IHS Global Insight Perspective | |
Significance | Despite the profit slump, Ericsson is continuing to grow significantly into some key emerging markets outside its usual comfort zone and this is reflected by its revenue growth. |
Implications | With the retraction of the vendor marker expected to get worse before it gets better, Ericsson is likely to be forced to make more cutbacks before the storm passes. |
Outlook | There have been rumours that venture partner Sony is less than impressed with things at Sony Ericsson—and IHS Global Insight expects to see a significant change in the structure of the unit within the next couple of years. |
Ericsson has released its annual report for 2008, which reveals that profits (net income) fell 47% to 11.67 billion kronor (US$1.33 billion), from 22.14 billion kronor in full-year 2007, which the company is blaming on restructuring charges and a poor performance at Sony Ericsson. Revenue (net sales) at the equipment vendor were up 11% in 2008 to 208.93 billion kronor, from 187.78 billion kronor in the previous year, but operating income also fell 47% to 16.25 billion kronor in full-year 2008, from 30.65 billion kronor in 2007.
The Swedish giant managed to increase its net cash in 2008 to 34.65 billion kronor, from 24.31 billion kronor in 2007, but the vendor's operating margin fell to 7.8% in 2008, from 16.3% in 2007.
Tellingly, operating margin excluding the company's Sony Ericsson unit only rose to 8%, from 12.5% in the previous year, revealing the struggling handset division cannot be held largely responsible for the profit slump.
Ericsson revealed it has over 78,000 employees at the end of 2008, serving well over 40% of all mobile subscribers, with customers in more than 175 countries. The vendor also manages a number of operator-owned networks with approximately 250 million subscribers globally.
Outlook and Implications
- Vendor Woes Continue: Ericsson announced at the start of the year it would make further job cuts last month, in a bid to drive down costs (see World: 21 January 2009: Ericsson Cuts 5,000 Jobs as Q4 Profits Plunge 31%). The vendor's fourth-quarter and full-year figures included restructuring costs of three billion kronor, and it chiefly blamed its woes on a poor performance at its Sony Ericsson handset unit. Carl-Henric Svanberg, Ericsson president and CEO, has played down the impact of the global financial crisis, saying: "So far, our network and services businesses have hardly been affected at all by the financial markets’ turmoil. However, the vast majority of our customers are financially strong. Their networks are well dimensioned, but traffic is growing rapidly which drives the need for continued spending to maintain quality of service." However, there is increasing evidence the telecoms equipment manufacturing market is in decline. U.S. giant Nortel has recently filed for bankruptcy (see World: 3 March 2009: Nortel Network's Q4 Revenues Down 15% Y/Y Before Chapter 11), and European rival Nokia Siemens has also announced significant job cuts (see Finland: 12 November 2008: Nokia Siemens Slashes 1,250 Jobs across Finland and Germany), and sees worse to come as the market slows and aggressive price competition takes its toll (see World: 5 December 2008: Nokia Sees Mobile Markets Fall 5% in 2009, CDMA Markets Plunge). Alcatel-Lucent, crippled by debt from massive restructuring costs, has also cut jobs as it aims to make savings of one billion euro over the next two years (see World: 12 December 2008: Alcatel Lucent to Cut 1,000 Jobs in US$1.3-bil. Savings Drive). Ericsson is continuing to grow, significantly into some key emerging markets outside its usual comfort zone (see China: 18 February 2009: Ericsson Wins 30% of China Unicom 3G Network Equipment Order), and this is reflected by its revenue growth. However, with the retraction of the vendor marker expected to get worse before it gets better, Ericsson is likely to be forced to make more cutbacks before the storm passes.
- Sony Ericsson Blamed as Global Handset Sales Slow: Once again, Ericsson has largely blamed its struggling handset unit for dragging down its performance, with CEO Svanberg stating: "Weakening demand for replacement phones is, however, impacting Sony Ericsson, especially in Western Europe. The JV is adjusting to the deteriorating market conditions with significant cost reduction activities which will restore its capability for profitable growth." However, although it is true that the global economic downturn is hitting the handset vendor hard (see World: 10 March 2009: Sony Ericsson Targets Return to Profit in H2 2009), the unit only represents an estimated 10% of Ericsson's revenues. However, as business-contract losses at its handset arm are biting hard, as Ericsson is relying more on the unit to boost the global slump in the equipment market. The depressed telecoms market is causing a slowdown in customer spend, hitting the handset unit while the slump in operator spend is hitting its equipment business. There have been rumours that venture partner Sony is less than impressed with things at Sony Ericsson—and IHS Global Insight expects to see a significant change in the structure of the unit within the next couple of years.