A slowdown in spending by telecom operators globally is hurting all vendors of telecom equipment, just as they were recovering from the last downturn and intense price wars.
Analysts predict slower growth of 3-4% in the overall market for telecom network equipment, down from 7-8% last year.
The market recovered strongly in 2011 as operators invested to catch up with a surge in traffic from smartphones and tablets, but the final quarter saw renewed concern about global growth, especially in Europe.
ZTE and Huawei Technologies have cut prices to grab market share in a slowing market, a strategy that has hit profitability, analysts said. Sales fell by 18% for both Ericsson and Alcatel-Lucent in the first quarter, although the first quarter is traditionally weaker across the industry.
Analysts said the poor start compared to Ericsson could make it hard for Alcatel-Lucent to hit its goal of improving margins this year.
"We had a slow start in a volatile environment because of lower product volumes and mix," Chief Executive Ben Verwaayen said on a conference call on Thursday. "The European debt crisis is all around us and that has an impact. It's a serious issue to factor in and a good reason to be cautious."
Alcatel-Lucent revenue fell 12.3% in the first quarter to $4.2 billion, in line with analysts' expectations. Its adjusted operating loss was $291 million because of the slowdown and weaker gross margin, while net profit on a reported basis was $525 million, helped by the disposal of its Genesys business unit.
Key to Alcatel-Lucent's profitability will not only be the outlook in Europe, where spending by operators fell 22% in the first quarter, but also the pace of U.S. operator spending on fourth-generation mobile gear. LTE is being rolled out quickly by AT&T  (Dallas, Texas, USA) and Verizon (New York) this year and has lower margins than the older third-generation mobile gear, known as CDMA, which has boosted Alcatel-Lucent's margins in recent years.
Ericsson (Stockholm, Sweden) beat expectations for earnings and margins in the first quarter raising hopes that recent market weakness has bottomed out.
Ericsson's underlying earnings before interest and tax reached $416 million excluding loss-making joint ventures but including restructuring charges.
The group's gross margin rose to 33.3% in the quarter from 30.2% in the final three months of 2011, a trend the company pinned on seasonal effects, a greater share of higher-margin capacity expansion projects and a smaller share of lower-margin services business.
Greger Johansson, analyst at Redeye said that analysts would probably revise up forecasts for the gross margin for the rest of the year.
"I think the Q1 report was kind of a relief. You don't have to expect anything worse going forward," he said.
While there were positive signs on the gross margin, sales in the key networks unit were down 18%. Total sales were $7.5 billion, versus a forecast of $7.8 billion.
Ericsson said operators remained cautious due to the macroeconomic environment.
Qualcomm Inc (San Diego, Calif., USA) reported quarterly revenue that beat Wall Street estimates due to strong demand for its cellphone chips.
The company posted a profit of $2.23 billion or $1.28 per diluted share for its second fiscal quarter ended March 25, compared with $999 million or 59 cents per share in the year-ago quarter.
Qualcomm said revenue rose 28% to $4.94 billion from $3.87 billion in the year ago quarter and beat Wall Street expectations for $4.84 billion, according to Thomson Reuters I/B/E/S.
But, Qualcomm Inc warned that it will have trouble meeting demand for some of its advance cellphone chips for the rest of the year due to manufacturing constraints and that will increase operating expenses faster than expected.
While the company maintained its previous revenue outlook for its fiscal year 2012, its shares fell 3% as investors had hoped it would be able to raise its targets.
Chief Financial Officer Bill Keitel said he is now planning for a 23% increase in operating expenses this year, up from the 18% rise he forecast three months ago mostly because Qualcomm is looking to alternative suppliers. The shortage is costing "tens of millions" extra, he said.
"Demand went so far ahead of availability that we've decided to start spending more money to get more supply as soon as possible," says Keitel.
ZTE Corp (Shenzhen, P.R.C.) reported weaker-than-expected first-quarter profit following sluggish telecoms spending and price wars.
ZTE has recently cut prices to grab market share in a slowing global telecoms equipment market, a strategy that has hit profitability, analysts said.
To boost margins, ZTE are now aiming to offer value-added services, focus on network upgrading projects and increase sales of consumer devices such as smartphones and tablet PCs, they said.
Unaudited net income was $23.92 million in the first quarter, compared with $20.1 million a year earlier, ZTE said on Wednesday. That missed an average forecast of $29 million by three analysts polled by Reuters.
Huawei (Shenzehm, P.R.C.) reported a 53% decline in its 2011 profit, even as sales grew 11.7%. ZTE said in March that full-year profit had dropped by a third.
"Western vendors would welcome Huawei and ZTE putting greater emphasis on margins," says Daryl Schoolar, principal analyst for network infrastructure at research firm Ovum. "Probably one of the biggest complaints I get when talking to their competitors is that they win business on low prices on very favorable financial terms backed by Chinese banks."
(By Sinead Carew, Simon Johnson, Leila Abboud and Lee Chyen Yee Additional report and editing by: Ryan Woo, Sven Nordenstam, Olof Swahnberg, David Holmes, Mike Nesbit, Gwenaelle Barzic, James Regan, Matthew Tostevin, Noel Randewich, Carol Bishopric and David Gregorio)