Infrastructure giant L.M. Ericsson announced it will put the brakes on its CDMA business, a move that coincides with the shuttering of its CDMA headquarters in San Diego. Ericsson said it will no longer seek out new CDMA deals and instead will focus on supporting its line-up of existing carriers.
“We will not aggressively look for any new customers,” said Ericsson spokeswoman Pia Gideon.
Investors appeared to brush off the company’s news. Ericsson’s stock closed up about 2.5 percent at $30.31 per share Wednesday following the news. Ericsson stock was trading at $30.70 on Friday.
Ericsson said it will cut around 250 jobs in San Diego due to the closure. The company will move the majority of its CDMA operations into its W-CDMA business. Ericsson employees are familiar with the color pink; the company has cut its staff in half-to about 50,000 at last count-during the past four years.
The moves cap Ericsson’s long downward spiral in CDMA technology. The company scored Qualcomm Inc.’s CDMA infrastructure business in 1999, including its research and development resources and 1,200 employees in San Diego and Boulder, Colo. However, Ericsson largely failed to tap into large U.S. CDMA accounts like Verizon Wireless and Sprint PCS. Today, Ericsson controls around 5 percent of the world’s CDMA gear business, way behind market leaders Lucent Technologies Inc. and Nortel Networks Ltd. Lucent commands 40 percent of the worldwide CDMA market, according to investment banking firm Lehman Brothers, while Nortel accounts for around 20 percent. Further, the market is becoming increasingly crowded with the likes of ZTE Corp., Huawei and others.
“Given the difficulty Ericsson has seen over the past few years in penetrating top accounts in the U.S., this move was not totally a surprise,” wrote Steven Levy of Lehman Brothers in a research note to investors. The firm makes a market in Ericsson securities.
Ericsson’s Gideon said the company’s move is largely due to the recent spate of consolidation in the U.S. telecommunications market. Sprint is in the process of merging with Nextel Communication Inc., Alltel Corp. is buying Western Wireless Corp., and Verizon Communications Inc. recently solidified its acquisition of MCI Inc. Further, fewer carriers are building new CDMA networks than Ericsson expected, Gideon said.
Ericsson counts CDMA gear deals with the likes of China Unicom and India’s Tata in Asia; BSI Panama and Telecsa in South America; Leap, Alltel, Western Wireless and Rural Cellular Corp. in the United States; and Rostov and Chelyabnisk in Eastern Europe. The company primarily plays in the CDMA 1xRTT space.
Ericsson’s announcement follows the company’s successful first-quarter results. Ericsson scored a jump in net sales to $4.5 billion and a spring in net income to $656 million. However, the company’s North American sales tumbled 24 percent year-over-year, which it blamed on consolidation in the U.S. wireless market.
At the same time, Qualcomm Inc. cut its 2005 CDMA handset forecast by about 5 percent due in part to inventory adjustments in Latin America and Southeast Asia.
Lehman Brothers said Ericsson’s announcement will further open the door for Lucent to score CDMA business. Lehman Brothers said 50 percent of Lucent’s sales come from mobile operators and-with Ericsson’s decision not to pursue new CDMA contracts-Lucent’s prospects are bright.
Lehman Brothers said Ericsson’s withdrawal could have a “slightly positive effect” on its cost base. The financial firm said it remains impressed by the company’s execution and Ericsson’s position in the third-generation market. Most analysts have an upbeat view of Ericsson, rating its stock “buy” or “overweight.”
