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Economic woes hit vendors

Major vendors saw profits decline amid ongoing weakness in the world economy

Ben Verwaayen, CEO, Alcatel-Lucent, said that the company would reduce its headcount and exit non-profitable contracts.
Ben Verwaayen, CEO, Alcatel-Lucent, said that the company would reduce its headcount and exit non-profitable contracts.

Telecoms vendors continued to struggle in the second quarter of the year as a sluggish global economy led to a decline in network investments.

Ericsson, Alcatel-Lucent and Huawei have each posted grim results with year-on-year profits in retreat.

Alcatel-Lucent said that it planned to slash spending by a total of EUR1.25 billion ($1.5bn) and axe 5000 jobs by 2013, following poor second quarter results.

The Paris-based vendor posted revenues of EUR3.5 billion in Q2, down 7.1% year-over-year, but up 10.6% quarter-over-quarter. It made an operating loss of EUR31 million in Q2, and stated that it expected its adjusted operating margin in the second half of 2012 to be better than first half. The vendor also said that it targeted a "strong positive net cash position" at year-end 2012.

Ben Verwaayen, CEO Alcatel-Lucent, said: "These times demand firm actions, but as this will involve shrinking our employee base and exiting certain non-profitable contracts we will use The Performance Program to execute in a measured fashion."

Alcatel-Lucent's networks business saw a double-digit decline in the second quarter compared to the previous year while "high single digit growth" in its IP business was "more than offset" by the double digit declines in both wireless and optics, the vendor said.

From a geographic standpoint, also adjusted for constant currency and compared to the year ago period, North America witnessed a double digit decline, due to a high comparison base, whilst Central and Latin America recorded its seventh consecutive quarter of double digit growth. Eastern Europe resilience, driven by Russia, tempered the Western Europe double digit decline. Asia Pacific experienced a double digit decline, mainly driven by China falling 21%.

Globally, Swedish vendor Ericsson also felt the effects of the ongoing economic turmoil, with net profits plummeting by 63% in Q2 to SEK1.2 billion ($174 million), compared to SEK3.2 billion the previous year. This decline came despite a small increase in global revenues, which reached SEK55.3 billion in Q2, representing growth of 1%.

Hans Vestberg, CEO and president of Ericsson, said: "In the quarter, demand for global services and support solutions was strong, while networks sales decreased YoY 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.

"In global services all areas showed good growth in the quarter due to operators' focus on operational efficiency and high project activities. The strong development for support solutions was driven by billing systems and TV solutions. Global services and support solutions together represented about half of the group's revenues. The growing global services business has a dilutive impact on gross margin," he added.

But it was not just European vendors that suffered. Chinese vendor Huawei posted an operating profit of CNY8.79 billion ($1.38bn) the first half of 2012, a decline of 22% compared to the same period in 2011. The steep decline came despite the vendor increasing its sales revenue by 5.1% to CNY102.7 billion over the same period.

"In 2012, Huawei outlined our new pipe strategy and we will focus even further on this approach moving forward to ensure more effective growth and greater efficiency to drive continued improvements in operating performance," said Ms. Meng Wanzhou, CFO, Huawei. "We are relatively optimistic about our operating performance and profitability for the remainder of 2012."

Despite tough conditions globally, Ericsson continued to see strong growth in the Middle East and Africa in Q2, offering a stark contrast to Europe and India, which were particularly weak for the vendor. It posted year-on-year sales growth of 26% in Sub-Saharan Africa in Q2, with sales reaching SEK 2.8 billion ($0.4bn).

The Middle East experienced slower year-on-year growth, with sales up 4% in Q2 compared to the same period last year. Middle East sales reached SEK3.7 billion. However, this figure represented a 17% rise compared with Q1.

Ericsson said that sales growth in the Middle East was mainly driven by sales in global services and support solutions. It added that political unrest "is still impacting the region" and stated that operators in those countries continue to be cautious with infrastructure investments.