Wednesday, Swedish telecommunications equipment maker LM Ericsson Telephone Co. (ERIC) reported a 30% decline in fourth-quarter profit, hurt by restructuring charges and a drop in the contribution from Sony Ericsson Mobile Communications AB, its JV with Sony Corp. (SNE). However, top line grew 23% on strong double-digit sales growth in Networks and Professional Services businesses as well as Asia Pacific region.
Further, Ericsson announced additional cost reduction initiatives, targeting annual savings of SEK 10 billion from the second half of 2010, which would result in about 5,000 job reductions, including about 1,000 in Sweden.
Fourth-quarter net income was SEK 4.06 billion, down from SEK 5.82 billion recorded last year. Net income attributable to stockholders of the parent was SEK 3.89 billion, 31% lower than SEK 5.64 billion a year ago, while earnings per share fell 32% to SEK 1.21 from prior year's SEK 1.77. The company pointed out that its earnings per share in the previous year are restated to reflect the reverse split 1:5, which was made in June 2008.
On a sequential basis, quarterly net income climbed 37% from SEK 2.8 billion and earnings per share rose 36% from SEK 0.89 reported in the third quarter.
Restructuring charges in Ericsson amounted to SEK 2.3 billion in the fourth quarter, related to its cost reduction initiatives. Ericsson's share of the restructuring charges in Sony Ericsson amounted to SEK 0.7 billion for the quarter.
Ericsson's share in Sony Ericsson's loss before tax was SEK 1.3 billion, compared to profit of SEK 2.3 billion a year ago. On January 16, Sony Ericsson Mobile Communications, the mobile-phone joint venture between Sony and Ericsson, reported a net loss of EUR 187 million for the fourth quarter compared with a profit of EUR 373 million last year, hurt by 23% fall in sales to EUR 2.91 billion, and restructuring costs. Sony Ericsson was affected by the economic downturn and the declining demand in the consumer market, Ericsson said in its statement, noting that it has taken necessary actions.
In the quarter, Ericsson's net sales climbed to SEK 67.03 billion from SEK 54.46 billion a year ago, reflecting good demand for entire portfolio, while the growth was 36% from SEK 49.2 billion recorded in the preceding third quarter.
According to the company, the currency exchange rate swings, especially towards the end of the year, positively impacted sales growth in the fourth quarter significantly. Excluding currency exchange rate effects, the fourth quarter still showed the strongest growth in the year.
The currency translation effects during the quarter were offset by the negative effects of transaction hedges, noted the company.
Gross income rose 15% year-over-year to SEK 22.50 billion, while gross margin fell to 33.6% from prior year's 36.1%. Excluding restructuring charges, gross margin was 35.2% in the quarter, lower than last year's 36.1%.
Research and development expenses rose 3% and selling and administrative expenses grew 15%, other operating income and expenses climbed 92%, and the company's share in earnings of JV and associated companies plunged 154% to SEK 1.28 billion.
Reflecting these, Ericsson's operating income fell 18% from last year to SEK 6.21 billion, and operating margin declined to 9.3% from last year's 14.0%. Before restructuring charges, operating income amounted to SEK 9.2 billion, higher than last year's SEK 7.6 billion, while adjusted operating margin dropped to 13.7% from 14% last year. The operating income for the quarter included a capital gain of SEK 0.8 billion from the divestment of shares in Symbian and a loss of SEK 0.7 billion from Sony Ericsson.
On a segmental basis, Networks sales climbed 22% year-over-year to SEK 45.8 billion, positively impacted by a weaker SEK. Sales of network rollout services were SEK 7.6 billion, up 17% from last year.
Professional Services sales in the quarter surged 34% to SEK 16.2 billion, of which managed services sales grew 29% to SEK 4.3 billion. Growth in constant currencies amounted to 26%. The total number of subscribers in managed operations now amounts to 250 million, of which 60% are in high-growth markets.
In the quarter, Multimedia sales rose 4% from last year to SEK 5 billion. 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.
Geographically, Western Europe sales increased 5% to SEK 16.1 billion, driven by strong performance mainly in Germany, Denmark and Italy. In Central and Eastern Europe, Middle East and Africa, sales climbed 24% to SEK 17.6 billion, with strong year-over-year quarterly performance in Nigeria, Saudi Arabia and South Africa, driven by continued 2G buildout, while a strong growth in Russia was driven by ongoing 3G rollouts.
Asia Pacific sales surged 49% in the quarter to SEK 20.5 billion, mainly reflecting the Chinese market that rebounded after the Olympic Games. According to the company, India, with large network rollouts, remains its largest and fastest growing market, while Japan and Indonesia showed strong development in the quarter and are now Ericsson's fifth and sixth largest markets.
Sales in Latin American grew 16% to SEK 7.9 billion, mainly on strong development in Mexico and Brazil. North American sales also rose 13% to SEK 4.9 billion, however, the growth was slowed mainly due to effect of a tough year-over-year comparison despite positive effects of the increasing USD in the fourth quarter.
In the quarter, mobile subscriptions grew by some 176 million to a total of 3.98 billion. The number of WCDMA subscriptions rose by 24 million to a total of 290 million.
Among peers, Alcatel-Lucent (ALU) is scheduled to announce its fourth-quarter results on February 4. Analysts are of the view that the company will record earnings of $0.21 per share on revenues of $7.48 billion.
Another rival, Motorola Inc. (MOT) is scheduled to report its fourth-quarter earnings on February 3. On January 14, the company reported a preliminary fourth-quarter loss amid weaker-than-expected handset sales. Fourth-quarter sales are estimated to be between $7.0 billion and $7.2 billion. Meanwhile, analysts estimate breakeven earnings on sales of $7.20 billion for the quarter.
For fiscal 2008, Ericsson's net income plunged 47% to SEK 11.67 billion from last year's SEK 22.14 billion. Net income attributable to stockholders declined 48% to SEK 11.27 billion from SEK 21.84 billion a year ago, while earnings per share fell 49% to SEK 3.52 from prior year's SEK 6.84.
Annual net sales grew 11% to SEK 208.93 billion from SEK 187.78 billion in the previous year. Meanwhile, gross margin dropped to 35.5% from prior year's 39.3%.
Commenting on the results, Carl-Henric Svanberg, President and CEO of Ericsson said, "We have had a solid performance in 2008. During the year, we saw some 650 million new mobile subscriptions and the 4 billion milestone is now reached. 2008 was also a breakthrough year for mobile broadband."
"The economic recession is spreading across the world. The effects on the global mobile network market should not be that significant as most operators have healthy financial positions, there is a strong traffic growth and the networks are fairly loaded. It remains, however, difficult to more precisely predict to what extent consumer telecom spending will be affected and how operators will act. To date, our infrastructure business is hardly impacted at all, but it would be unreasonable to think that this would be the case also throughout 2009," Carl-Henric Svanberg added.
Ericsson said it exceeded its cost reduction targets launched in 2008. In the present environment, the company expects to continue to reduce costs, with restructuring charges of SEK 6 billion - SEK 7 billion, targeting annual savings of SEK 10 billion from the second half of 2010, with an equal split between cost of sales and operating expenses.
In February 2008, the company had announced a cost reduction plan of SEK 4 billion in annual savings, including estimated charges of the same size, and all related activities were launched by the third quarter, and it was announced that further charges would be made in the fourth quarter.
As part of the latest cost reduction initiatives, the company said it is leveraging synergies between different technologies, in-house and acquired, and will reduce the number of software platforms and increase the re-use of hardware. The company also will also move certain activities to low-cost countries.
Further, the company said there will be reduction in the number of consultants and other temporary staff, consolidation of R&D sites and layoffs. The company expects the cost reduction activities to result in a reduction of the number of employees by some 5,000, of which about 1,000 in Sweden, primarily in Stockholm.
Ericsson also said its Board of Directors will propose to the Annual General Meeting a dividend of SEK 1.85 per share, lower than last year's SEK 2.50 per share.
Looking ahead for fiscal 2009, the company sees R&D expenses to be at around SEK 27 billion to SEK 28 billion, including amortizations/write-downs of intangible assets related to major acquisitions previously made and excludes Ericsson Mobile Platforms, restructuring.
In addition, the company noted that 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. The number of households served by IPTV is expected to grow to approximately 100 million from the current 20 million households within the same timeframe.
ERIC closed Tuesday's regular trading session at $6.61, down $0.62 or 8.58%, on a volume of 9.9 million shares. In the past 52 weeks, shares have been trading in a range of $5.49 - $14.00.
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