Ericsson's sales in the quarter increased by 23% year-over-year to SEK 67.0 billion (54.5) and by 11% for the full year to SEK 208.9 (187.8) billion. The company said the global economic downturn so far has had limited effect on mobile network investments by its customers. The handset market, however, has been clearly affected, as seen in Sony Ericsson's results last week. The company said it is difficult to predict to what extent consumer telecom spending will be affected and how operators will act. Operators are generally financially strong, the networks are fairly loaded and traffic continues to increase. However, large currency movements and uncertainties in the credit markets could affect operators' investment capacity. In this respect, Ericsson announced a further 5,000 job cuts (including 1,000 in Sweden) in order to position itself with lower on-going costs.
Ericsson cited a number of other positive market indicators. Mobile subscriptions grew by some 176 million in the quarter to a total of 3.98 billion. The number of WCDMA subscriptions grew by 24 million to a total of 290 million. In the twelve-month period ending September 30, 2008, fixed broadband connections grew by 20% year-over-year to more than 385 million. In addition, broadband Internet revenues for fixed operators are expected to grow from 20% to more than 30% of total revenues in the next five years. Mobile operators' data revenues, currently at some 20% of total revenues, are expected to grow even faster. Currently, 20 million households are served by IPTV. This is expected to grow to approximately 100 million households within the same timeframe.
Some highlights from the quarterly financial report:
In the quarter, Ericsson's gross margin was 35.2% (36.1%), excluding restructuring charges. Full year gross margin amounted to 36.8% (39.3%). The sequential decline was mainly due to a high proportion of network rollout services. The network rollout sales increased sequentially by 61%.
Ericsson's net cash position increased sequentially to SEK 34.7 (30.2) b. Cash, cash equivalents and short-term investments amounted to SEK 75.0 (57.7) b. Of a total debt position of SEK 30.5 b., SEK 5.5 b. matures in the next twelve months.
Restructuring charges are estimated to SEK 6-7 b. and annual savings of SEK 10 b. are expected by the second half of 2010, with an equal split between cost of sales and operating expenses.
Networks
- Sales in Networks increased by 22% in the quarter, year-over-year, positively impacted by a weaker SEK. For the full year sales grew by 10%. 2008 was another record year for rollout of GSM. In addition, major 3G rollouts are ongoing in many markets while key markets, such as China and India, will soon start their 3G buildouts.
- Mobile broadband is now firmly established and networks with speeds of 21 Mbps have been launched in several countries. LTE is established as a true global world standard for mobile broadband. In January, 2009, Ericsson announced its first contract for a commercial LTE network.
- The transition from traditional circuit switching to softswitching has come far and Ericsson has established a clear leadership position. Sales of Redback's SmartEdge products noted very strong growth for the second consecutive quarter .
- Sales of network rollout services increased 61% sequentially, reflecting a high proportion of completions of large new network buildouts.
Professional Services
- Sales of Professional Services increased by 34% in the quarter, year-over-year, and by 14% for the full year. Growth in constant currencies amounted to 26% and 13% respectively. Managed services continued to grow substantially, and consulting and systems integration showed strong growth due to a high amount of customer projects finalized during the quarter. Operating margins in the quarter reached18% (15%) due to favorable mix, continued efficiency gains and high volumes.
- During the quarter, 11 new managed services contracts were signed. The total number of subscribers in managed operations now amounts to 250 million, of which 60% are in high-growth markets. The growth in managed services is fueled by operators' desire to reduce operating expenses and improve efficiency in network operation and maintenance.
Multimedia
- Sales in Multimedia increased by 4% in the quarter, year-over-year, and by 13% for the full year. For comparable units, i.e. excluding divestment of the enterprise PBX operations and adjusted for the transfer of the IPX operations, sales grew by 21% in the quarter, year-over-year and by 16% for the full year. Tandberg Television and revenue management continued to show good growth while the mobile platform business is starting to experience effects of the weakening handset market. Operating income in the quarter, excluding effects from the divestment of shares in Symbian, was SEK -0.2 (-0.4) b.
Regional Trends
Western Europe sales increased by 5% in the quarter, year-over-year, and decreased by 2% for the full year. The year-over-year increase in the quarter was driven by strong performance mainly in Germany, Denmark and Italy. The strong sequential increase of 39% is above normal seasonality and driven by good demand for mobile broadband and professional services.
In Central and Eastern Europe, Middle East and Africa, sales increased by 24% in the quarter, year-over-year, and by 9% for the full year. A strong year-over-year quarterly performance in Nigeria, Saudi Arabia and South Africa is driven by continued 2G buildout, while a strong growth in Russia is driven by ongoing 3G rollouts.
Asia Pacific sales increased by 49% in the quarter, year-over-year, and by 16% for the full year. The Chinese market rebounded after the Olympic Games. 3G licenses were awarded in the beginning of January 2009 and rollouts will start soon. India, with large network rollouts, remains Ericsson's largest and fastest growing market. Japan and Indonesia showed strong development in the quarter and are now Ericsson's fifth and sixth largest markets. The market in Pakistan is still weak due to political uncertainties.
Latin American sales increased by 16% in the quarter, year-over-year, and by 25% for the full year. The year has been impacted by a combination of 2G enhancements and 3G buildouts, and 3G is now an established technology across the region. Mexico and Brazil showed strong development, both in the quarter and for the full year, and show no signs of slow-down despite the economic downturn.
North American sales increased by 13% in the quarter, year-over-year, and full year sales increased by 34%. The recorded slower growth in the fourth quarter is mainly an effect of a tough year-over-year comparison despite positive effects of the increasing USD in the fourth quarter. For the full year, the effects from changes in currency exchange rates were limited. Mobile broadband is now well established with good consumer take-up, which is driving continued rollouts as well as capacity enhancements.
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