Has Ericsson plateaued in the U.S.?

Ericsson’s skyrocketing growth in North America is leveling off as the vendor settles into servicing its considerable network and outsourcing contracts. For the second straight quarter, Ericsson recorded a decline in North American revenues after a year of phenomenal growth that turned the U.S. and Canada into the vendor’s biggest region, a process that began even before its acquisition of Nortel’s commercial network assets.

Though overall revenues jumped 17% in the quarter, Ericsson’s North American sales dropped another 6% year over year, though the region still brought in 12.1 billion Swedish kroner (U.S. $1.8 billion) and accounted for 22% of its overall revenues. Chief Financial Officer Jan Frykhammer said that part of the decline in the last quarters is attributable to exchange rates: The krona has strengthened against the dollar. But the leveling off is primarily attributable to Ericsson’s own success in the region. Almost all of the major U.S. and Canadian carriers have named their next-generation network operators and are in the middle of their mobile broadband rollouts. While long-term evolution activity is picking up in North America, CDMA activity is scaling down, while outsourcing revenues remain steady.

Frykhammer said that the big surges in new contracts have now shifted to other parts or world like Latin America. “North America, perhaps with Korea and Japan, are the most advanced in smartphone penetration,” resulting in the first big flurry of LTE and high-speed packet access (HSPA) build-outs, Frykhammer said. “Now Latin America is building out its HSPA coverage and starting its initial deployments of LTE.”

Despite all of the LTE activity in the U.S.—the three biggest operators are all in varying stages of nationwide rollouts, all using Ericsson gear—HSPA and CDMA as well as outsourcing are still Ericsson’s primary revenue sources in the region, Frykhammer said. It will take some time before LTE becomes the dominant revenue stream, though it starting to make a significant contribution in North America, he said. Frykhammer estimated that 80% of the world’s population is covered by GSM while 40% is covered by wideband-CDMA/HSPA networks. By 2016, Ericsson expects HSPA to be the dominant technology with 80% coverage and LTE to hold the 40% slot, making it the dominant network growth driver.

While Ericsson beat analysts’ expectations on revenue, Ericsson forecast a slowdown in the global telecom equipment market for the last half of the year due to growing indications carriers are tightening their capex belts. Financial analysts also zeroed in on Ericsson’s shrinking margins, which were much smaller than they expected and a good sign that Ericsson may be cutting prices to gain more market share.

While not addressing the issue of margins directly, Frykhammer said that a much more cutthroat competition is to be expected as the industry is in a major transition stage. LTE represents the next evolution of network technologies and therefore the opportunity for carriers to re-evaluate their vendors. Just as Ericsson replaced Nortel in Verizon’s radio network—before Ericsson bought Nortel that is -- and Samsung replaced Motorola in Sprint’s new Network Vision architecture, other vendors are gunning for Ericsson’s huge customer base. At this stage, it’s important for vendors to lock in those initial LTE contracts to gain incumbency status. “If you’re there and you perform well, they’re not likely to get rid of you,” Frykhammer said.