Ericsson is finally growing again, but there is a snag. Rising sales are coming at the cost of lower profitability, at least if fourth quarter results released on Tuesday are any indication. Investors shouldn’t be too despondent though – the telecom equipment maker is holding its own in an increasingly attractive market.
Ericsson’s sales rose 7 per cent year-on-year in the fourth quarter after more than a year in the doldrums. It is selling more network hardware and less software as operators roll out new networks or modernise old ones. Operators in India, for example, are rolling out a third-generation network. As this is commoditised and low-margin stuff, the group gross margin fell from 39 per cent in the third quarter to 37 per cent in the fourth. But building these networks also keeps Ericsson’s feet firmly under the emerging markets table, despite fierce competition from the likes of China’s Huawei. Half of all new mobile subscribers in the fourth quarter were in China and India; Ericsson cannot afford to be squeezed out.
Not that the developed world is standing still. Ericsson’s sales in the US more than doubled last year, far outstripping any emerging market, helped by its acquisition of Nortel. Smartphones, dongles and tablets forced US operators to roll out new technology to cope with extra mobile data traffic. European operators are in a stronger position, having spent lavishly on networks a decade ago, but even they will have to increase capital expenditure if traffic continues to double each year, as Ericsson expects.