LM Ericsson Telephone reported a 10% decline in first-quarter sales to SEK 49.33 billion, with EBIT falling to SEK 1.44 billion. Despite a sales contraction in North America and warnings about increasing component costs, the Swedish telecommunications equipment manufacturer maintains its expectation for growth in its network business.
The company stated on Friday that its core network division achieved 7% organic sales growth for the quarter. The decline in North America was counterbalanced by growth in most other regions. While Ericsson anticipates the global network market to remain flat overall this year, it expressed confidence in its ability to outpace the broader industry.
Sales growth in the network business within Europe, the Middle East, and Africa was driven by network modernization and the ongoing commercialization and deployment of 5G technology. Shipment volumes also increased in India and Japan. The sales decline in North America was attributed to high network investment levels in the prior year and a temporary reallocation of spending by some customers.
According to the earnings report, the adjusted gross margin for the network business was 50.4%, aligning with the company's guided range of 49% to 51%. Ericsson forecasts that the division's gross margin for the second quarter will remain within this same band. The company also indicated it expects second-quarter network sales growth to be roughly in line with the three-year average seasonal increase of approximately 4%.
However, the company cautioned that the broader macroeconomic and geopolitical environment introduces heightened uncertainty, posing corresponding risks to its performance outlook.
CEO Börje Ekholm noted that the company's prior investments in building a robust and diversified supply chain have enabled it to maintain stable customer deliveries amidst geopolitical and macroeconomic instability. He simultaneously warned that component prices are rising.
"We are facing continuously increasing input costs, particularly in semiconductors, partly driven by AI-related demand," Ekholm said. "Our aim is to manage these challenges through close collaboration with customers and suppliers, advancing product substitutions, and enhancing operational efficiency."
During Friday's analyst call, the company confirmed that pressure from component price increases is materializing. It emphasized, however, that these costs represent a relatively small portion of Ericsson's total cost structure. To mitigate the impact, the company has implemented measures, including sharing cost increases with customers through pricing adjustments.
"Although our position is relatively favorable, we are not entirely immune to these disruptions, and therefore they will impact product pricing and supply conditions," Ekholm stated.
The company has also experienced some effects from the conflict in the Middle East. Executives mentioned on the call that they have incurred additional logistics costs due to having to adjust certain shipping routes and change the paths of some cargo deliveries.
Ekholm explained that Ericsson, which has a distribution hub in the Middle East, was affected by the hostilities. However, the company's agile supply chain has fully absorbed the impact, and it will continue to monitor and manage the situation effectively.
Ericsson's first-quarter EBIT of SEK 1.44 billion (approximately $156.7 million) was negatively affected by unfavorable currency exchange rates and restructuring charges related to the previously announced job cuts in Sweden. This compares to an EBIT of SEK 5.93 billion in the same period last year.
Quarterly sales decreased by 10% year-over-year to SEK 49.33 billion, falling short of the SEK 50.92 billion consensus forecast from a Reuters poll. The group's overall gross margin declined from 48.2% to 47.2%.
In an announcement on Thursday evening, Ericsson stated it will commence a previously disclosed SEK 15 billion share repurchase program starting next week.
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