Steep rise in costs hits Ericsson bottom line

The Swedish telecommunications giant Ericsson has reported a 92 per cent fall in fourth-quarter net profit, blaming rising restructuring costs and lower sales.

The Swedish telecommunications giant Ericsson has reported a 92 per cent fall in fourth-quarter net profit, blaming rising restructuring costs and lower sales as mobile operators cut spending on upgrading and expanding networks. Net income slumped to 314 million kronor (Dh160.2m) from 3.89 billion kronor a year earlier, the company said yesterday. The world's largest maker of wireless equipment also said it would cut another 1,500 jobs.

Ericsson gave no outlook for the current year, but said that during last year, operators in a number of developing countries had been increasingly cautious with investments. But markets including China, India and the US remained strong, and the market for professional services - such as maintaining and running operators' networks - was robust. "During the second half of 2009, networks' sales were impacted by reduced operator spending in a number of markets," said Hans Vestberg, the chief executive of Ericsson. But Mr Vestberg said the company held its market share in all business segments and service demand remained strong.

The company launched a cost-cutting programme, which included 5,000 staff redundancies, in January last year and estimated restructuring costs of between 6bn and 7bn kronor. The programme is expected to be completed by the second quarter of this year. Total annual savings of between 15bn and 16bn kronor are anticipated, with total restructuring costs of between 13bn and 14bn kronor, plus the additional 1,500 job cuts announced yesterday. Ericsson had about 83,000 staff at the end of last year.

Restructuring costs in the fourth quarter increased sharply to 4.3bn kronor from 2.3bn kronor a year earlier. Those costs, together with falling sales, hurt net profit for the last quarter to the end of December. Operating profit excluding restructuring charges and joint ventures fell to 7.5bn kronor from 9bn kronor in the same quarter a year earlier. "The market is weak but one might have hoped for some recovery in Q4," said Michael Andersson, a senior analyst at the Finnish firm Evli Bank.

"They're saved by cost cuts and that will probably be the case in 2010, so it's in no way a disaster. But it's hard to see any trigger in this when sales are down so much." Ericsson's rival, the France firm Alcatel-Lucent, reckons the market will be flat or grow a maximum of 5 per cent this year while Nokia Siemens Networks predicts no growth. Along with other telecoms companies, Ericsson has in the past year suffered from slowing demand as the operators that buy its equipment spent cautiously in the economic downturn.

But service sales have been stable, in part because many customers have outsourced the management of their networks to better control costs. Ericsson last summer won a seven-year contract to maintain the networks of the US-based telecoms group Sprint Nextel. The company, based in Stockholm, has seen intense competition in its equipment business from vendors including Chinese rival Huawei Technologies, which in recent months has secured several network deals with European operators such as Norway's Telenor with its low prices and improved quality.

Ericsson's fourth-quarter operating profit, excluding loss-making joint ventures and restructuring costs, was 7.5bn kronors. Sales fell 13 per cent to 58.33bn kronor, against expectations for 60.1bn kronor. Earnings before interest and taxes fell to 1.79bn kronor from 6.21bn, well below expectations of 4.76bn kronor. * with Dow Jones and Reuters