Ericsson Q2 revenue analysis: densification, small cells gain

Second quarter result of Ericsson indicates North American operators are investing heavily in densification projects, leading telecom network company to achieve flat growth (in both the region and overall) in a market that was expected to contract at a double-digit pace following the conclusion of coverage buildouts.

Capacity investment in North America is also driving margin growth by hundreds of basis points year-to-year as Ericsson reached 36.4 percent and 7.3 percent gross and operating margins, respectively.

Operators are investing in small cells as well as additional macro cells. LTE deployments for China Mobile are only partially offsetting dramatically lower legacy RAN investment in China. TBR expects growth in Ericsson’s North East Asia region to resume in 2H14 as China Telecom ramps up its LTE rollout.

With capacity builds set to continue in North America, nationwide LTE rollouts in China, selective LTE deployments in Europe, and, further out, LTE buildouts in India, Ericsson’s Networks unit will fuel low single-digit revenue growth and 35 percent-37 percent gross margins through 2015.

Ericsson’s decision to split the Networks unit into Radio and Cloud & IP will accelerate virtualization efforts.

To better allocate investment in 4GIP and cloud initiatives, Ericsson split its business unit Networks into two new business units (Radio and Cloud & IP), which are housed within the new Segment Networks. The change is effective as of July 1, although the transformation is not expected to be complete until later in 3Q14. By forming a Cloud & IP unit entirely focused on IP routers, cloud, the data center, SDN and NFV, Ericsson is pursuing its longstanding goal to be a strong number three player in IP routing.

Networks head Johan Wibergh will ensure product and R&D alignment between the two units, but  the Cloud & IP unit will be given additional resources to ensure continued and enhanced development of Ericsson’s virtualization and cloud initiatives.

These actions are partially in response to Alcatel-Lucent’s recent success with its Nuage Networks SDN subsidiary, through which the parent backed Nuage with resources, but allowed greater autonomy and minimal bureaucracy.

Ericsson is investing in India ahead of anticipated LTE vendor selections later in 2014.

The network investment environment in India is improving as evidenced by Ericsson’s 30.3 percent year-to-year sales growth in the country in 2Q14. While the service provider marketplace remains crowded and in need of consolidation Indian operators are, for the first time since 3G rollouts concluded in 2012, beginning to spend en masse following spectrum auctions and reduced political uncertainty.

Vodafone’s Project Spring, through which the operator will invest in Vodafone India, among other subsidiaries, will also spur spending among rivals seeking to maintain competitiveness.

Much like it did in the 3G investment cycle, Ericsson aims to capture a leading share of LTE contracts in the country, which are expected to be doled out later in 2H14 and 1H15.

Ericsson is ramping up investment in the country ahead of LTE contracts, adding headcount and building up its own infrastructure. Beginning in 2014, Ericsson employed more people in India than any of its other reported regions. This is largely due to the expansion of its service operations, including a new Global Network Operations Center in Kolkata, Ericsson’s fourth GNOC in the country.

The renewed investment in GNOCs, which provide managed services, will help Ericsson capture managed services contracts in India, as well as in other regions, when operators select LTE vendors. Indian operators typically agree to managed services contracts with their infrastructure vendors.

Michael Soper, telecom analyst, Technology Business Research