Ericsson's Q4 Operating Income Falls 16%, Maintains Market Share

Ericsson has announced its fourth-quarter operating income, excluding its joint ventures (JVs) fell 16 % year-on-year (y/y) to 7.5 billion Swedish kronor (US$1.04 billion), as the ongoing economic downturn continued to hit operator spend. The world number-one telecoms equipment vendor by market share announced revenue for the quarter fell 13% y/y to 58.3 billion kronor, while fourth-quarter profit (net income) plunged 82% y/y to 0.7 billion kronor.

Meanwhile, Ericsson has also announced its full-year 2009 operating income dropped 65% y/y to 4.1 billion kronor, something the company is chiefly blaming the downturn on a drop in sales and heavy restructuring charges, as 2009 revenues fell 1% y/y to 206.5 billion kronor.

The Stockholm, Sweden-based vendor also raised the target for its savings program to 15-16 billion kronor in annual savings, from previous targets of 10 billion kronor per year, and added that the restructuring plans are continuing, as it aims to cut 1,500 jobs this year, part of the 6,500 cuts previously announced. Ericsson announced it will continue to focus on strong cash conversion and on growing earnings in its JVs, including its Sony Ericsson handset joint venture with Japan's Sony and wireless chip-maker ST-Ericsson, which it owns with Swiss-based STMicroelectronics.

Outlook and Implications

• Ericsson Riding the Storm: Ericsson's quarterly performance has been slightly below analyst expectations, but the yearly results are largely what were expected of the world number-one vendor. The company's new CEO, Hans Vestberg, said in a statement that while network sales were hit by reduced operator spending in several markets, Ericsson had managed to maintain its market share, and service demand remained strong. Indeed, Ericsson's revenues jumped 46% in the fourth quarter compared to the previous quarter, although profit dropped 6% due to higher costs and one-off items. Ericsson has also said the downturn in investments has coincided with an anticipated decline in sales related to the GSM cellular standard, as operators shift their focus from traditional voice and SMS services to mobile broadband. Stockholm-based Ericsson has seen intense competition over the year, from local rivals Nokia Siemens and Alcatel-Lucent as well as Chinese giants ZTE and Huawei. The latter recently hit Ericsson where it hurt, securing several network deals with European operators such as Norway's Telenor, as it was able to undercut the local vendor due to low prices and improving quality. However, despite some high profile losses to its Chinese rivals in its home markets, Ericsson has captured some large European contracts in the last quarter, notably in the key 4G sector (see Sweden: 21 January 2010: 3 Scandinavia Taps Ericsson for 84-Mbps HSPA Nordic Networks), while it secured a seven-year contract last summer to maintain the networks of U.S. telecoms giant Sprint Nextel.

• Focus on Services Sector: In addition to the acquisition of bankrupt Nortel's CDMA business, Ericsson has been scaling up service operation capabilities globally (see Sweden: 14 January 2010: Ericsson Boosts Services Offering with Purchase of Italian Consultancy Pride), and sales in this sector have remained stable, as operators increasingly look to outsource network management to better control costs. Indeed, Ericsson has recently announced the new heads of its CDMA and Global Services businesses as it moves to improve the delivery of full network construction and service capabilities on a global scale (see World: 19 January 2010: Ericsson Appoints CDMA and Global Services Unit Heads in Nortel Takeover). The operator is seeing some success in the key 4G and managed services sectors; however all eyes will be on the fourth-quarter results of its rivals, as further consolidation in the vendor sector is expected this year.

• Some Signs of Improvement at Ericsson's JVs: Troubled handset JV Sony Ericsson recently announced its own fourth-quarter revenues had risen 3.5% from the previous quarter, but were still down by 39.7% y/y, with only 57 million phones sold in 2009, from nearly 97 million in the previous year (see World: 22 January 2010: Sony Ericsson's Losses Continue in Q4; Outlook Improves). However, the outlook for the vendor is improving, and Ericsson has repeated its support for the JV as it looks to be crawling back from the brink. Elsewhere, chipmaker JV ST-Ericsson announced today its core operating losses had shrunk to US$50 million in the fourth quarter, compared with a pro-forma loss of US$98 million in the fourth quarter of 2008, and a US$77-million loss in the third quarter of 2009, helped by lower expenses and strong expansion into the Chinese TD-SCDMA market. Although Ericsson's JVs are still proving something of a drag on the vendor, the Swedish giant has pledged its continuing support, and there are some signs of light at the end of the tunnel.