By Sven Grundberg
STOCKHOLM--Slack demand for mobile data networks in Japan and
North America and stiff competition from rivals led Swedish
wireless networks giant Ericsson to report a sharp decline in
revenue over the first three months of the year.
The company, doing battle with the likes of China's Huawei
Technologies Co., ZTE Corp., France's Alcatel-Lucent and Nokia
Corp.'s network arm, said Wednesday revenue declined 9% in the
first quarter to 47.51 billion Swedish kronor ($7.21 billion).
While Ericsson expects a boost in the second half of the year due
to new business awards, declining revenue from two large mobile
broadband coverage projects in North America hurt the most recent
results.
Ericsson is one of the leading participants in an industry in
transition. People around the world are increasingly browsing the
web using wireless smartphones and tablets, heightening the need
for faster and more capable networks. But manufacturing of base
stations and antennas has become more commoditized, opening the
door for lower-cost competitors from China that put pressure on an
already-crowded field of telecom gear manufacturers.
As a result, the Swedish company is becoming more focused on
delivering services that often have lower margins but require less
capital. In addition, Ericsson is increasingly involved in
programming software that telecom operators use to run and
administer their networks, such as programs that help billing
operators' subscribers.
Despite declining revenues, the company posted higher net profit
during the period, mainly due to a more favorable business mix that
boosted gross margins to 36.5% in the first quarter, from 32% a
year ago. Ericsson sold a smaller share of low-margin network
rollout projects and a larger share of higher margin software
projects. "Some of our customers invested more in software to
improve network performance and user experience," the company
said.
Shares of Ericsson fell 4.6% Wednesday.
A key area of concern resides in North America, Ericsson's
single largest market. Overall revenue in the region slipped 23% in
the first quarter compared with the same period a year ago. Sales
in Northeast Asia declined 19% on the year.
Those declines were partially offset by growth in China, the
Middle East and Latin America.
Ericsson has been a beneficiary of investments into
fourth-generation LTE networks--a technology standard that offers
vastly higher mobile data speeds compared with older solutions. The
technology has been widely adopted by mobile carriers in the U.S.,
Japan, South Korea.
While Ericsson's revenue miss in the first quarter was
substantial, Lars Söderfjäll, an analyst at Ålandsbanken in
Stockholm, said Wednesday's results may not be a proxy for the
wider industry. "This business leans heavily on single projects and
individual customers, so I'd be careful to read too much into
Ericsson's earnings as far as its competitors are concerned," he
said.
Huawei, for instance, has seen revenue and earnings climbing
steadily in recent years despite operators' reluctance to increase
spending on networking equipment. Last month, it forecast an 8%
rise in revenue from its mainstay telecom-network-equipment
business.
A key reason for optimism is that the deployment of 4G network
technology still has plenty of frontiers to penetrate. Large parts
of Western Europe, for instance, have lagged behind Japan and the
U.S. in deploying ultrafast LTE networks.
Ericsson, however, said Western Europe remained roughly flat in
the first quarter, compared with a year earlier even as operator
investments in Europe are expected to pick up following the
prolonged economic slump.
Ericsson's European performance is set for a boost as it has
been awarded a five-year contract from Vodafone Group PLC as part
of the mobile operator's effort to beef up its networks. Ericsson
didn't disclose the size of contract, but said it involves
upgrading and expanding Vodafone's older 2G and 3G networks, as
well as participating in the build-out of its fourth generation
network in Europe.
Ericsson's net profit came in at 2.12 billion kronor, up from
1.21 billion kronor a year ago, when profits were weighed by
restructuring costs. Operating income increased 25% on the year to
2.63 billion kronor.
Write to Sven Grundberg at sven.grundberg@wsj.com
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