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Ericsson, the world’s biggest manufacturer of mobile phone networks, on Friday said the acquisition of Marconi of the UK and lower equipment prices were eroding its profit margins.
Reporting a 24 per cent year-on-year increase in net sales to SKr39.2bn ($5.2bn) in the first quarter, Ericsson said operating margins had declined from 21 per cent to 16.9 per cent. Excluding Marconi, sales were up 15 per cent from the first quarter of last year.
“Pricing pressure on mobile networks is very intense,” said Carl-Henric Svanberg, chief executive. “If you exclude the Marconi effect and the [growth in] managed services, margins have fallen by about 1 percentage points, which is an indication of the pricing pressures.”
Sweden’s premier technology company said Marconi had generated more business than expected but admitted the fast-growing services business had proven surprisingly difficult to digest.
“We have postponed the timings of certain actions to safeguard the increased orders and delivery commitments,” said Mr Svanberg. “As a consequence, the targeted cost savings will be realised slightly later than originally planned.”
Bengt Mölleryd, telecoms analyst at Nordea Bank, said the difficulties with Marconi could delay any further acquisitions in a consolidating sector, which this month saw Alcatel of France and its US peer Lucent announce a merger plan, he said.
Professional services sales, which include support functions from the management of networks on behalf of operators to running their products, grew much faster than equipment revenues. Ericsson reported sales of these services up 60 per cent at SKr7.2bn. Excluding Marconi, they rose 48 per cent.
Mr Mölleryd said Ericsson’s sales of professional services, driven by increasing cost-consciousness among operators, exceeded expectations by about SKr1bn in the first quarter. Because services contracts tend to be less profitable than selling hardware, particularly in the early part of a contract, analysts have raised concerns about Ericsson’s margins.
Ericsson forecast “good” growth for the global professional services market this year but said increases in network sales would be “moderate”.
Meanwhile, the company said the number of the world’s mobile phone subscribers would breach 3bn during 2007.