Ericsson: 4G lead will take time to materialize in earnings

Ericsson chief financial officer Jan Frykhammar

Ericsson (NASDAQ:ERIC) may have established an early market lead in the next-generation of wireless technology, but it will take several years before long-term evolution (LTE) revenues start making an impact on its earnings sheet, the company’s CFO said in an interview.

Today Ericsson fell victim to the declining market for 2G and 3G network infrastructure, reporting a 13% decline in sales in the fourth quarter and announcing plans to lay off a further 1500 employees this year.

Ericsson has made huge steps in establishing itself in the emerging 4G market, winning pieces or entire contracts with Verizon Wireless (NYSE:VZ, NYSE:VOD) and MetroPCS (NYSE:PCS) in the US, NTT DoCoMo (NYSE:DCM) in Japan and TeliaSonera in Scandinavia -- all of which will rollout large-scale networks by the end of the year. In an interview today with Connected Planet, Ericsson chief financial officer Jan Frykhammar said that while those contracts are critical for Ericsson to establish momentum in the next era of wireless infrastructure, those deals are still too few and too early in their deployment schedules to have any serious impact on Ericsson’s financials this year.

“There are lots of initial contracts and deployments, but writ number-wise it is very small,” Frykhammar said. In fact, the cycles for any new generation of technology are very long, taking years to develop into major business for any vendor. Frykhammar pointed out that GSM is still Ericsson’s largest business even though it has been deploying 3G networks since 2001 and the more recent race to deploy high-speed packet access (HSPA) upgrades. “HSPA is catching up for sure,” Frykhammar said. “But it will take some time. It will continue to grow and at some point it will surpass GSM. When that will be, I don’t know.”

With GSM still kicking aggressively in the developing world and HSPA dominating the capital investment budgets in developed markets, it’s safe to say it will take years before LTE becomes a major business for Ericsson, Frykhammar said.

Regardless, sales of Ericsson’s bread-and-butter GSM and 3G equipment suffered in fourth quarter, particularly in central Europe, Africa and the Middle East. 3G equipment sales in Western markets weren’t enough to make up the difference as overall network equipment sales fell 16% in the quarter and 3% for the year. Even Ericsson’s red hot professional services arm couldn’t make up the revenue shortfalls. Services only saw a modest increase in revenue from its managed services contracts in local currencies, but were up 8% for the year. Revenue increases from Ericsson’s recent network outsourcing contract with Sprint (NYSE:S) were offset by reduced outsourcing spends in Europe.

Ericsson said the 1500 layoffs, on top of the 5000 job cuts made last year, would reduce its expenditures by 15 billion to 16 billion Swedish kronor (about US $2 billion) by June, but would primarily affect its European operations. In North America, Ericsson has done nothing but grow. Silicon Valley has become the headquarters of its IP business, Ericsson has taken over Nortel’s 4G R&D group in Canada and its CDMA business in Dallas, and the Sprint deal added 6000 employees to Ericsson’s payroll. Ericsson now employs 14,000 people in North America, making it one of the vendors most critical markets from both operational and sales standpoints, Fykhammar said.

Frykhammar added that network outsourcing deals like the one with Sprint will become increasingly important to Ericsson, especially as the 3G and 4G equipment markets build up. While operators may be cautious with capital expenditures they’re looking to save money operationally, Frykhammar said, and Ericsson has created the ideal mix of local resources and global scale to allow it to be competitive in professional services in any market around the world. Frykhammar said that the telecom services market is starting to resemble the IT services market with a few large-scale companies like IBM (NYSE:IBM) and HP (NYSE:HPQ) and many smaller IT providers filling the gaps. Ericsson and Nokia Siemens Networks (NYSE:NOK, NYSE:SI) appear to filling the roles of IBM and HP in their respective industry.

“The important thing is you have to have a local aspect and a global aspect to your services delivery,” said Frykhammar, who headed up the professional services group. Only thing can you provide the manpower necessary to manage complex operations, but also provide efficiencies of scale that a local provider can’t offer, he said.