LM Ericsson Telephone Co. (ERIC) and Motorola Inc. (MOT), through its Motorola Solutions business unit, have entered into an alliance to provide the next generation of mobile communication technology, LTE. Through this alliance, the companies aim to extend a safe communication system to the public using mobile broadband, providing a high speed and safe internet solution.
 
With the rising rate of communication through mobile internet, it has become extremely necessary to ensure safe communications for the public. LTE, a mobile broadband technology from Ericsson, will aid Motorola’s unified next generation platform to provide a highly developed communications means required for public safety. The new system helps in transmitting large number of data quickly, efficiently and economically. It helps users to promptly access huge number of applications and in future is expected to be installed in the new and improved mobile internet applications.
 
Ericsson, a leading provider of LTE technology, has signed eight contracts worldwide for LTE with six major operators. The company’s three alliance partners are in the U.S., which is the fastest growing LTE market worldwide. Ericsson expects to become the largest patent holder in the industry for LTE by gaining 25% patents for the next generation of mobile communication technology.
 
As a technology and market leader in wireless equipment (based on the GSM standard), Ericsson stands to benefit from the continued growth of the wireless industry, especially in the emerging markets. GSM-based network expansions in the emerging markets (including Latin America, Eastern Europe, Africa, China and India) are expected to drive moderate revenue growth over the next several years.
 
Having established partnerships with local companies and having set up R&D centers in numerous locations, Ericsson is well positioned to win additional network expansion contracts in Asia over the next couple of years. In addition, Ericsson has been winning more than its share of 3G contracts, including a contract to provide High Speed Downlink Packet Access (HSDPA) technology to Cingular Wireless (the largest wireless carrier in the U.S.).
 
However, we expect the continued consolidation in the telecom industry to hamper growth and squeeze margins over the long term as competitors that cannot compete on technology will begin to cut prices to win businesses. Going forward, “catch-up” capital spending by the wireless carriers is likely to be replaced by lower-margin 3G equipment rollouts and network builds in price-sensitive emerging markets. In this environment, Ericsson finds it prudent to plan for a flattish development in the global mobile infrastructure market and good growth in the professional services market.
 
Risk factors include potential negative effects of the continued uncertainty in the financial markets and the weak economic business environment on operators’ willingness to invest in network development. Another risk factor involves uncertainty regarding the financial stability of the suppliers due to a lack of borrowing facilities, or reduced consumer telecom spending, or increased pressure on Ericsson to provide financing.
 
Headquartered in Stockholm, Sweden, LM Ericsson Telephone Company is a multinational company engaged in manufacturing and selling wireless infrastructure equipment for the telecom sector. It is a total network solutions provider, serving wireless and wireline operators, enterprises and consumers. The company is primarily a supplier of global system for mobile communications (GSM)-based equipment, and looks to benefit the next generation systems as more broadband content is being streamed to mobile devices, prompting network providers to upgrade their networks. A major competitor of Ericsson is Alcatel-Lucent (ALU).
 
We currently maintain our Neutral recommendation on Ericsson, with a Zacks #3 Rank (Hold recommendation) over the next one-to-three months.
 
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