Tough competition impacted Ericsson's first-quarter results with sales in Europe falling. The company says that orders for its 2G and 3G equipment experienced a major decline, while sales of LTE are generating lower than expected margins.
However, the company's first quarter net profit jumped to €983 million due to the completion of the sale of its joint venture Sony Ericsson to Sony. However, operating income excluding this handset joint venture fell 56 per cent to €313.8 million, while overall sales were down 4 per cent year-on-year to €5.72 billion.
Ericsson said sales in its first quarter of this year were impacted by "cautious operator spending in regions with macro-economic or political uncertainty" and that CDMA sales declined 40 percent from the year-ago period. However, Ericsson said demand for HSPA and LTE were strong in the quarter, following an increased focus on network performance, especially in North America.
Sales in Northern Europe and Central Asia fell 32 per cent year-over-year, while sales in western and Central Europe were down 10 percent year-over-year.
Ericsson said in the quarter it had more network coverage than capacity projects as well as European network modernization projects, which cut into its gross margins. Ericsson reported a gross margin of 33.3 percent, down from 38.5 per cent in the year-ago period. " The impact on profitability from the network modernization projects in Europe is a result of the strategic decision in 2010 to increase market share in Europe," the company said. "Efficiency activities are ongoing to mitigate these effects."
Commenting on the quarter, CFO Jan Frykhammar said upgrade deals in Europe, which produce lower profits due to harsh competition, could depress margins for several years. "Modernisation is important for us with the footprint," Frykhammar told Bloomberg. "We took the decision to improve our position in Europe and we have to live with the financial impact, which on average will be with us for 18 to 24 months," he said.
"The underlying result is fine thanks to the gross margin, which should be reassuring," Alexander Peterc, a London-based analyst with Exane BNP Paribas, told Bloomberg. "Networks sales were light because of the decline in CDMA and macro factors in regions like southern Europe."
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