year for comparable units, i.e. excluding Ericsson Mobile Platforms and the PBX operations. Italy and the Netherlands showed good growth while Spain remains weak. UK showed positive development driven by good growth in managed services.
In Central and Eastern Europe, Middle East and Africa, sales increased by 12% year-over-year but with significant variations between countries reflecting the economic development. Several countries in Eastern Europe are weak although Russia improved in the quarter. Egypt, Saudi Arabia and Turkey showed good development, while sales in Middle East overall was slightly down.
Asia Pacific sales increased 10% year-over-year. China remains strong and was Ericsson's largest market in the quarter. The ongoing nationwide 3G rollout is progressing well, with the first phase already completed. The activity in the Indian market remains high, even though sales were slightly lower year-over-year due to project phasing. Australia, Indonesia and Japan were also strong, while operators in Bangladesh and Pakistan have reduced investments dramatically due to tough local business conditions. Republic of Korea is another country signing up for LTE technology as part of a strategy to build an intelligent sustainable society.
Latin American sales were also affected by the economic slow-down and decreased by 3% year-over-year. Central America, Brazil and Mexico were weaker, while Chile and Argentina showed good growth.
North American sales increased by 34% year-over-year, driven by demand for mobile broadband and currency exchange rate effects. Ericsson signed its first network services deal in the region on July 9 with Sprint. Ericsson is now a strategic supplier to the four largest mobile operators in the US.
Market Development
Growth rates are based on Ericsson and market estimates. The global economic slowdown is affecting all parts of the society. However, we believe that the fundamentals for longer-term positive development for our industry remain solid. The need for telecommunication continues to grow and plays a vital role for the development of a sustainable and prosperous society. Ericsson is well positioned to drive and benefit from this development.
There is continued growth in mobile subscriptions, although the current growth rate is lower than in 2008. Mobile subscriptions grew by some 149 million in the quarter to a total of 4.3 billion. The number of new WCDMA subscriptions is accelerating and grew by 40 million in the quarter to a total of 377 million. In the first quarter, fixed broadband connections grew to 408 million, adding 13 million subscribers.
The traffic in the mobile networks is accelerating, which creates need for new and expanded mobile networks and corresponding professional services. GSM/WCDMA/LTE is the dominating technology track. WCDMA is growing strongly and currently surpasses GSM in deliveries. The build-out of telecommunications in emerging markets continues, and although they represent less than one third of global GDP they represent significantly more of the market for mobile network equipment.
Data traffic, as part of operator revenues, continues to increase. Mobile operators' data revenues have increased from 20% in the first quarter to some 25% of total revenues and in some markets mobile data is now more than 30% of total revenues. In addition to capacity enhancements, operators face the challenge of converting to all-IP broadband networks. This will include increased deployments of broadband access, routing and transmission equipment along with next-generation service delivery and revenue management systems.
There is continued strong growth in services, fueled by operators' desire to reduce operating expenses and improve efficiency in network operation and maintenance. The move toward all-IP and increased network complexity will create further demand for systems integration and consulting.
