The recent inclusion of the acquired Telcordia’s revenues
slightly offset the impact declining sales within Ericsson’s Networks business
had on total revenue.
Sales in Ericsson’s Networks business unit fell 16.8
percent year-to-year in 2Q12, as the division continues to experience headwinds
in the CDMA market and in its largest Asian regions. Sales of infrastructure in
India are declining due to the revocation of 2G licenses from Indian operators
and the conclusion of 3G equipment supply deals, while Chinese operators have
slowed spending on GSM equipment. These factors contributed to company-wide
organic revenue growth of -1 percent year-to-year.
Despite a 50 percent year-to-year drop in worldwide CDMA
sales, which was primarily caused by lower CDMA spend at Tier 1 U.S. operators
as they transition to LTE, Ericsson was able to reverse the negative
year-to-year growth trend that persisted in North America for the last year to
grow sales 6.6 percent year-to-year. Ericsson saw an uptick in LTE spend and
realized revenue from the acquisition of Telcordia, whose customer base is
skewed toward North America. CDMA sales will plunge further – both globally and
in North America in 2H12, but higher LTE capex outlays will partially offset
the decline, as Ericsson is the top LTE vendor in the United States, with
contracts at all four Tier 1s.
Profitability woes in the Networks unit will persist in
2H12 as Ericsson solidifies its customer base in Europe.
Since 2011, Ericsson has taken on low-margin coverage and
modernization contracts in an effort to shore up its market share in Europe and
position the company to win LTE deals in the region. Overall operating margin
dropped to 3.8 percent, down from 7.8 percent in 2Q11, reflecting the ongoing
network modernization projects taking place in Europe. In the Networks unit,
operating margin stood at 4.5 percent, down 930 basis points from 2Q11. In
recent quarters, European operators have demonstrated their willingness to
break ties with incumbent, Europe-based network suppliers and sign contracts
with China-based Huawei to save money. Ericsson’s response has been to accept
lower margins on projects to keep its core customers.
Network modernizations typically endure for 18-24 months,
indicating that their effect on Ericsson’s margins will continue in the latter
half of 2012. Following project completions, Ericsson will be favorably
positioned with a host of European operators to turn on LTE services in the
next two years.
Ericsson views 2012 as an inflection point in small cells
and Wi-Fi, as the company makes a strategic push in both markets
The heavily hyped small cell market will gain greater
steam throughout 2012 as Tier 1 operators look to add capacity and coverage
within their networks to cope with ever-increasing data traffic caused by rapid
consumer adoption of smartphones. Small cells equipped for 3G will be in
highest demand, as operators’ older CDMA and HSPA networks are more heavily
congested than nascent LTE networks.
Operator demand for both small cell and Wi-Fi
technologies will ramp up in 2H12 and 2013 as carriers such as AT&T begin
deploying small cells in densely populated areas. AT&T is anticipating
installing multi-mode small cells that will support LTE, HSPA+, and WCDMA, as
well as Wi-Fi. AT&T’s plans highlight the value of Ericsson’s BelAir
Networks acquisition, which gives Ericsson a presence in the carrier Wi-Fi
space. Wi-Fi will be a valuable complement to cellular networks as operators
deal with the capacity crunch. Ericsson will be able to capitalize on the
market by integrating BelAir’s technology with its own picocells and
microcells.
Michael Soper, Networking & Mobility Research Analyst
editor@telecomlead.com
