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Ericsson: Mobile Sector Is Resilient

Check out Carl-Henric Svanberg's smile, if you can. This guy should be advertising toothpaste.

And why does he have a smile so wide he makes The Joker look depressed?

Because while rivals such as Nortel Networks Ltd. are imploding under the stress of the global recession, Svanberg's company, Ericsson AB (Nasdaq: ERIC), has just exceeded its own -- and the market's -- expectations for the fourth quarter of 2008, sending the vendor's share price up by more than 12 percent. (See Ericsson Soars on Strong Q4, Outlook and Nortel Files for Bankruptcy Protection.)

In addition, Ericsson's business model is, according to Svanberg, right in a sweet spot just now. That's because most of its revenues come from mobile operators, which are still growing and investing in their networks. And that makes Svanberg confident that his company, which has a net cash position of 34.7 billion Swedish Kronor (US$4.2 billion), can get through the current downturn without too many lasting financials scars.

Commenting on general market trends and conditions during an early and hastily convened fourth quarter earnings press conference Wednesday morning -– Ericsson had originally been scheduled to present its earnings on Jan. 29 -– Svanberg noted that Ericsson doesn't expect "the effects on our industry will be as severe as on the rest of society."

He noted that some carriers are announcing capex cutbacks, but that these are more to do with the fixed network side of their businesses, including the capital required for fiber-based next-generation broadband projects, which Ericsson believes are being delayed in many instances. (See LR Poll: Capex to Crash in '09, Capex Watch: Expect Shrinkage in 2009, and Emerging Markets Offer Capex Hope.)

And while the mobile handset industry is being impacted by the downturn, as fewer people upgrade their devices, Ericsson believes mobile service usage is remaining strong, and that the impact on the global market for mobile network equipment will not be significant. (See The Cellphone Slide for the contrasting news from Sony Ericsson Mobile Communications and other cellphone providers.)

Svanberg noted that most operators are financially healthy, traffic growth on mobile networks is strong, and many current networks are reaching their full capacity levels, a situation that will trigger spending on upgrades and expansion.

In addition, the recent award of 3G licenses in China, and the imminent award of 3G spectrum in India, which was Ericsson's single largest market by revenues in 2008, will trigger further spending. (See China Awards 3G Licenses, India Faces 3G Delay, and IndiaWatch: 3G Delayed, 2G Adds 10M.)

Mobile broadband is really starting to take off, he added, noting that the number of WCDMA, or 3G, subscriptions globally grew by 24 million during 2008 to 290 million, and that mobile operators' data revenues, which currently account for about 20 percent of total mobile service revenues, are set to account for more than 30 percent of total mobile service revenues by 2013. (See EU Mobile Data Grows

According to a new report from Pyramid Research , the value of global mobile data revenues is set to increase by 15 percent during 2009 to $223 billion. (See Pyramid Predicts.)

As a result, Ericsson hasn't noticed much of an impact on its business so far.

That's because Ericsson's revenues come mostly from the world's mobile carriers. The vendor's Networks division, which generated SEK142 billion ($17 billion) in 2008, up 10 percent year on year, relies mostly on the sale of infrastructure to wireless network operators. That division accounted for 68 percent of Ericsson's sales in 2008.

A further 23 percent of Ericsson's 2008 revenues, or SEK49 billion ($5.9 billion), came from the Professional Services division, which helps mobile operators build and, in an increasing number of instances, run their networks. Revenues from such services grew by 14 percent in 2008, and with an increasing number of operators looking to offload network operations and management tasks to third parties, such as Ericsson, Alcatel-Lucent (NYSE: ALU), and Nokia Networks , that part of the Swedish giant's business looks set to be strong again in 2009. (See AlcaLu Supports BT Global, NSN Scoops UK Deal, C&W Picks Ericsson, Telco Managed Services Opportunities, Ericsson Touts IT Hosting, and AlcaLu, Reliance Form Joint Venture.)

Cautious approach
Svanberg, though, isn't relying on everything remaining so positive. He noted that it would be "unreasonable" to expect the mobile networks sector to be completely unscathed, and that it is impossible to predict how economic events will impact consumer behavior and operator spending habits in the future.

Ericsson's peers feel the same, though Nokia Siemens and AlcaLu have gone as far as to predict the size of the overall market in 2009, something Ericsson hasn't done. (See Nokia Siemens Braced for Tough 2009 and Verwaayen Unveils AlcaLu's New Plan .)

As a result of the uncertainty, Ericsson is implementing a new restructuring program that will result in the loss of 5,000 jobs during 2009 and reduce the company's annual operating costs by $1.2 billion by the middle of next year. Read this news story for further details.

And in the meantime, the CEO says his company intends to "stay close to our customers, and understand how they're thinking and what they want to do." All with a dazzling smile, of course.

— Ray Le Maistre, International News Editor, Light Reading

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