Ericsson reports changed business mix, lower income

Ericsson reported an increase in net sales to SEK 43.5 bln from 41.3 bln in the third quarter of this year, with the nine-month net sales up 6% to SEK 133.3 bln from  125.6 bln the first nine months of last year.

Operating income dropped 36% to SEK 5.6 bln from 8.8 bln in the quarter, and down to SEK 23.0 bln (from 23.6 bln) in the first nine months.

The year-over-year sales increase amounted to 6%, of which 4% was organic growth, while the decline in gross margin is mainly due to the business mix. In addition, the year-over-year growth in network rollout affected Group gross margins negatively.

“The sharp decline in profit this quarter is mainly due to weaker sales of mobile network upgrades and expansions combined with continued high sales of new network buildouts,” said Carl-Henric Svanberg, President and CEO of Ericsson. “This changed business mix within Networks affected Group margins negatively. All other businesses performed as expected.

With regards to cash flow from operations, the capital redemption from Sony Ericsson of SEK 1.4 bln was offset by a similar amount of reduction of the advance payment to Ericsson Mobile Platforms.

Sales in Networks declined mainly due to lower sales of expansions and upgrades of mobile networks as well as software. Sales of optical and radio transmission systems for back/long-haul showed good growth.

The alignment of Ericsson’s and Redback’s sales channels is running according to plan, however with some negative effects on Redback’s sales during this transition. Significant resources have been redeployed from other parts of Ericsson to support Redback’s rapid expansion, including integrating their technology into other Ericsson products.

In the Multimedia sector, sales growth was 31% year-over-year of which 14% is acquired. Operating income in the quarter was slightly above breakeven level. The areas 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.

Sony Ericsson Mobile units shipped in the quarter reached 26 mln, a 31% increase compared to the same period last year. Sales for the quarter were EUR 3,108 mln, representing a year-on-year increase of 7%. Income before taxes for the quarter was EUR 384 mln, representing a year-on-year decrease of 11% and reflecting the exceptional third quarter the company experienced in 2006.

In line with Sony Ericsson expectations, the increase in low and mid-tier priced phones in the product portfolio in the third quarter resulted in a decline in ASP to EUR 120.

Ericsson invoiced Sony Ericsson EUR 156 mln in the quarter, mainly for mobile platforms, which was deducted from the balance of the advance payment made to Ericsson in the first quarter. Ericsson’s share in Sony Ericsson’s income before tax was SEK 1.7 bln (2.0 bln) in the quarter.

 

— Regional Overview

The market in Western Europe showed a year-over-year sales growth of 6%, primarily driven by managed services and increased demand for broadband transmission. Sales of mobile networks were down somewhat due to less than expected sales of upgrades and expansions, especially in the UK and Italy.

Central and Eastern Europe, Middle East and Africa returned to good growth, 10% year-over-year. Asia Pacific was flattish due to lower mobile systems sales in China. Australia was down compared to same period last year when a nation-wide HSPA network was rolled out. Excluding China and Australia, sales growth was 17% in the region.

Latin American sales were up 1% year-over-year driven by continued 2G expansions as well as initial 3G rollouts. North American sales have returned to growth, primarily as a result of a more favourable comparison year-over-year.

 

— Market Development

Mobile subscriptions grew with some 156 mln in the quarter to 3.16 bln of which 2.7 bln are GSM/WCDMA subscriptions. 157 mln are WCDMA subscriptions, growing by some 18 mln in the quarter. There are 179 WCDMA networks in 80 countries, of which 138 are upgraded to HSPA services.

In the twelve-month period ending June 30, 2007, fixed broadband connections grew by some 14 mln per quarter to a total of approximately 300 mln.

 

— Market Outlook

 

For 2007, we continue to believe that the GSM/WCDMA track within the global mobile systems market, measured in USD, will continue to show mid-single digit growth.

Also, the addressable market for professional services will show good growth in 2007.

For 2008, an early expectation is that the current market conditions will prevail.