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Ericsson Looks to LTE, Services Amid Profit Slump

Wed, 07/18/2012 - 7:33am
Maisie Ramsay

Ericsson's profits slid 63 percent in the second quarter as it took a hit from the European debt crisis and a slowdown in spending on legacy networks.

The Swedish infrastructure vendor's net income dropped to $172 million from $460 million. Revenue inched up to $7.9 billion after growth in its services and support businesses offset a 17 percent drop in network equipment sales.

The drop in profit stemmed from a number of areas. Operators in the United States cut investment in 3G equipment to focus on construction of their new LTE networks, European wireless providers held off on purchases because of the region's debt crisis and there were also declines in China and Russia, the company said in its earnings results.

Even so, Ericsson appears to be faring better than rivals Alcatel-Lucent and ZTE, which both issued profit warnings over the past week.

Some financial analysts have questioned whether the numbers coming in from infrastructure vendors are an indication that mobile data growth does not necessarily correspond to an increase in operators' capital expenditures, a bad development for companies that sell equipment.

But CFO Jan Frykhammar maintains that the company's strength in LTE and growing software and support division positions it well for the long term. 

"We fundamentally believe in the long-term growth opportunities in the industry both for operators as well as vendors," he said in an interview. 

However, the transition from 3G to LTE would not be without some growing pains. When asked when the decline in CDMA sales would be offset by increases in LTE investment, Frykhammar said "it will take some time." Ericsson's strong market share in early LTE deployments will be "important for the long term," he said, helping the company secure its hold on a growing area of the wireless industry.

Small cells will also be an "important growth opportunity" in the future for Ericsson, Frykhammar said, though operators are still "in the technology architecture phase rather than the business phase" in terms of making purchases. Ericsson boosted its small cell and Wi-Fi offerings with the acquisition of BelAir Networks earlier this year. 

The company will continue to expand its software and services business, which it recently buoyed with the purchase of Telcordia. The combined sales of its global services and support solution businesses rose to $3.9 billion last quarter. 

Ericsson's chipmaking joint venture with STMicroelectronics continued to weigh on its financial sheets last quarter after its losses widened to $318 million. 

When asked whether Ericsson was looking to exit the money-losing business, Frykhammar said "the purpose of that joint venture has been from the beginning to create value by means of making sure there are enough alternatives in the market for modem chipsets... Having said that, what we are clear on is that the joint venture is working on measures to lower its break even point."     

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