Ericsson’s Q1 hit by slower networks business in North America

Ericsson reports that Q1 network sales in North America fell by 40 per cent year-on-year in US dollar terms, as US operators rein in spending on mobile broadband infrastructure.

Favourable exchange rates helped cushion the fall. Reported Q1 network sales in North America fell by 20 per cent, to SEK5.2 billion (US$600 million), while overall revenue for Ericsson’s networks business segment increased by eight per cent, to SEK26.4 billion.

Take away favourable currency movements, however, and revenue at the business unit declined by nine per cent year-on-year.

Reported operating margin at networks was squeezed from 10 per cent (Q114) to two per cent in Q115.

Reported group sales were up 13 per cent, to SEK53.5 billion, but fell six per cent without the favourable currency movements.

Group operating income fell 19 per cent during Q1, year-on-year, to SEK2.1 billion. Had it not been for restructuring charges, at SEK600 million, operating income would have been flat.

Ericsson primarily attributed the subdued performance to a change in business mix at the networks segment, as well as an increase in operating expenses (mainly driven by increased selling expenses due to negative currency effects and acquisitions).

Although declines in North American network spending was keenly felt, it was partly offset by a “continued fast pace of 4G deployments” in China.

However, coverage projects in China are less profitable for Ericsson than capacity upgrades in North America, which impacts operating income and operating margin (which dropped, year-on-year, from 5.5 per cent to four per cent).

The change in the business mix was also a factor in squeezing gross margins, down from 36.5 per cent (Q114) to 35.4 per cent.

Strains on operating income filtered through to the bottom line. Net income fell 14 per cent, to SEK1.5 billion.

There was better news at Global Services, which, even at constant exchange rates, managed to hold fairly steady on the top line with only a two per cent dip in sales. Reported revenue at the division was up 17 per cent, to SEK23.9 billion, helped by stronger performances from professional services and its network rollout business. Operating income was up 62 per cent, to SEK1.7 billion.

Sales at Support Solutions declined by 11 per cent, at constant exchange rates, although reported revenue was up 11 per cent, to SEK3.1 billion.

Ericsson also said its cost and efficiency programme, launched in November 2015, is “progressing according to plan”.

The ambition is to achieve savings of approximately SEK9 billion with full effect during 2017. As part of the plan, Ericsson announced last month that 2,200 jobs would be cut in Sweden, as well as reducing the number of consultants in its home market by 850.