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Numbers Temper Ericsson M&A Plans

Ericsson AB (Nasdaq: ERIC) doesn't need to merge or acquire to retain its status as a major telecom systems vendor, CEO Carl-Henric Svanberg said during the company's first-quarter results conference call this morning. (See Ericsson Reports Q1.)

Svanberg said the vendor community was divided between the strong and weak players. "You have those that are clear leaders, and we are a clear leader, and then there are those that are weaker… that don't have the economies of scale. It was anticipated that Lucent Technologies Inc. (NYSE: LU) would merge with someone. We are in a strong position and don't need to merge or acquire -- we are fine."

He also doesn't believe there will be a rash of mergers following the announcement that Lucent and Alcatel (NYSE: ALA; Paris: CGEP:PA) are engaged. "I don't think this is necessarily the start of a lot of consolidation. There may be another merger or deal, but we're fine," he reiterated. (See Alcatel, Lucent Seal Deal and Lucatel: French Staff Not Safe.)

Ericsson, which acquired Marconi last year, has been linked with a number of companies, including Juniper Networks Inc. (NYSE: JNPR) and Siemens Communications Group , in the past few months. It made a bid for Riverstone Networks Inc. (OTC: RSTN.PK) but lost out to Lucent. (See Ericsson's Riverstone Hangover, Sources: Lucent, Nokia in Play for Siemens, Analysts Dismiss Ericsson/Juniper Talk, and Ericsson Buys Bulk of Marconi.)

The Swedish firm is still in the throes of integrating Marconi, and the costs associated with that purchase hit the firm's first-quarter profits. While revenues were up 24 percent to SEK 39.2 billion (US$5.2 billion) compared with a year earlier, net income and earnings per share (EPS) were flat at SEK 4.6 billion ($609 million) and SEK 0.29 ($0.04) respectively.

While the revenues met analysts' expectations, the EPS fell short of the anticipated SEK 0.32, and gross margins were down notably, at 43.3 percent compared with 48.5 percent a year earlier. The company said the impact of the Marconi acquisition, revenues from new network rollouts in lower-margin territories, and the costly early stages of some big managed services contracts were to blame. (See Ericsson to Run 3's Network.)

Those numbers sent Ericsson's share price down by SEK 1.00, about 3.5 percent, to SEK 27.70 ($3.66) on the Stockholm exchange.

And at least one analyst believes the crunching competition in the mobile network infrastructure market will continue to put pressure on those numbers. While Nomura Securities analyst Richard Windsor expects the gross margin to pick up as revenues ramp during the rest of the year, he believes "margins will be unable to regain recent highs as growth will not be high enough to compensate for the persistent price pressure we see in the industry."

Windsor, who described the first-quarter numbers as "slightly disappointing," has a Sell rating on Ericsson's stock.

Analysts at Lehman Brothers are more upbeat. "Although we expect the market to initially focus on margin weakness [during the first quarter], we continue to see strong long-term growth for Ericsson," stated Stuart Jeffrey in a research note to clients this morning. He expects strong growth in professional and network rollout support services "to drive EPS growth in the second half of 2006 and 2007."

Jeffrey added that revenues from the acquired Marconi business, at SEK 2.9 billion ($384 million) for the quarter, were much lower than expected.

Svanberg, though, was bullish about the prospects of his company's new fixed-line assets. He said the "business flow is good" from the Marconi line, and that "we are well positioned for a number of deals" with major European carriers. We're fine!

The CEO also touted his firm's strong position in next-generation wireless infrastructure and VOIP infrastructure. Ericsson is supplying HSPA (high-speed packet access) infrastructure -- which is effectively 3G on steroids -- for 30 network rollouts, and has 85 softswitch customers, said Svanberg. (See Ericsson Demos 28-Mbit/s HSPA, Insider: HSPA Boosts 3G, Mobile Softswitches in Demand, and Ericsson Wins Japan 3G Deal.)

— Ray Le Maistre, International News Editor, Light Reading

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