Following profit warnings from two network systems vendor rivals during the past few days, Ericsson AB (Nasdaq: ERIC) showed Wednesday morning that with the right scale and business mix it's possible to ride the storm. (See AlcaLu Issues Full-Year Profit Warning and ZTE Issues H1 Profit Warning.)

Ericsson reported second-quarter sales of 55.3 billion Swedish kronor (US$7.94 billion), slightly better than a year ago and 9 percent better than in the first quarter. Those revenues were helped by the addition of Telcordia to the group, though. Without the contribution of the Service Provider Information Technology (SPIT) specialist, which generated revenues of SEK1.1 billion ($158 million), and the positive impact of non-operational factors (such as shifting currency exchange rates), Ericsson's revenues would have been down by about 6 percent compared with a year ago.

Table 1: Ericsson Q2 2012 Key Financials

In billions of Swedish kronor	Q2 2011	Q2 2012	Y/Y change	Q1 2012	Q/Q change
Revenues	54.8	55.3	1%	51.0	9%
Gross margin	37.8%	32.0%	Decrease of 5.8 percentage points	33.3%	Decrease of 1.3 percentage points
Operating margin excluding joint ventures and sale of Sony Ericsson	9.2%	5.9%	Decrease of 3.3 percentage points	5.5%	Increase of 0.4 percentage points
Net income	3.2	1.2	-63%	8.8	-86%
Source: Ericsson

What is key to Ericsson is its scale and scope. It has a significant international presence -- in fact CEO Hans Vestberg claimed on the Wednesday morning earnings conference call that it is now the only telecom vendor "showing up" in all markets, a claim that could be contested by Huawei Technologies Co. Ltd. I'd imagine -- and isn't reliant on one line of business.

For example, Ericsson has been hit by the same pressures that have been hurting Alcatel-Lucent (NYSE: ALU) and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) in recent months, especially a slowdown in orders from China, a dramatic dip in CDMA network infrastructure business and, to some extent, the ongoing uncertainty in India. (See India Suffers From Policy Hiatus.)

Along with depressed investments in Europe, these factors contributed to a 17 percent year-on-year decline in revenues at its Networks division, a dip that Vestberg described as "very much a CDMA issue." CDMA network sales declined by almost 50 percent year-on-year to SEK2 billion ($287 million) and the company expects the decline to continue through the rest of this year (see table below).

But Ericsson, which currently employs 108,000 staff around the world, isn't a one-trick pony. Its Global Services division reported a 26 percent increase in year-on-year revenues, while its Support Solutions division (SPIT and video systems) reported a 47 percent increase. CEO Vestberg noted that Ericsson is picking up a lot of new consulting and systems integration work thanks to its expanded telecom software portfolio (from Telcordia) and that managed services deals are still coming in thick and fast (17 new deals signed during the quarter). (See Say Goodbye to Telcordia and Ericsson: We're No. 2 in OSS.)

Together, these divisions to some extent mitigated the impact of lower network infrastructure sales.

Table 2: Ericsson Q2 Revenues by Division

In billions of Swedish kronor	Q2 2011	Q2 2012	Y/Y change	Q1 2012	Q/Q change
Networks revenues	33.4	27.8	-17%	27.3	2%
Global Services revenues	19.0	24.1	26%	20.6	17%
Support Solutions revenues	2.4	3.5	47%	3.0	15%
Total	54.8	55.3	1%	51.0	9%

A greater reliance on services does come at some cost, though, as this depresses Ericsson's gross margin, which slipped by 32 percent in the second quarter. That margin level is unlikely to improve much during the next couple of quarters while so many mobile operators undertake modernization programs that involve the supply of lower-margin products, a process that is ongoing and which was discussed in some detail when Ericsson reported its first-quarter results. (See Ericsson Retrenches in Q1.)

The vendor does expect margin improvements in 2013, though, when those operators that have updated their networks require more capacity, a higher-margin opportunity for the vendor.

Despite the impact on its margins, and the negative impact of its stake in loss-making chip vendor ST-Ericsson , the company is still profitable, and continues to invest in new developments such as Long Term Evolution Time Division Duplex (LTE TDD). Vestberg said that while 2G investments have slowed considerably in China, "there are large LTE TDD field trials," though it's hard to say when commercial 4G will arrive in the country.

Where 4G has taken hold, though, Ericsson claims to have grabbed the lion's share of the business, stating that, up to the end of 2011, it had shipped 60 percent of the LTE equipment volumes, with the U.S. and South Korea as the two significant markets, though others are expected to become meaningful in the current quarters.

Vestberg is committed to making sure the vendor has a leading market share in LTE and believes that investments made during the past few years, in terms of acquisitions and winning network modernization deals that may have suppressed profits, will pay off in the years to come at the expense of its main rivals. "We see a very tough time for our competitors," said the CEO.

Second-quarter results for Nokia Networks will be announced July 19 as part of Nokia Corp. (NYSE: NOK)'s earnings announcement, while AlcaLu reveals its numbers on July 26.

— Ray Le Maistre, International Managing Editor, Light Reading