Ericsson’s networks unit recovered in Q4 due to LTE

Telecom Lead America: In 4Q12, Ericsson was able to stabilize the Networks unit with 6 percent year-to-year growth and flat margins compared to 4Q11 thanks to massive LTE build outs in North America. This stabilization indicates that an inflection point has been reached, whereby LTE sales are fully offsetting the terminal decline in legacy technologies like CDMA and GSM.

Capex budget guidance indicates that North American operators will spend aggressively on LTE equipment in 2013, boding well for continued growth in Ericsson’s Networks unit through 2013.Latin America will also fuel growth in Networks in 2013 as Ericsson has secured 50 percent market share in the region for LTE deployments. This investment will coincide with LTE spend in North America, further supporting growth in Ericsson’s Networks unit in 2013. In 4Q12, Ericsson won contracts with Telcel in Mexico and TIM in Brazil. While sales declined 8 percent year-to-year this quarter, revenue will begin climbing in 1H13 as revenue from these LTE deployments rolls in.

Ericsson is reducing headcount in high-cost markets, selling non-core assets and monetizing patents to avoid the pitfalls experienced by NSN and Alcatel-Lucent.

Strong competition from Huawei and ZTE has driven Ericsson to take calculated steps to tailor its business to the new market reality, which is especially apparent in Europe. Huawei and ZTE have driven down the cost of products and services within the telecom industry and Ericsson is positioning itself to avoid the consequences felt by its close rivals Alcatel-Lucent and Nokia Siemens.

Ericsson ramped up efforts to offload assets deemed non-core in 2012, selling its IPX business to Gemalto and closing the sale of its fiber access business to Calix in 4Q12. Similarly, Ericsson is keen on exiting joint ventures that drag on its bottom line, selling its share of Sony-Ericsson to Sony and most likely looking for an exit – either selling its stake or winding down the business – from ST-Ericsson. Ericsson is also proactively monetizing patents, reaching an agreement with Unwired Planet in January 2013 to sell 2,000 wireless patents and share in the revenues generated from licensing.

Perhaps the greatest limitation for NSN and Alcatel-Lucent were their large European workforces. NSN has largely solved this problem through layoffs and asset sales, while Alcatel-Lucent still suffers from the high cost of European labor. To remain ahead of the curve Ericsson will lay off 1,550 employees in Sweden by end of 1Q13, meaning 45 percent of its workforce will be concentrated in relatively low labor cost regions like MEA, APAC, and CALA.

Michael Soper, research analyst – Networking & Mobility Practice, Technology Business Research
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