Ericsson Underperforms
LM Ericsson Telephone Company (ERIC) reported earnings from continuing operations
of about 14 cents for the second quarter of 2010, below the Zacks Consensus Estimate of 17 cents. This does not include restructuring charges of SEK 2.0 billion ($263.8 million) charged in the second quarter.
Revenues in the quarter were down 8% year-over-year and were up 6% sequentially. Sales for comparable units adjusted for currency declined 15% year-over-year. During the quarter, operators in multiple developing markets exhibited robust demand for mobile broadband. This was partly offset by component shortages. Gross margin, not including restructuring expenses, improved year-over-year and sequentially to 39% due to production efficiency and sales mix.
Integration expenses of CDMA and GSM businesses, trials for next generation telephony and increasing investment in research & development activities augmented operating expenses to SEK 13.9 billion, not including restructuring charges. This is despite the beneficial effects of cost-reduction initiatives.
Ericsson's share in earnings of joint ventures, before tax, amounted to a loss of SEK 0.1 billion, not including restructuring charges, compared to loss of SEK 0.3 billion in the first quarter. Sequentially, Sony Ericsson improved sales and margins significantly due to efficiency programs and new products, while ST-Ericsson's loss remained sequentially flat while sales declined sequentially.
Segment Results
Networks
Despite being positively impacted by CDMA sales, Network sales in the quarter declined by 12% year-over-year. However, tight industry component supply conditions affected sales in the quarter. This was more than offset by the acquired CDMA operations. Voice-backed sales, such as 2G access and circuit switched core continued to decline. Demand for microwave based backhaul solutions was healthy in the quarter.
Global Services
Global Services sales were flat year-over-year and surged 11% sequentially. Professional Services sales expanded 5% year-over-year and growth amounted to 9% year-over-year in Swedish Krona. Managed Services sales in the quarter increased by 23% year-over-year. Network Rollout sales declined 12% year-over-year.
Multimedia
Multimedia sales in the quarter declined by 27% year-over-year and grew 5% sequentially, due to continued slower sales of revenue management solutions in Sub-Saharan Africa, Middle East and India. Sales in multimedia brokering (IPX) and TV business were firm with robust demand for compression technology and IPTV solutions.
Sony Ericsson
Units shipped in the quarter were 11 million, a decline of 20% year-over-year and increase of 5% sequentially. Sales in the quarter were EUR 1,757 million, an increase of 4% year-over-year. Driven by improved product and geographical mix, average selling price increased by 31% during the quarter.
Ericsson's share in Sony Ericsson's income before tax was SEK 0.1 billion in the quarter.
ST-Ericsson
Net sales in the quarter showed a 10% decrease sequentially, due to the shock of the portfolio reshuffle and weaker-than-expected performance in Asia. It was partly neutralized by performance in EDGE products. Ericsson's share in ST-Ericsson's income before tax, adjusted for IFRS, was negative SEK 0.4 billion in the quarter, including restructuring charges of SEK 19 million.
Regional Reporting Pattern
As of Jan 1, 2010, the geographical reporting has changed. Instead of five geographical areas, ten regions are reported, which mirror the new internal geographical organization.
Market Data
While the global mobile infrastructure market declined by more than 10% in 2009 and also in the first quarter of 2010, measured in dollars, the company believes that the fundamentals for longer-term positive development for the industry remain solid. Global mobile data traffic has surpassed voice traffic. In addition, 3G/WCDMA traffic has surpassed GSM traffic.
Ericsson's findings show that mobile data traffic globally rose 280% during the last two years and is expected to double annually over the next five years. The Mobile subscriptions grew by 190 million in the quarter to a total of 5 billion, returning to higher growth levels. Global mobile penetration is now 72%. China and India alone accounted for 50% of net additions with 33 and 61 million respectively. The worldwide number of new WCDMA subscriptions grew by 40 million in the quarter to a total of 530 million.
Acquisition
On Jun 30, 2010, Ericsson completed the acquisition of Nortel's majority shareholding (one share more than 50%) in LG-Nortel, the joint venture of LG Electronics and Nortel Networks. The purchase price was $242 million on net-cash basis with the retirement of the target company's debt. The acquisition is expected to be accretive to Ericsson's earnings within a year.
Headquartered in Stockholm, Sweden, LM Ericsson Telephone Company is a multinational company engaged in manufacturing and selling wireless infrastructure equipment to the telecom sector. It is a total network solutions provider, serving wireless and wireline operators, enterprises, and consumers.
We currently have a Neutral recommendation on Ericsson.
Ericsson Underperforms
By: Rex Camposagrado
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