Ericsson's Q3 Revenues Up 17% on Mobile Broadband Sales

Ericsson has revealed its third quarter revenues jumped 17% year-on-year (y/y) to 55.5 billion Swedish kronor (USD8.38 billion), as it saw strong demand for mobile broadband networks, and increased services revenues. The telecoms networks vendor saw key growth in emerging regions including China and Latin America, where its revenues in the quarter jumped 39% y/y and 64% y/y, respectively:

Ericsson also revealed its operating income in the third quarter was up 9% to SEK5.66 billion; however, its closely-watched gross margin fell to 35%, from 38.2% a year earlier. In Ericsson's key Networks unit, revenues in the quarter were up 25% y/y to SEK32.5 billion, while sales at Global Services rose 7% to SEK20.4 billion, while those at Professional Services also gained 7% due to increased sales of systems integration projects. At the Swedish giant's mobile handset joint venture (JV) Sony Ericsson, net sales fell1% y/y to EUR1.59 billion (USD2.19 billion).

Outlook and Implications

• Ericsson Continues to See Cautious Spending in Developed Markets: World number one telecoms network equipment vendor Ericsson largely attributed the strong quarter to continued strong demand for mobile broadband networks, as well as increased services revenues. However, the fall in Ericsson's gross margin was cause for concern, something the vendor attributed to its exposure to network modernisation projects in Europe, which generate lower margins than building new networks from scratch. Ericsson also said it was still seeing sluggish growth in its developed markets, as economic uncertainties caused more cautious short-term operator spending. Notably, the vendor saw sales drop 6% y/y in North America, a traditionally strong market where it has targeted further growth. Ericsson blamed weaker demand prospects in the United States, saying that a positive uptake in its services business in the country couldn't fully offset the impact from a slower networks business in the region. While Ericsson is involved in a large number of next-generation LTE mobile network upgrade deals, including some key contracts in its home Nordic region (see Denmark: 11 October 2011: TeliaSonera Extends LTE Network to Cover Half of Danish Population), the vendor continues to face serious competition in the sector.
• Competition Increasing in Developing Markets: Ericsson is currently the world leader in rolling out and upgrading mobile network infrastructure, but it continues to face serious competition from local rivals Nokia Siemens Networks and Alcatel-Lucent, as well as a strong challenge from dynamic—and cheap—Asian competitors such as China's Huawei. Huawei took an estimated 16% of revenue in the global networks vendor market in 2010, coming second behind Swedish giant Ericsson, which grabbed a share of some 20%. As it continues to target growth key developing regions, Ericsson recently announced that it has been selected as the first equipment provider for TD-LTE in India (see India: 10 October 2011: Ericsson Secures India's First TD-LTE Equipment Deal). However, Huawei continues to snap at its heels, launching an enterprise business unit in the country, with the aim of generating USD1 billion from the market by 2015 (see India: 28 September 2011: Huawei Targets Enterprise Market in India).
• Some Signs of Improvement at Sony Ericsson: Ericsson's handset vendor Sony Ericsson—a joint venture (JV) with the Japanese electronics giant Sony—recently announced its third-quarter revenues had stayed fairly flat, dropping just 1.1% y/y as it saw some signs of improvement in the smartphone segment (see Sweden: 14 October 2011: Sony Ericsson Reveals Q3 Revenue Down 1.1%, Sees Smartphone Improvement). Sony Ericsson saw overall handset shipments in the third quarter drop 8.7% y/y to EUR9.5 million, but it improved its smartphone mix, with the high-end devices accounting for 80% of sales, up from about 50% in the same quarter last year—driving the average selling price of handsets up nearly 8% y/y. Meanwhile, competition is reaching fever pitch in the smartphone market ahead of the end-of-year sales boom, with Google, Samsung, RIM and Motorola all announcing new products this week, as iPhone maker Apple reports its third quarter revenues were up 39% y/y (see World: 19 October 2011: Smartphone War Heats Up Prior to Holiday Season). Meanwhile, recent reports suggest that Sony could be looking to acquire Ericsson's 50% stake in Sony Ericsson, allowing the Japanese electronics giant to integrate its smartphone business with its operations in tablets, hand-held videogame players and personal computers (see Sweden: 7 October 2011: Sony in Talks to Buy Out Ericsson Stake in Sony Ericsson—Report).