Telecom Lead Europe: Ericsson’s Networks sales declined
17.9 percent year-to-year in 1Q12, reflecting ongoing trends in North America
and India both at the company and within the industry as a whole, which became
more pronounced in 2H11. Worldwide CDMA sales were down 40 percent in the
quarter, though the decrease can be mainly attributed to North America, where
Verizon has cut back significantly on CDMA investments and Sprint is focused on
upgrading to LTE through its Network Vision project, of which Ericsson is a
major supplier. Networks revenue in North America fell 18 percent year-to-year
due to Verizon’s capex contraction, but was partially offset by strong HSPA
sales at AT&T and T-Mobile USA, as well as a recovery of LTE sales at Tier
1’s following a weak 4Q11.
The 71 percent decline in Indian Networks revenue was
driven by the conclusion of 3G supply deals, as well as the revocation of 2G
licenses from Indian operators, which caused them to halt investment and wait
for government regulators to clarify the situation. India is in between network
technology investment cycles, and will remain so for 2012.
Operating margin declines continued in 1Q12, as the
company emphasizes market share gains in the short term
Operating margin of 17.8 percent reflects the €1.05
billion (or $1.47 billion) gain made from the sale of Ericsson’s stake in Sony
Ericsson. However, adjusted operating margin, which includes just Ericsson’s
core segments, fell 640 basis points year-to-year to 5.5 percent, its lowest
point since the depths of the financial crisis in 4Q09. The acquisition of
Telcordia, which is a highly profitable company, was accretive to the Support
Solutions unit and helped drive that segment’s operating margin 1,390 basis
points higher year-to-year to -0.9 percent.
The Networks unit, which makes up over 53 percent of
Ericsson’s total revenues, posted operating margin of 6 percent and has
declined sequentially for four consecutive quarters. The declines indicate
Ericsson is executing its strategy of pursuing market share gains over margin
performance in the short term, which has manifested itself in a greater number
of low margin network modernization deals and coverage buildouts. Ericsson is
under pressure to keep prices low to retain customers, especially in Europe,
where low-cost Chinese vendor Huawei is making significant inroads. When
operators increase capex outlays due to network congestion in densely populated
areas, Ericsson will be able to win higher margin capacity deals from current
coverage customers.
Ericsson revamped its Multimedia business, now called
Support Solutions, and outlined key focus areas for growth going forward
Ericsson’s Multimedia unit was renamed Business Unit
Support Solutions in February 2012. The unit’s focus areas include OSS/BSS, TV
& Media, and M-Commerce. Per Borgklint will remain at the helm as Senior
Vice President and Head of Business Unit Support Solutions. As part of the
reorganization, Ericsson discontinued its Money Service, which enabled users to
transfer money on their mobile phones. The company will instead focus on mobile
money service enablement for operators.
With the integration of Telcordia well underway, Ericsson
is positioned to capitalize on operator interest in service fulfillment,
assurance, network optimization, and real-time charging, which are core
competencies of the newly acquired company. The reorganization places a
spotlight on customer experience management (CEM), which is a strategic focus
area for telecom vendors going forward. Similar to NSN, Ericsson is focusing on
services, mobile broadband and CEM. However, unlike NSN, Ericsson has given no
indication that it will sell its fixed business or BSS assets, as it uses its
status as an end-to-end supplier of fixed and wireless as a strategic
advantage, and will leverage Telcordia to offer end-to-end OSS/BSS solutions.
Michael Soper, Networking & Mobility Research
Analyst, Technology Business Research
