The third quarter could mark the end of a hot streak for Ericsson (Stockholm, Sweden) as a combination of a global slowdown, tough competition and an increase in low margin business cloud the outlook for the world's top mobile equipment firm.
The last three quarters have seen booming sales at Ericsson's key networks unit, driven largely by investment in mobile broadband in the United States and second generation equipment in China.
Now analysts are concerned that the strong trend, driven by surging smartphone and mobile internet use, is petering out, particularly in North America.
"It could well be that margins start to go down this quarter," says Thomas Langer, analyst at WestLB. "The big unknown is the demand for network upgrades (and) increases in capacity in 2012."
Ericsson said in the second quarter it expected a higher proportion of lower margin business starting in the second half of this year due to base-station swap-outs in Europe.
North America has been Ericsson's largest single market by far for the last 18 months, but the company said investment in network capacity had started to slow.
The effects are likely to be limited for now and the company is seen posting core operating profit, excluding joint ventures, $860 million in the third quarter, up from $798 million a year ago and $753 million in the April-June period, according to a Reuters poll.
Sales are seen up 11.5$ year-on-year, though down 3% versus the second quarter. The firm's closely watched gross margin is seen at 37.0% against a year-ago 38.2% and 37.8% in the April-June period.
While a changing business mix is likely to crimp margins, Ericsson also faces longer-term headwinds and sales growth is seen slowing sharply in 2012 and 2013. Prospects for global growth have taken a beating with debt problems on both sides of the Atlantic. This means operators are likely to keep hold of cash rather than invest. Some analysts also say competition is getting tougher, not least from China's Huawei.
Rivals are cheaper and analysts see Ericsson's technological edge being rapidly erased. To maintain market share, Ericsson will have to drop prices, hurting margins.
Other analysts take a brighter view, even if times will be tougher ahead.
The trend of increased use of smartphones and connected devices has a long way to run and operators must invest in additional capacity.
Bullish analysts say Ericsson is in a strong position to benefit. Pricing pressure, they say, has not worsened and Ericsson has, in fact, gained market share over the last year.
"There is still explosive growth in the mobile broadband business," said Morten Imsgaard, analyst at Sydbank.
Consumers are slow to cut down on mobile use even in a downturn, he added. And, while operators want to save money, network quality is a key competitive advantage.
"As long as we have the huge growth in smartphones, the telecoms operators are forced to invest in their networks."
Ericsson reports its third-quarter results on October 20.
(Reporting by Simon Johnson and Olof Swahnberg; Editing by Helen Massy-Beresford)
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