Slowing of Chinese 4G orders, continuing US softness, and economic situation in Brazil and Russia, lead to fall in quarterly sales
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The Chinese market has a disproportionate effect on vendors' financial cycles, and it is an unpredictable beast. Ericsson, whose 11% second quarter revenue growth was largely due to Chinese 4G contracts, saw the opposite effect in the third quarter, which saw a decline in sales on a constant currency basis.
Revenues actually rose by 3% year-on-year to SEK59.2bn but without favourable currency movements, they would have been down by 9%.
The company blamed a slowdown in Chinese 4G, as well as economic weakness in two other critical BRIC markets, Brazil and Russia - which puts a lot of pressure on the fourth one, India, to deliver some big deals as the major carriers move towards LTE.
"In markets where there has been pressure on currencies, purchasing power has come down and we've seen that in Brazil and Russia," CEO Hans Vestberg told the earnings press conference, though he insisted the Chinese slowdown was temporary. "There is still tremendous demand for 4G in China and we've never seen such a quick roll-out. It's just that customers slowed down the pace in the third quarter."
There is no such optimism about Ericsson's biggest market, north America, which accounts for about 25% of its sales but has slowed significantly since 4G roll-outs at AT&T and Verizon peaked. This factor has been hitting Ericsson all year and it has yet to see improvements. North American sales rose by just 2% on a reported basis to SEK14.4bn ($1.7bn), with the OSS/BSS and TV platforms being rare highlights in the region. However, in an interview, Vestberg tried to be upbeat, saying: "It's not falling. It's on the level that we've seen in other quarters."
Despite these pressures, Ericsson's Q3 net income was up 19% year-on-year to SEK3.1bn ($370m), though there are concerns that too many of the profit improvements are coming from the firm's major reorganization program, which looks to reduce annual operating costs by SEK9bn ($1.06bn), rather than organic business growth. Staff numbers fell by almost 1,000 in the quarter, to 116,240 people.
Gross margin was down by 1.3 percentage points to 33.9%. In revenue terms, the worst performer was the core Networks unit, with sales down 4% even with the positive currency changes, to SEK28.8bn. Global Services is almost as big as Networks now, and its sales were up 11% to SEK27.1bn, while the third division, Support Solutions, was up 8% to SEK3.3bn.
Ericsson, like its rivals, is relying on building up new revenues in areas of growth, and claimed to have seen 10% sales increase from these sectors, though it does not break them out. Its target growth businesses are OSS/BSS, media, IP, cloud, and what it calls 'industry and society', which includes smart cities and the internet of things.