Ericsson, the world’s largest maker of wireless networks by sales, suffered deteriorating margins and sharply lower revenue in the first quarter amid tough competition for contracts to modernise mobile networks.
The Swedish company said it had seen a “major decline” in sales of older wireless technology - with revenues down 18 per cent year on year in this network division - and that new projects for building 4G networks were proving lower margin as it fought for market share again fierce competition from China and other European equipment providers.
Hans Vestberg, chief executive, told the FT that the group had made a “conscious decision” to gain market share in highly competitive network modernisation projects, as well as increased its expenditure on research.
Pre-tax profits in the quarter more than doubled to Skr8.8bn ($1.4bn) due to the completion of the sale of Sony Ericsson, the handset maker, but operating income excluding this and joint ventures fell 56 per cent to Skr2.8bn. Sales were down 4 per cent year on year to Skr51bn in total, with sales in northern and central Asia down 32 per cent and, in India, by 55 per cent.
Ericsson has been struggling since the second half of 2011, struck by lower margins as the group shifts its business focus to the next generation LTE networks in the face of weak global demand and competition from Chinese competitors such as Huawei.
Gross margins fell 5.2 per cent to 33.3 per cent from the same quarter last year, although this beat analyst’s expectations and was up from the 30.2 per cent in a dismal fourth quarter of 2011. Shares in the company were up 3 per cent to Skr65.80.
The company was upbeat about the future. “The impact on profitability from the network modernisation projects in Europe is a result of the strategic decision in 2010 to increase market share in Europe,” it said. “Efficiency activities are ongoing to mitigate these effects.”
Sales were affected in the quarter by weak economic conditions in Europe and regulatory problems in India, said Mr Vestberg.
“Sales of high-performance mobile broadband developed well in North America, Japan and Korea, while other regions such as Europe including Russia, parts of the Middle East and India, were weaker,” he said.
The best performing region was Latin America, where sales were up 20 per cent from the same quarter last year. In the all-important US market, sales fell 3 per cent.
The worst results came from the company’s network division where revenues fell 18 per cent from the same quarter last year and margins fell from 17 per cent to 6 per cent. Sales in the older network system fell 40 per cent year-on-year.
The results were not helped by losses from ST-Ericsson, a joint venture between Sweden’s Ericsson and Franco-Italia STMicroelectronics, which this week said it would slash 1,700 jobs, or 25 per cent of its workforce, in an effort to accelerate cost cuts following rapidly declining sales to Nokia, its key customer.