Good News in Ericsson’s Poor Financial Outlook?

While Ericsson posted lower than anticipated earnings expectations this week, blaming an unexpected drop in mobile network upgrades and expansions, a behind-the-numbers look suggests the development is part of its evolution beyond a primarily wireless play to one well equipped for wireline video markets.

What the numbers don’t explain is how Ericsson has spent roughly two years and more than $5 billion on three key acquisitions (two of them closed this year) to establish itself as a video services giant. The purchase of optical transmission assets from Marconi started the drive, followed by the buyup of edge router maker Redback Networks, GPON equipment upstart Entrisphere and video power TANDBERG Television.

Together, Ericsson wants to become a diversified broadband networking player, with a top priority being expanded its beachhead in North America, where it already landed a key IPTV related GPON deal from AT&T in mid-June.

While the foreseen net income drop of 36 percent got all the early attention, the percentage growth of its three key groups: network, professional services and multimedia, as cited in its third quarter earnings estimate Tuesday, tells much more of the story.

Still, the company’s American shares fell more than $9 Tuesday, or 23 percent, to $31.33 as a result of the poor overall outlook. They were down another 2.7 percent through early afternoon Wednesday to $30.47.

The networks group’s growth was less than expected compared to the same quarter a year ago as spending on wireless network evolution – Ericsson’s bread-and-butter business – was unexpectedly weak. Its percentage growth over same quarter last year dropped 2 percent.

However, growth of its professional services (which includes managed services) climbed 26 percent over a year ago.

And most importantly for a company that invested big to build an international wireline video business, its multimedia group posted the highest growth rate with the company, up 31 percent over the third quarter of 2006.

Industry experts agree that how well Ericsson does in the next several quarters will be determined by its progress in pulling together the assets of its acquired companies, and layering systems integration and its professional services atop them.

Further, greater penetration in the wireline video services may soften blows form continued weakness in the mobile networking part of the business.

Ericsson will announce its third-quarter results Oct. 25.

Ericsson www.ericsson.com

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