North American slowdown may hit Ericsson's Q3

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North American slowdown may hit Ericsson's Q3

As mobile broadband growth shifts eastwards, it will see its margin squeezed in price war with Huawei and others, says Reuters

By CAROLINE GABRIEL

Published: 18 October, 2011

READ MORE: Financial | North America | Ericsson

Analysts are bracing themselves for a disappointing quarter at Ericsson, as it nears the end of a powerful 18-month growth surge in its north American markets. According to Reuters, margins are likely to fall as the Swedish market leader becomes more dependent on lower cost Asian countries.

After the acquisition of many of Nortel's assets, and the winning of major deals with the top three US cellcos (Verizon and AT&T for LTE, Sprint for outsourcing and Network Vision), Ericsson has been on a roll in a region where it used to struggle against Lucent and Nortel itself. North America has been the vendor's largest single market by a long way for the past 18 months, but now investment in capacity has started to slow down.

"It could well be that margins start to go down this quarter," Thomas Langer, an analyst at WestLB, told the Reuters report. "The big unknown is the demand for network upgrades and increases in capacity in 2012." A poll of analysts predicts revenues up 11.5% year-on-year, but down 3% on the second quarter, when Ericsson reports on Thursday. Operating profit, excluding joint ventures such as Sony Ericsson and ST-Ericsson, is tipped to total SEK5.75bn ($860m), up from SEK5.3bn a year ago and SEK5bn in Q2.

While such figures are hardly disastrous, the report fears there will be "longer term headwinds", with sharper slowdown in sales growth to be seen in 2012 and 2013. This pessimism is grounded in the belief that, as the balance of purchasing shifts eastwards, more deals will be won largely on price, which benefits Huawei. By contrast, Huawei has been virtually excluded from the recent boom in US spending, because of security concerns, but is in pole position in up-and-coming growth markets such as its native China.

Not everyone is bleak about Ericsson, though, especially as it is increasingly shifting its business towards services. And many believe that, despite the pressures on operators to reduce their capex budgets, at least by stretching or delaying 3G and 4G contracts, the demand for mobile broadband will force them to invest. "There is still explosive growth in the mobile broadband business," Morten Imsgaard, an analyst at Sydbank, told Reuters. "As long as we have the huge growth in smartphones, the telecoms operators are forced to invest in their networks."