Ericsson continues to find the going tough in North America, its largest market, with Q1 network sales falling an enormous 40 per cent year-on-year – when measured in US dollars – 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 ($600 million), while overall revenue for Ericsson’s networks business segment actually increased by 8 per cent, to SEK26.4 billion.

Strip out favourable currency movements, however, and revenue at the business unit declined by 9 per cent.

More worryingly, reported operating margin at networks – which includes an uplift from exchange rates – was squeezed from 10 per cent (Q1 2014) to 2 per cent.

“It was a disappointing quarter for networks in terms of profitability,” Jan Frykhammar (pictured), Ericsson’s CFO, told Mobile World Live. “On the other hand, we have had many quarters of good profitability at networks, and of course we still have the ambition to get back to 10 per cent.”

Hans Vestberg, Ericsson’s chief executive, attributed the margin squeeze to factors beyond the supplier’s control.

“What we’re seeing in North America over the last three quarters is very much what is happening a lot in the market,” he said. “Our customers are both buying frequencies and planning mergers. That of course has slowed down investment levels.”

But another factor outside Ericsson control – exchange rates – is one that Vestberg no doubt welcomed.

Reported group sales were up 13 per cent, to SEK53.5 billion, but fell 6 per cent without the favourable currency movements.

Vestberg, in a conference call, added that the proposed merger of Nokia and Alcatel-Lucent would not affect Ericsson’s strategy and that it was the “logical step” for the two companies to take. He declined to say whether the deal was positive or negative for the Swedish supplier.

Profit squeeze
Group operating income fell 19 per cent during Q1, year-on-year, to SEK2.1 billion. Had it not been for restructuring charges, at SEK0.6 billion, operating income would have been flat.

Frykhammar primarily attributed the subdued performance, which would have been worse without a positive net currency effect, 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 4 per cent).

The change in the business mix was also a factor in squeezing gross margins, down from 36.5 per cent (Q1 2014) 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 2 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

Cutting costs
Ericsson said its cost and efficiency programme, launched last November, 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.