Ericsson AB (Nasdaq: ERIC - message board) saw its market value crash by more than a quarter Tuesday morning after it issued a profit warning for its third quarter and said market conditions in the mobile infrastructure sector would remain tough through 2008.
The vendor's share price fell by more than 27 percent to 19.18 Swedish Kroner ($2.97) on the Stockholm exchange this morning after it announced preliminary third-quarter financials "below the company's own as well as current market expectations."
Ericsson expects third-quarter revenues to be SEK43.5 billion ($6.7 billion), operating profit to be SEK5.6 billion ($866 million), gross margin to drop to 35.6 percent, and net income to fall to SEK4 billion ($619 million). (See table below for year-on-year and sequential comparisons.)
Financial analysts had expected an operating profit of around SEK8.9 billion ($1.4 billion).
The company's full third-quarter earnings report will be published on October 25.
The shortfall is down to factors affecting the mobile infrastructure part of the vendor's Networks business unit, noted Ericsson's CEO, Carl-Henric Svanberg.
The company's other business units ¨C- professional services and multimedia (billing, messaging, IPTV, and so on) -¨C are performing well, he noted. (See table below.)
But that isn't much compensation. "This is a day to be humble, concerned and disappointed," said Svanberg during a Webcast press conference this morning. "This is a dynamic business environment... We should have talked more about it and understood more about it. We have underestimated the impact" of changes in the market, added the CEO.
So at least he's not absolving himself of any blame.
The CEO also said that fourth-quarter sales are expected to be between SEK53 billion ($8.2 billion) and SEK 60 billion ($9.3 billion), with an operating margin in the "mid-teens," compared with 22.7 percent in the fourth quarter of 2006.
The operating margin in the second quarter this year was 19.4 percent, and is expected to be 12.9 percent in the third quarter.
Blame it on the mix
So what's the problem in Ericsson's mobile networks business?
Basically, sales are lower than expected, and the mix of sales is weighted more towards the low margin products Ericsson delivers for new network builds. The company's mobile business includes more new network rollouts, in India for example, and there has been a slowdown in network expansion and network upgrade projects, particularly in North America and Western Europe. Network upgrades in particular are more profitable deals because they involve high-margin software upgrades. (See BSNL Awards $1.3B GSM Contract.)
New network build business will dominate for the rest of 2007 and through 2008, noted the CEO.
Then there's the ongoing market pricing pressure that has been affecting Ericsson's main mobile infrastructure rivals, Alcatel-Lucent (NYSE: ALU - message board) and Nokia Siemens Networks . (See AlcaLu: Pressure Is Still On, Pressure Grows on ALU, Instant Revamp for Nokia Siemens, AlcaLu Cuts 2007 Outlook by $1.25B, AlcaLu's Russo: We're Under Attack!, and Nokia Siemens Suffers Merger Blues.)
Svanberg says prices are being eroded at about 3 percent per quarter, but that Ericsson has ongoing cost-cutting measures that counter that particular factor.
Still the big hitter
Ericsson still commands a major advantage in terms of its mobile infrastructure (GSM and 3G) market share and corresponding economies of scale.