Telecom Lead America: Ericsson’s focus on North America for revenue growth while it protects its European customer base will pay off during 2013.
Despite shrinking gross and operating margins, TBR believes Ericsson’s 1Q13 results provide a reaffirmation of the company’s strategy to protect its customer base in Europe, while capitalizing on operator spend on LTE in North America and developing regions like South East Asia.
Ericsson’s 32 percent and 4 percent gross and operating margins continue to fall due to heavy modernization activity in Europe, but these projects will wind down throughout the year, causing margins to recover in 2H13. Sales in 1Q13 rose 2.1 percent year-to-year largely due to Tier 1 LTE contracts in North America, including the T-Mobile LTE contract, which is just beginning to ramp up.
Sales growth will remain in the low single-digits as Latin American LTE contracts come online and North American capex spend remains elevated. Offsetting increasing LTE revenues in the Americas will be decreased LTE activity in South Korea and Japan, as well as a spending lull in China caused by the upcoming LTE investment cycle. These developments triggered a 34 percent decline in revenue in North East Asia in 1Q13.
Ericsson continues to win multi-year managed services contracts in new and emerging markets, highlighting a difference in strategy between
Ericsson and other vendors
Ericsson is the managed services leader in the telecom industry and continues to win large-scale, multi-year contracts with new customers, despite increased competition from low-cost players like Huawei and ZTE, which have made managed services a focal point of their growth plans.
TBR estimates Ericsson had 17 percent market share in managed services in 2012. Despite low or negative margins on some contracts – the main factor pushing NSN and Alcatel-Lucent to reduce their exposure to managed services – Ericsson believes its managed services scale is a differentiator.
The company is increasingly upselling managed services customers to consulting and systems integration business and winning new customers in regions that have been curbing infrastructure spending.
In 1Q13, Ericsson added its first major managed services contracts in Russia and Serbia with VimpelCom and Vip mobile, respectively, as well as a $1 billion, eight-year services contract with Reliance in India, and a five-year contract with Atlantique Telecom in Africa. Ericsson’s ability to secure these wins comes as the vendor’s Networks sales in Northern Europe & Central Asia, which includes Russia, and India fell 35 percent and 42 percent in 2012.
Acquiring the Microsoft Mediaroom business gives Ericsson the leading position in IPTV and enhances its multiscreen offerings
Ericsson is buying Microsoft’s Mediaroom IPTV software for an undisclosed amount in a deal that will close in 2H13. Ericsson gains over 40 operators customers, many of whom it already supplies telecom equipment, to more deeply ingratiate itself with operators.
Mediaroom, which will be housed in Support Solutions, gives Ericsson a 25 percent market share in IPTV, by its own estimates. Ericsson will leverage Mediaroom to enable customers to deliver television across a range of devices, or “TV Anywhere.”
Ericsson can come to market with a compelling software and services portfolio to offer TV operators after acquiring Mediaroom and Technicolor’s Broadcast Managed Services business in 2012. Media became a key focus area after Ericsson reorganized Support Solutions last year.
Michael Soper, Networking & Mobility Analyst, Technology Business Review
editor@telecomlead.com
