Ericsson profits tumble as 3G business dries up

The telecoms kit-maker saw quarterly profits fall 63 percent year-on-year, while Nokia's sales struggles are still deepening losses at the ST-Ericsson chip-manufacturing joint venture too
Written by David Meyer, Contributor

The telecoms equipment manufacturer Ericsson has seen revenues halved and profits fall by almost two thirds in the last year, due to a slowdown in operators building 3G networks.

The results on Wednesday came a day after ST-Ericsson, the company's chip-making joint venture, reported deepening losses, losing $318m (£204m) in the most recent quarter. The joint venture is struggling to cope with problems at its biggest customer, Nokia, which halved the price of its latest Windows Phone handset this week. 

Ericsson logo
Profits have fallen at Ericsson as its chip-making joint venture ST-Ericsson continued to struggle. Image credit: Ericsson

However, ST-Ericsson said its operating losses had decreased year-on-year, and claimed this represented the start of a turnaround.

Ericsson's net income for the second quarter of this year was 1.2 billion Swedish krona (£110m), down 63 percent from the corresponding quarter of 2011. Operating income stood at 2.1 billion SEK, down 51 percent from 4.3 billion SEK. However, sales were down only one percent, as the company's Global Services and Support Solutions businesses saw growth.

"In the quarter, demand for Global Services and Support Solutions was strong, while Networks sales decreased year-on-year mainly due to the expected decline in CDMA equipment sales as well as lower business activity in China, including weaker sales of GSM and lower 3G sales in Russia," Ericsson chief Hans Vestberg said in a results statement.

Vestberg said Ericsson's Support Solutions business was boosted by "billing systems and TV solutions". He also pointed out that operators still want to optimise their data traffic as much as they can, as demand for mobile internet services was still on the up.

"In customer conversations it is clear that the fundamental drivers for increased data traffic are unchanged," he said. "Today there are more than 700 million smartphone subscriptions and according to our estimates this number will increase to three billion in 2017. Based on these drivers, we see an increasing focus from our customers on network performance and quality of service. This will require continuous operator investments in hardware, software and services."

Sales drop

The Ericsson chief described ST-Ericsson as being in "a challenging situation due to a significant drop in sales of new products to one of the largest customers and continued decline in legacy products".

ST-Ericsson has previously attributed its heavy losses — at least in part — to the collapse in sales of Nokia's Symbian phones, which use older ST-Ericsson chips. The company also supplies newer NovaThor chipsets for Nokia's Windows Phones, but sales of those devices come nowhere near to offsetting the drop in Symbian sales.

However, NovaThor also powers a variety of mid-range Samsung and Sony Android smartphones, such as the Galaxy Beam and Xperia P. While ST-Ericsson chief Didier Lamouche had to announce deeper losses than before — the company lost $312m in the previous quarter — he was able to point to a lower operating loss.

"We are advancing towards our objective to reduce our break-even point and to reach sustainable profitability," Lamouche said.

In April, ST-Ericsson announced 1,700 job cuts and the transfer of its application processor business to joint venture partner STMicro.

"This has been a quarter of progress across the board," Lamouche said. "We ramped our NovaThor ModAp platform with Samsung and Sony Mobile Communications and also added several new Chinese key players. We are executing in a timely manner our new strategic plan to reposition our whole business model and we finalised on July 1, as anticipated, the transfer of the application processors development team to [joint venture partner] STMicroelectronics to build a world class partnership."

Lamouche added that "all profit and loss metrics showed a sequential improvement", but conceded that "further improvements in the execution of our critical programmes are needed".

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