Ericsson expects sales of SEK 43.5 bln, an operating income of SEK 5.6 bln and a cash flow of SEK -1.6 bln for the third quarter 2007. This is below current market expectations and primarily a result of an unexpected shift in the business mix, a company announcement said.
“The unexpected development in the quarter is mainly due to a shortfall in sales in mobile network upgrades and expansions which resulted in an unfavorable business mix that also negatively affected Group margins,” said Carl-Henric Svanberg, President and CEO of Ericsson. “All other businesses performed as expected.”
Ericsson’s networks business continues to develop most rapidly in regions where new network rollouts and break-in contracts are predominant. This is where competition is intense as it builds footprint for long-term profitable growth. So far the margin pressures from these business activities have been offset by higher margin sales such as network expansions and upgrades. Such expansions and upgrades have a short sales cycle and builds during the quarter. This quarter, sales of these higher margin offerings did not materialize as much as in previous quarters. High margin software sales are also lower than normal.
The Professional Services segment continues to show strong growth and stable margins. The Multimedia segment is expected to also show a strong growth with operating income slightly above breakeven level, reflecting the continued investments in new business areas.
“Our strategy to regain scale advantage through increased mobile systems market shares has been effective. The present market dynamics are however working to our disadvantage from a short-term financial perspective. Now that we have reestablished our scale advantage from the pre-industry consolidation we will shift our focus slightly and capitalize on our market share gains,” said Carl-Henric Svanberg.
The year-over-year sales increase of 6% consisted of organic growth of 4%. The USD has continued to weaken during the quarter and affected reported sales growth negatively.
The decline in gross margin is mainly due to an unfavorable business mix consisting of a high proportion of new network rollouts and lower software sales. In addition to the good growth in network rollout, sales of transmission systems with a lower margin, showed strong growth, also negatively affecting Group gross margins.
Operating income amounted to SEK 5.6 bln (8.8 bln) in the quarter and SEK 23.0 bln (23.6 bln) year-to-date. In the Networks business mix, new network rollouts are now dominating and in combination with lower sales of software this caused the group operating margins to decline significantly during the quarter. Sony Ericsson’s pre-tax profit contributed 4% to Group operating margin in the quarter.
Cash flow from operating activities is estimated to be SEK -1.6 bln (4.8 bln) in the quarter and SEK 7.2 bln (7.5 bln) year-to-date.
Multimedia growth was 31% year-over-year. Operating income in the quarter was slightly above breakeven level. The businesses Ericsson Mobile Platforms, Service Delivery Platforms, Tandberg Television and Charging are all showing strong growth with healthy margins. IPTV, IMS and Messaging are new business development areas with significant R&D investments but with limited sales.
North American sales increased slightly year-over-year, however Ericsson had expected a more significant increase driven by mobile network expansions and upgrades of the installed base which so far has not materialized. In Western Europe Ericsson was also expecting similar sales which did not occur due to ongoing operator consolidation in several major markets.
Sales development in Asia-Pacific was flattish due to lower mobile systems sales in
For the fourth quarter of 2007 Ericsson’s planning assumption is Group sales of SEK 53-60 bln and operating margins in the mid-teens, including Sony Ericsson. For the market in 2008, early expectation is that the current conditions will prevail.
