The company has given a tepid future financial outlook. Management declared that the first quarter 2010 gross margin will be even lower, around 24%.

Intensifying competition for embedded modules is a concern for Novatel. In addition to its traditional rival Sierra Wireless Inc. (SWIR), the company is facing significant challenges from newly launched products by large manufacturers, including Qualcomm Inc. (QCOM) and L.M. Ericsson (ERIC).

Qualcomm has launched its Gobi chipset that combines broadband modem technology for high-speed 3G networks (both EV-DO and HSPA) with GPS functionality. The Gobi chipset is currently used in more than 50 devices. Huawei Technologies and Foxconn are also likely to follow suit. These developments are expected to lower product pricing and may materially impact the gross margins of Novatel.

Although Novatel has developed a niche for its MiFi mobile intelligent hot spot, we foresee increased competition as large firms such as Qualcomm, ZTE and Huawei Technologies are on the verge of introducing their own version of intelligent mobile hot spots. Novatel’s product sales depend to a large degree on the market dynamics for wireless access to enterprise networks and the Internet and may be impacted by alternative solutions.

We do not find any near-term growth catalyst for Novatel and believe the company to incur loss for full year 2010.

Zacks Investment Research

(NVTL) Novatel Analyst Downgrades Stock to Underperform

Trails in these two test sites have shown the potential of achieving peak downlink speeds of 40 to 50 megabits per second (Mbps) and peak uplink speeds of 20 to 25 Mbps, significantly faster than the current 3G deployments. This represents a major milestone in Verizon’s first phase of 4G trial process, providing the roadmap for future test launches.

While Verizon continues to extend the nationwide coverage of its 3G wireless services, the carrier is also investing heavily on 4G, representing a key future growth driver. The company spent $9.4 billion for purchasing the 700 megahertz (MHz) spectrum from the Federal Communications Commission (FCC) auction in 2008, providing the platform for 4G network deployments.

Verizon is using the 700 MHz frequency band for 4G data transfer to successfully test applications such as Web browsing, voice transmission, video streaming and file upload and download. The company continues to expect achieving average network speeds of 5 to 12 Mbps on the downlink and 2 to 5 Mbps on the uplink in practical settings.

Verizon is leveraging the network infrastructure provided by its technology partners Ericsson (ERIC) and Alcatel-Lucent (ALU), network equipment vendors Starent Networks (STAR) and Nokia Siemens and trial device providers LG and Samsung.

Leading carriers across the globe have adopted LTE as the base technology standard for their 4G network upgrade initiatives due to its fast data transfer capability and ability to handle bandwidth-intensive applications. LTE is faster than the other leading 4G standards including WiMax. Swedish telecom operator TeliaSonera (TLSN) became the first carrier in the world to launch 4G LTE services (in Stockholm and Oslo) in late 2009.

Verizon is progressing well in leapfrogging its archrival AT&T (T) in 4G roll-out initiatives. The company expects to commercially launch its 4G LTE services in 2010 across 25 to 30 markets (covering 100 million people) with plans in place to provide nationwide coverage by 2013. This will make Verizon the first operator to offer commercial LTE services in the US as AT&T lags with its 4G LTE service launch planned in 2011.

We expect this technological lead to strengthen Verizon’s existing network footprint and drive wireless data revenues with increased margins as a result of new features enabled by the lightning-fast 4G services. ARPU (average revenue per user) is also expected to expand as higher pricing for wireless data service contributes increasingly to overall sales.

Zacks Investment Research

(VZ) Verizon Wireless Speeds up 4G Long-Term Evolution Broadband

Net income soared 127% year-over-year to $33.1 million, driven by healthy revenue growth and subscriber accretions across all segments. For full year 2009, net income climbed 18% to $176.8 million or 49 cents a share, also beating the Zacks Consensus Estimate of 47 cents. The current Zacks Consensus Estimate for 2010 EPS is 44 cents.

Revenue & EBITDA

Consolidated revenues of $930 million for the quarter reflect a 29% year-over-year increase, beating the Zacks Consensus Estimate of $893 million. This growth was fuelled by a 24% annualized increase in service revenue that reached $824.5 million (89% of total sales). Equipment revenue was $105.5 million, up 83% year over year.

Revenues of the Core Markets segment increased 15.4% year over year to $823 million. Northeast Markets revenues grew to $107 million from $11 million. Consolidated adjusted EBITDA increased 29% to $251 million. Revenue for the full year grew 26.5% to $3.48 billion, also above the Zacks Consensus Estimate of $3.45 billion.

ARPU & Churn

Reported ARPU (average revenue per user) of $40.70 represents an improvement from $40.52 reported in the year-ago quarter, driven by the success of the company’s new unlimited international calling plan. However, monthly average churn (a measure of customer attrition) rose to 5.3% from 5.1% registered in the prior-year quarter.

Churn level remains high due to increased customer defection, as MetroPCS has been increasingly challenged by the aggressive roll-out of discounted service plans by its rival Leap Wireless (LEAP) and some of its larger peers, such as Sprint Nextel (S) and America Movil’s (AMX) Tracfone.

Subscriber Trends

Net subscriber additions in the quarter were 317,255, a significant improvement from 66,157 customers added in the previous quarter. However, this represents a decline from the net additions of 519,519 customers registered in the year-ago quarter. The company added 112,427 customers and 204,828 customers in the Northeast and Core markets, respectively. Roughly 1.3 million net additions were registered in 2009.

Consolidated penetration of covered population in the quarter was 7.2%, compared to 8.3% in the prior-year quarter. At the end of 2009, the company served approximately 6.6 million customers, up 24% year-over-year.

Financial Condition

The balance sheet remains leveraged for MetroPCS, as total debt of approximately $3.6 billion represents an increase from roughly $3.1 billion reported at the end of 2008. The company exited 2009 with consolidated cash and marketable securities of approximately $1.2 billion.

MetroPCS generated positive free cash flow (cash flow from operations less capital expenditure) of approximately $67.7 million for 2009, compared to a negative free cash flow of $507 million registered a year-ago.

Outlook

MetroPCS has not released its financial guidance for 2010 given the uncertainties in the economic and competitive environment. However, the company recently provided a grim margin outlook for 2010 as it expects adjusted EBITDA margin for its core markets in the mid-30% range, which underscores the impact of higher promotional expenses for rolling out its new service plans.

MetroPCS remains a leading low-cost service provider in the unlimited prepaid market in the US. The company is increasingly focused on strengthening its position in the unlimited prepaid segment by broadening its portfolio of discounted service plans. Moreover, the company continues to expand its footprint in the lucrative Northeast markets.

MetroPCS plans to launch 4G Long-Term Evolution (LTE) service and several dual-mode smartphones across its metropolitan markets in the second-half 2010. The company has selected Ericsson (ERIC) as infrastructure vendor and Samsung Telecommunications America as the supplier of the LTE-enabled handsets. The ultra high bandwidth multimedia data applications supported by the 4G LTE network will boost revenue per user through increased minutes of use.

The company recently revamped its prepaid wireless service plans to counter stiff competition in the low-cost unlimited prepaid wireless market. The revised service plans (called “Wireless for All”), which start at $40 per month, includes all taxes and regulatory fees. Moreover, MetroPCS has reportedly hired investment bankers JPMorgan Chase and Credit Suisse as advisors to explore the possibility of purchasing rival Leap Wireless.

However, MetroPCS is expected to remain challenged by high churn as Tier-1 national carriers such as AT&T (T) and Verizon (VZ) continue to attract customers with better product/service offerings. While expansion into Northeastern US markets may drive future growth, we feel that associated expenditures will continue to strain the balance sheet. We currently have a Neutral recommendation on the stock.

Zacks Investment Research

(PCS) MetroPCS Communications’ Quarterly Report Exceeds Expectations

In addition to its traditional rival, Sierra Wireless (SWIR), Novatel is facing significant challenges from newly launched products by large manufacturers, including Qualcomm Inc. (QCOM) and L.M. Ericsson (ERIC). Qualcomm has launched its Gobi chipset that combines broadband modem technology for high-speed 3G networks (both EV-DO and HSPA) with GPS functionality. The Gobi solution has significantly captured embedded solutions market share from Novatel.

The market for broadband wireless access solution is emerging rapidly in terms of technological innovation and demand. Although Novatel has developed a niche in its MiFi mobile intelligent hot spot, we anticipate increased competition in the near future. Qualcomm, Huawei Technologies, and ZTE are on the verge of introducing their own version of intelligent mobile hot spots. Novatel has also hinted at sequential demand weakness in the fourth quarter of 2009 for its MiFi product line.

Nevertheless, Novatel has generated a record high level of free cash flow and significantly improved its gross margin. In addition, the company has a very strong balance sheet, capable to support its long-run business endeavors. Management has taken a decision to extend the MiFi platform with new features and functionality, as well as building a MiFi ecosystem through organic development and strategic partners.

According to our assessment, all these positive factors are already reflected in the current valuation, leaving little room for above-market gains.

Zacks Investment Research

(NVTL) Novatel Wireless Gets Downgraded

Networks’ sales in the quarter declined by 16% year-over-year. Full year sales declined by 3%. The mobile infrastructure market share was maintained well in 2009. During the second half of 2009, Networks’ sales were impacted by reduced operator spending in a number of markets.

Professional Services sales in the quarter were flat year-over-year. Organic growth in local currencies amounted to 2%. Managed services sales in the quarter increased by 19% year-over-year and by 22% for the full year. Sales for the second half of the year were negatively impacted by the reduced scope in a managed services agreement in Italy as well as somewhat lower volumes in project-related services.

Multimedia sales in the quarter for comparable units, i.e. adjusted for the divestment of the PBX and mobile platform operations, decreased year-over- year by 14% mainly due to tough comparison with a strong fourth quarter 2008 and somewhat slower sales of revenue management solutions in several emerging markets.

Ericsson’s share in Sony Ericsson’s income before tax was a loss of SEK 1.0 billion in the quarter. Ericsson’s share in ST-Ericsson’s income before tax, adjusted to IFRS, was a loss of SEK 0.4 billion in the quarter, including restructuring charges of SEK 0.2 billion.

Western Europe sales declined 21% year-over-year in the quarter and 6% for the full-year for comparable units, i.e. excluding mobile platforms and PBX. Sales in Central and Eastern Europe, Middle East and Africa decreased in the quarter by 21% year-over-year and by 4% for the full year. Asia Pacific sales in the quarter decreased 18% year-over-year and increased by 4% for the full year. Latin American sales in the quarter decreased by 25% year-over-year, and by 13% for the full year. North American sales in the quarter increased by 101% year-over-year. Full- year sales increased 41%.

In January 2009, cost reduction activities were initiated, targeting annual savings of SEK 10 billion. from the second half of 2010 split equally between cost of sales and operating expenses. Related restructuring charges were estimated to SEK 6-7 billion.

In the third quarter 2009, it was reported that the program was ahead of plan and additional opportunities for efficiency improvements had evolved during the program and would lead to further cost savings, with related charges, during the last three quarters of the program. The program is planned for completion by the second quarter 2010 and it is now estimated that the total annual savings of the entire program will amount to SEK 15-16 billion from the second half of 2010. Related total restructuring charges are estimated at SEK 13-14 billion.

When the initial program was announced in January 2009, it was anticipated that the actions would reduce the number of employees by some 5,000, including 1,000 in Sweden. The target has been exceeded and is now estimated to reach approximately 6,500.

For 2010, the company is determined to increase its efforts to combine its strong technology leadership position and service capabilities to provide value to customers and ensure its continued healthy financial development.

We currently have a Neutral recommendation on ERIC.

Zacks Investment Research

(ERIC) LM Ericsson Telephone Company’s Quarterly Profit Falls 82%

According to our view, these contracts are highly critical for the survival of Nokia Siemens Network. The company is the second largest telecom infrastructure developer of the world with a 20% market share. Despite this, it has a very limited presence in the most lucrative North American markets. Its attempt to purchase CDMA and Metro Ethernet assets of bankrupt Nortel Network failed in the bidding process.

Meanwhile, Nokia Siemens Network failed to clinch a deal with Telenor ASA (TELN) in Norway for the latter’s strategic network upgrade contract. Proximus, the mobile services wing of Belgian telecom operator Belgacom SA also plans to replace its entire radio access networks across GSM, UMTS, as well as LTE, with Huawei Technologies’ SingleRAN base stations. The base stations that will be replaced would be from Nokia Siemens Network.

Management of Nokia Siemens Network has already predicted that the company’s loss of global market share will be more than what was estimated earlier. In the third quarter of 2009, the company generated Euro 2.8 billion revenue, down 21% year-over-year and also down 14% sequentially. Gross margin was 28.2% compared to 30.8% in the same quarter of the previous year. Operating loss was Euro 1.2 billion compared to an operating loss of Euro 1 million in the prior-year quarter. In the same quarter, the company expensed Euro 908 million as goodwill impairment.

Nevertheless, in the last one month, Nokia Siemens Network has taken several steps to improve its financials. The company is now giving more competitive bid prices for any contract. We believe this may be the primary reason for the TeliaSonera contract win surpassing Huawei Technologies. Furthermore, the company has decided to cut 5,760 jobs as part of a major restructuring program. This will help the company reduce operating expenditure by around $732 million by end 2011.

Zacks Investment Research

(ERIC) Nokia and Siemens AG Network Wins Contract

The Nordic region has had a tradition of being at the forefront of telecommunications development. TeliaSonera now offers its customers a next generation broadband network with wireless access to facilitate interactive, bandwidth-demanding services, such as live web, online gaming, social media interaction and video conferencing.

Ericsson was awarded the contract based on its high precision technology and encouraging offer price.

Supplied by Ericsson, TeliaSonera recently launched the world’s first and largest LTE service in Stockholm. Ericsson has signed commercial Long-Term Evolution contracts with four major operators to date, including Verizon Wireless (VZ) and MetroPCS (PCS) in the US, NTT DoCoMo (DCM) in Japan and TeliaSonera in Sweden.

The Zacks Consensus Estimate on ERIC for fiscal 2010 stands at 76 cents, which is up 38% from the fiscal 2009 figure. There are 17 analyst estimates available for 2010, out of which three have been increased while one has been lowered in the last 30 days. The stock has provided positive earnings surprises in each of the trailing four quarters with the average being 19%. All the above factors along with gradually improving macro environment have helped the stock retain its Zacks #3 Rank. This implies a long-term Neutral recommendation on the stock, which means that it will perform in-line with the broader U.S. Equity market over the next six to twelve months.

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.

Zacks Investment Research

(ERIC) LM Ericsson Telephone Company Wins 4G Bid

Given their backgrounds, it appears that Skype is intent on building its position as a leading communications tool for handset and other platforms. The company has existing arrangements with handset makers – Nokia (NOK), Apple (AAPL) and Research In Motion (RIMM), which were recently supplemented through agreements with high definition TV-makers Panasonic (PC) and LG Electronics.

It is expected that the company’s technology would be harnessed by small businesses that are not in a position to deploy expensive communications infrastructure as provided by the likes of Cisco Systems (CSCO).

However, it is still a fledgling operation and could run into different issues, related to both technical difficulties and competition. We still don’t know for example, whether Google (GOOG), on its current buying spree, would acquire competing technology and put it put of business. We also don’t know if the majority of users will remain non-paying and how they would react to a payment plan should Skype decide to implement one. For now, the company seems to be going out for business customers.

In November 2009, eBay sold off the majority 56% stake in Skype to private equity firm Silver Lake and the Canadian Pension Plan Investment Board (CPPIB), with the balance going to founders Janus Friis and Niklas Zennstrom.

The transaction netted $1.9 billion for 70% of the company, a small gain considering the $2.5 billion it paid to acquire Skype in 2005.

Zacks Investment Research

(EBAY) Skype Company Beefing Up Management Team

Once upon a time, the real mobile phone industry consisted of only two companies: Swedish-based Ericsson ADR (NASDAQ: ERIC) and the Finnish Nokia ADR (NYSE: NOK).

These days though, while Ericsson might still lead the sector as the world’s largest mobile network equipment maker, Silicon Valley dominates software innovation.

Just take the iPhone from Apple (NASDAQ: AAPL). Or Google (NASDAQ: GOOG), which continues setting new standards for the industry, most recently with its Android operating system.

Together, they’re leaving Ericsson in the dust at a crucial time, right when mobile network equipment manufacturers are facing difficult times as mobile phone operators cut back on capital spending.

For instance, during the third quarter of 2009, revenue fell 9.3% at Alcatel-Lucent, 21.2% at the number-two manufacturer Nokia Siemens Network and 6.0% at Ericsson.

Ericsson in particular faces an uphill battle, considering that it doesn’t just make equipment; it also has two loss-inducing ventures and a service unit that runs repair networks on behalf of mobile operators.

Neither Sony Ericsson – the mobile phone marker it owns with Sony ADR (NYSE: SNE) – nor ST Ericsson – the wireless semiconductor manufacturer it shares with STMicroelectronics ADR (NYSE: STM) – have done very well lately.

In addition, Ericsson’s mobile network equipment unit still suffers from the profit warning it had to issue two years ago, a necessary action that still sent shares plunging 25% in a single day.

Worse yet, the mobile network equipment unit’s operating profit margin was 17% in 2006, but dropped to 11% last year.

One Good Call

On the plus side, Ericsson paid $1.1 billion for Nortel’s bankrupt mobile network business back in February, a move that could eventually turn it into the leading equipment supplier in the U.S.

That deal gives it the opportunity to sell equipment to the four main US mobile operators: Verizon (NYSE: VZ), AT&T (NYSE: T), Sprint Nextel (NYSE: S) and Deutsche Telecom ADR (NYSE: DT)’s T-Mobile USA unit.

It also adds to Ericsson’s pact to supply Verizon Wireless with network equipment based on LTE, fourth-generation technology that enables speedy web browsing on mobile phones. Made in February, that agreement underlines the company’s position in the forefront of mobile network equipment, an area that it has to maintain in order to stay competitive.

Fortunately, its services unit, which manages that aspect of the business, continues to grow quickly.

It generated 40% of Ericsson’s revenue in the third quarter and could produce 50% in coming months, especially since mobile operators have chosen to cope with fierce competition by handing network management to third parties such as Ericsson in an attempt to cut costs.

In the long term, that brings in a tidy profit though over the shorter-term, it incurs significant implementation costs. For example, the company’s $5 billion, seven-year deal to manage Sprint’s network will depress Ericsson’s gross profit margin in the fourth quarter by two percentage points.

This International Call Could Cost A Lot

Just to make things even more difficult for the mobile maven, the Chinese, privately-owned Huawei Technologies, entered the mobile network equipment world and almost instantly jumped into third place in 2008, behind only Ericsson and Nokia.

Pushing heavily into the emerging markets especially, Huawei has doubled its share of the market to 17% over the past year. It also won a six-year deal with Norwegian mobile phone operator Telenor last month, to replace its entire wireless infrastructure in Norway and upgrade the network for 4G services.

And that just happened to be Ericsson’s stronghold.

Critics accuse Huawei of being subsidized by the Chinese government, which the company denies while still admitting to having a $35 billion credit line from the China Development Bank that customers can use to buy its equipment.

But in the end, whether it has connections or not doesn’t really matter.

As incoming Ericsson CEO Hans Vestberg says: “We just need to compete with them like anybody else… We just need to win.”

And for it and its investors’ sakes, Ericsson had better hope it does win… because as of right now, nothing is certain.

Good investing,

Tony Daltorio

View original at: Investment U

($ERIC) Don’t Buy Into Ericsson Before You Read This

The market for broadband wireless access solution is evolving rapidly in terms of technological innovation and demand. Although Novatel has developed a niche in its MiFi mobile intelligent hot spot, we anticipate increased competition in the near future. Qualcomm, Huawei Technologies, and ZTE are on the verge of introducing their own versions of intelligent mobile hot spots. Novatel has also hinted at a sequential demand weakness in the fourth quarter of 2009 for its MiFi product line.

Nevertheless, Novatel has generated a record high free cash flow and significantly improved its gross margin. In addition, the company has a very strong balance sheet, capable of supporting its long-run business endeavors. Management has taken a decision to extend the MiFi platform with new features and functionality, as well as building a MiFi ecosystem through organic development and strategic partners.

According to our assessment, all these positive factors are already reflected in the current valuation, leaving little room for above-market gains.

Zacks Investment Research

(NVTL) Novatel Wireless Inc Downgraded to Neutral

NTT DoCoMo (DCM), the largest wireless service provides in Japan is likely to become the first carrier in Asia to deploy LTE network. DoCoMo is all set to commercially launch its LTE service from Dec 2010 and is using L.M. Ericsson’s (ERIC) LTE solutions. KDDI Corp., the second largest mobile operator in Japan, is in the process to implement LTE from end 2012. KDDI is using Motorola Inc (MOT) and NEC Corp’s LTE infrastructure.

China Mobile Ltd. (CHL), world’s largest mobile operator with respect to subscriber count, is also conducting several trial runs for its nationwide LTE deployment from end 2011. The company is using Motorola, Huawei Technology, and Ericsson’s technical solutions for LTE network. Singapore Telecommunications, the largest wireless carrier in Singapore with operations in Australia, Indonesia and the Philippines, also announced plans for LTE trials. The company has chosen Alcatel-Lucent (ALU) as its equipment vendor for the trials, which will begin in the first half of 2010 and take anywhere from six to nine months. Singapore Telecom will start multi-market LTE trial runs with the help of its partners like Optus, Globe Telecom, and Telkomsel, the wireless service division of P.T. Telekomunikasi Indonesia Tbk. (TLK).

LTE offers several advantages over other 4G techniques like WiMAX, Ultra Mobile Broadband (upgrade of CDMA EV-DO) and Multi-input Multi-output (MIMO) Wireless LAN. This includes improvement in spectral efficiency, lower costs, and solid integration with other open wireless standards. LTE provides downlink and uplink peak rates of 100 Mbit/s and 50 Mbit/s respectively with RAN (radio access network) round-trip times of less than 10ms. LTE also supports flexible carrier bandwidth and both FDD (frequency division duplexing) and TDD (time division duplexing) on the same platform. Ability to incrementally increase speed and capacity are the major hallmarks for its acceptability to wireless carriers.

Zacks Investment Research

(DCM) 4G Cellular Technology LTE Thriving in Asia

Virgin Media will launch this service on two Nokia Inc. (NOK) handsets ? 5580 and 5530 ? and also on two Sony-Ericsson handsets namely, W595 and K770i. Sony-Ericsson is a joint venture between Sony Corp. (SNE) and L.M. Ericsson (ERIC). Increasing sale of high-end mobile handsets resulted in huge growth of mobile Internet data tariff for Virgin Media.

Virgin Media is the first quad-play service provider in the U.K. offering television, fixed-line telephone, broadband and mobile telephone services. In our view, the company is in the early stages of a turnaround, poised to generate strong free cash flow and improved EPS in fiscal 2010. A new management team is re-branding the product, formerly notorious for poor customer service.

Virgin Media’s video-on-demand (VOD) service is gaining traction. Average monthly VOD views increased 51% year over year to 66 million in the third quarter 2009, and is now second only to YouTube for on-demand viewing of any kind. The market for quad-play cable MSO is emerging rapidly in terms of technological innovation and demand. Through Get Social, Virgin Media is trying to change the mobile experience of its customers’ favorite social networks.

Zacks Investment Research

(VMED) Virgin Media Continues Innovation

The test was launched in O2 UK’s home market Slough, Berkshire, leveraging the infrastructure support provided by Chinese vendor Huawei Technologies. The trial achieved peak downlink speeds of 150 megabits per second (Mbps) while running high-bandwidth applications such as high-definition video streaming, mobile gaming and video conferencing. A larger network launch is expected in late 2010.

Telefonica unveiled the details of a large-scale field trial project in Oct 2009 for 4G LTE network services. The company will test run its 4G LTE network in Spain, UK, Germany and the Czech Republic in Europe, while the Latin American trials are slated to be staged in Brazil and Argentina. The outcome of the trials will help Telefonica chalk out the next phase of network deployment strategy. The company completed the LTE trial in Madrid, Spain, in April 2009 which has demonstrated encouraging throughput levels.

To facilitate the trial projects, Telefonica has selected six technology providers: Alcatel-Lucent (ALU), Ericsson (ERIC), Huawei, NEC, Nokia Siemens and ZTE. Telefonica plans to deliver peak downlink speeds of 340 Mbps, which is difficult to achieve in a practical setting as the available bandwidth will be shared by the company’s huge customer base.

Leading carriers across the globe have adopted LTE as the base technology standard for their 4G network upgrade initiatives due to its fast data transfer capability and ability to handle bandwidth-intensive applications. LTE offers rapid downlink speeds that average 100 Mbps and are faster than other leading 4G standards including WiMax. Swedish telecom operator TeliaSonera AB (TLSN) recently became the first carrier in the world to launch 4G services (in Stockholm and Oslo) based on LTE.

By moving to the 4G LTE network, Telefonica will offer its customers superfast mobile broadband experience, representing an encouraging opportunity to improve customer retention. Moreover, the ultra high-bandwidth multimedia data applications enabled by the 4G LTE network will boost revenues per user through increased minutes of use.

Zacks Investment Research

(TEF) Telefonica’s O2 UK Tests 4G Long Term Evolution Technology

Although 3G (third generation) technologies deliver significantly higher bit rates than 2G technologies, there is still a great opportunity for wireless service providers to capitalize on the ever-increasing demand for wireless broadband and take advantage of the technology innovation that improves the economics of deploying mobile broadband networks. Consequently, there is an expanding revenue opportunity from a growing pool of consumers and business professionals who are demanding the same experience and applications that they enjoy on a fixed wire line connection over wireless — anywhere, any content, stationary or mobile. The solution is LTE.

LTE (Long Term Evolution) is the project name of a new high performance air interface for cellular mobile communication systems. It is the last step toward the 4th generation (4G) of radio technologies designed to increase the capacity and speed of mobile telephone networks. Where the current generation of mobile telecommunication networks are collectively known as 3G. LTE is marketed as 4G. Major mobile carriers in the United States and several worldwide carriers had announced plans to convert their networks to LTE beginning in 2009. LTE is a set of enhancements to the Universal Mobile Telecommunications System (UMTS) which will be introduced in 3rd Generation Partnership Project Release 8.

TeliaSonera’s mobile broadband commercial network in Stockholm is now the fastest and largest in the world. It is the first operator in the world to offer customers 4G services.

Stockholm has been covered with the Ericsson LTE network, making it the largest LTE deployment to date. TeliaSonera’s customers are the first to have access to the LTE service by commercially available Samsung LTE dongles. A dongle is a piece of hardware that attaches to a computer in order to make a piece of secured software run. A dongle is used as a high-end form of security to prevent the unauthorized copying of software.

Ericsson has completed commercialization of its LTE products and larger production is ready for further deployment. Interoperability has been tested thoroughly with many different devices in different operators’ networks.

Headquartered in Stockholm, Sweden, LM Ericsson Telephone Co. 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 wire line operators, enterprises, and consumers. The company is primarily a supplier of global system for mobile communications (GSM)-based equipment, and looks to benefit to the next generation systems as more broadband content is being streamed to mobile devices, prompting network providers to upgrade their networks. Its major competitor is Alcatel-Lucent (ALU).

We currently have a Neutral recommendation on ERIC.

Zacks Investment Research

(ERIC) Ericsson Facilitates Largest 4G Service

The Greater China and South Asia region will be led by Corporate Vice President Francois Guibert, who has guided ST’s efforts in the Asia/Pacific region since June 2006. Under his direction, ST’s revenues in the region has increased more than 10%* in a declining market. Within this region, ST’s headquarters for sales and marketing will be based in Shanghai, while the company will keep its manufacturing headquarters in Singapore.

The Japan and Korea region will be led by Corporate Vice President Marco Cassis, currently the head of ST Japan. Moving from Greater China to the Americas, Corporate Vice President Bob Krysiak will lead ST’s efforts to expand into Central and South America and continue to increase market share in North America.

ST’s worldwide sales and marketing initiatives focus on key global challenges and market trends.
ST Ericsson, the maker of mobile phone chips, on Thursday said was planning to cut up to 600 more jobs – 7.5 per cent of its workforce – in an effort to make an additional $115m in annual savings. It will be the third round of restructuring and lay-offs that the loss-making company has announced in the past year. Created by combining the wireless chip operations of three companies – LM Ericsson Telephone Co. (ERIC), STMicroelectronics and NXP Wireless – the company announced 500 staff cuts in November to save $250m and a further 1200 redundancies in April with an aim to saving $230m a year.

STMicroelectronics N.V., an independent semiconductor company, together with its subsidiaries, designs, develops, manufactures, and markets semiconductor products used in various microelectronic applications, including automotive products, computer peripherals, telecommunications systems, consumer products, industrial automation, and control systems. Major competitor is Texas Instruments Inc. (TXN).

Zacks Investment Research

(STM) STMicroelectronics NV to Consolidate Regions in Asia

Ericsson’s bid for Nortel’s GSM assets was made together with Kapsch CarrierCom AG of Austria. Under the agreements, Ericsson is acquiring certain assets of Nortel’s GSM business in North America while Kapsch is paying $33 million to acquire most of the remaining assets outside North America.

Ericsson acquires an installed GSM base, which expands its North American footprint.
The agreement includes the transfer of important GSM business with North American operators such as AT&T and T-Mobile. Under the agreement Ericsson will offer employment to approximately 350 employees from Nortel. Nortel’s North American GSM operations generated approximately $400 million in 2008.

The acquisition makes North America the largest geographical segment within Ericsson and encompasses some 14,500 employees, up from 5,000 at the beginning of 2009. The acquired operations will contribute top- and bottom-line additions to Ericsson. The transaction is expected to have a positive effect on Ericsson’s earnings within a year after closing.

Ericsson is the world’s leading provider of technology and services to telecom operators. Ericsson is the leader in 2G, 3G and 4G mobile technologies, and provides support for networks with over 1 billion subscribers and has a leading position in managed services. The company’s portfolio comprises of mobile and fixed network infrastructure, telecom services, software, broadband and multimedia solutions for operators, enterprises and the media industry. Its major competitor is Alcatel-Lucent (ALU).

We currently have a Neutral recommendation on ERIC.

Zacks Investment Research

(ERIC) LM Ericsson Telephone Co Buys Nortel’s GSM Business

In Oct 2005, six large wireless handset technology developers, namely, Nokia Corp. (NOK), L.M. Ericsson AB (ERIC), Broadcom Corp. (BRCM), Texas Instruments Inc. (TXN), NEC Corp., and Panasonic Mobile Communications filed coordinated complaints alleging that Qualcomm was both violating antitrust laws and breaching its own commitments to standard-setting bodies to license its declared essential patents on fair, reasonable and non-discriminatory terms. In support of these complaints, they filed substantial economic evidence that Qualcomm’s conduct has caused mobile phone users to pay billions in unnecessary costs.

Qualcomm has already settled its litigation issues with Nokia and Broadcom. On Jul 27, 2009, the anti-trust authority of the Government of South Korea imposed a fine of 260 billion won (approximately $208.7 million) on Qualcomm for unfair trading practice. On the very next day, Japan’s anti-trust regulator issued a notice to Qualcomm stating that the company had illegally pressured the Japanese mobile handset makers to incur unfair licensing expenses. As a result of the actions taken by the South Korean and Japanese regulators, Ericsson and NEC Corp have withdrawn their complaints.

The patent disputes were mainly due to Qualcomm’s 3G WCDMA licensing practices. Resolution of these issues will not only reduce litigation expenditure of Qualcomm but also accelerate the deployment of 3G networks throughout the world. The company is the undisputed global leader in the CDMA mobile chipset market, holding more than 5,700 patent and intellectual property rights. A recent report of ABI Research estimated that Qualcomm owns roughly 1 out of every 4 patents regarding the next-generation (4G) super-fast LTE technology. Settlement of legal issues with major customers will help the company to significantly increase its top-line when the LTE network starts getting deployed rapidly within, may be, the next 2?3 years.

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($QCOM) Patent Investigation into Qualcomm is halted

MetroPCS remains a leading low-cost service provider in the unlimited prepaid market in the US and will continue to benefit from the ongoing wireline replacement trend. The company is increasingly focused on strengthening its position in the unlimited prepaid segment by broadening its portfolio of discounted service plans.

MetroPCS has initiated several steps to counter intense competition and drive subscriber accretion. The company is rolling out new product/services, upgrading network infrastructure and entering additional markets for growth.

The company is currently enjoying meaningful traction in the Northeast region, which is evidenced by healthy subscriber growth. Gains from the Northeastern markets continue to offset declines in Core markets (including Atlanta, Dallas, Las Vegas, Los Angeles and San Francisco). A significant part of MetroPCS’ network infrastructure deployment initiatives is centered on the lucrative Northeast region.

MetroPCS has joined the league of the top-tier US wireless carriers such as Verizon (VZ) and AT&T (T) as the company recently declared vendors for its 4G Long Term Evolution (LTE) wireless broadband service. MetroPCS has selected Ericsson (ERIC) as network infrastructure vendor and Samsung as the supplier of LTE enabled handsets.

The company plans to launch 4G LTE service and several dual-mode smartphones across its metropolitan markets in second-half 2010. The ultra high bandwidth multimedia data applications supported by the 4G LTE network will boost revenue per user through increased minutes of use.

However, despite these encouraging growth prospects, MetroPCS contends with subscriber retention problems as customer accretion continues to decelerate on a sequential basis due to intense competition in the prepaid wireless segment. The company is experiencing sustained customer attrition in its legacy Core markets.

Churn (customer switch) level remains high due to increased customer defection as the company’s larger peers in the prepaid market such as Sprint Nextel (S) and America Movil’s (AMX) Tracfone continue to lure subscribers with competitive service plans and better product offerings.

While expansion into the Northeastern markets is expected to drive future growth, we feel that associated capital expenditures will strain balance sheet moving forward.

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(PCS) MetroPCS Communications Upgraded to Neutral

The company is the second largest telecom infrastructure developer of the world with 20% market share. Despite this, it has a very limited presence in the most lucrative North American markets. NSN first tried to enter this market in a big way by means of purchasing the lucrative CDMA assets of now bankrupt Nortel Network. But it lost the game to the world’s largest telecom infrastructure developer L.M. Ericsson AB (ERIC), which commands 32% of global market.

In November 2009, NSN again bids for Nortel’s Metro Ethernet Network assets but failed to the higher bids provided by Ciena Corp. (CIEN). Successive failure of NSN for two major network assets of Nortel has raised serious doubt regarding the company’s near-term business potential in the North American region.

Meanwhile NSN failed to clinch a deal with Telenor ASA (TELN) in Norway for the latter’s strategic network upgrade contract. Telenor will replace its entire mobile infrastructure in Norway with radio access equipment from Huawei Technologies Co. Ltd. Proximus, the mobile services wing of Belgian telecom operator Belgacom SA is the latest addition to NSN’s pathetic performance. Proximus plans to replace its entire radio access networks across GSM, UMTS, as well as LTE, with Huawei Technologies’ SingleRAN base stations. The base stations that will be replaced are from NSN.

Telecom infrastructure and related services market is likely drop by 5% -10% in 2009 compared to the previous year. Management of NSN has already predicted that the company will lose its global market share more than that was earlier estimated. In the third quarter of 2009, the company generated Euro 2.8 billion in revenues, down 21% year over year and also down 14% sequentially. Gross margin was 28.2%, compared to 30.8% in the same quarter of the previous year. Operating loss was Euro 1.2 billion compared to an operating loss of Euro 1 million in the prior-year quarter. In the same quarter, the company expensed Euro 908 million as goodwill impairment.

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($NOK) Nokia-Siemens Suffers Setbacks

Operating margin came in at 14.4% compared to 12.0% in the previous quarter. Earnings per share came in at 24 cents, easily beating the Zacks Consensus Estimate of 18 cents.

During the quarter, the company retired $17.4 million in 2010 convertible bonds, which led to a dilution of the equity base by two million.

Going forward, although the management remains cautious about the broader economy, it expects revenues to grow by 15% – 20% year over year driven by mobile Internet, energy management and diversified analog applications. Management indicated improved order visibility and strength in backlog at the end of the quarter. This implies a revenue guidance of $238 million – $242 million. Operating margin is forecasted around 20%. Earnings per share are expected around 25 cents.

The company launched network infrastructure digital attenuators, voltage controller oscillators, synthesizers and mixers at Huawei, ZTE, Ericsson (ERIC), Alcatel-Lucent (ALU) and Nokia-Siemens (NOK)/(SI).

Skyworks is well positioned to benefit from recent trends in the handset market, which are favorable to increasing dollar content for RF components. In general, the increasing complexity of higher-end phones that offer multi-band communication across various air standards are expanding the market for Skyworks’ products due to the need for backward compatibility from 3G to 2G networks. There is a significant growth opportunity in the handsets market, propelled by the launch of 3G in China.

Another favorable trend is the continued shift towards multi-mode modules, which save board space in a handset, generating higher margins. The company has tie-ups with major OEMs that underscore the company’s success in gaining market share. The company is also making good progress in the linear business with WLAN wins at Intel (INTC) and Broadcom (BRCM).

Headquartered in Woburn, Massachusetts, Skyworks Solutions designs, manufactures, and markets a broad range of high performance analog and mixed signal semiconductors that enable wireless connectivity.

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(SWKS) Skyworks Solutions Beats Estimates

The deal is subject to a competitive bidding process. Nokia Siemens Networks, a joint venture between Nokia (NOK) and Siemens AG (SI) and a private equity firm One Equity Partners have jointly bid for Nortel’s optical networking and carrier Ethernet business challenging Ciena Corporation’s (CIEN) bid for the assets.

The telecommunication and network specialist Ciena offered a total of $521 million ($390 million in cash and 10 million in shares) to Nortel for acquiring substantially all of its MEN division.

We believe that the deal has strong growth potential for Ciena’s rapidly expanding metro Ethernet business and optical networking products. The Nortel deal would be the largest ever for Ciena and would also help it expand geographically.

While the Nortel acquisition will enable revenue growth, integration risk will be an issue. Moreover, the deal could pull Ciena into a net debt (debt exceeding cash) position. Other potential bidders include Ericsson (ERIC) and Infinera (INFN), who could take the deal away from Ciena.

Ciena reported better-than-expected results for the third quarter amid cautious consumer spending and weak demand. However, the more stable macroeconomic environment helped it deliver sequential growth, although year-over-year comparisons have been weak.

Ciena is set to announce its fourth quarter results on Dec 10, 2009. Though market conditions have improved Ciena expects results to be lumpy as customers are still spending cautiously. As a result, the company guided revenue in the fourth quarter to be flat sequentially.

Non-GAAP operating expenses for the fourth quarter are expected to be in the low to mid $80.0 million range. The company expects higher prototype costs in the upcoming quarter.

While pricing remains competitive, the company expects to sustain gross margins in the mid to high 40% range in the near term. Ciena’s restructuring initiatives to trim operating expenses appear positive for the company.

Although we do not expect Ciena to become profitable in the next two quarters, we do expect a recovery in 2010 due to favorable operational execution and growth in data traffic. However, uncertainty regarding the closure of the acquisition of Nortel’s assets further adds to the risk.

We therefore maintain our neutral rating on the stock.

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(NOK) Final Deadline for Nortel Bid

China Mobile has recently selected Alcatel-Lucent (ALU) for the responsibilities of design, construction, installation and integration of communication infrastructure to facilitate the 4G network trial. The TD-LTE network will provide advanced wireless services (including high-definition TV and ultra-fast broadband Internet access) to the visitors at the exposition.

The three major Chinese telecom operators China Mobile, China Unicom (CHU) and China Telecom (CHA) are investing heavily in Shanghai to improve the city’s network infrastructure, thereby ensuring the delivery of smooth network coverage for Word Expo 2010. China Mobile plans to invest RMB 15 billion ($2.19 billion) over the next three years in Shanghai.

China Mobile’s TD-LTE venture is being supported by the British telecom giant Vodafone (VOD). In addition to Alcatel-Lucent, the company has also selected Ericsson (ERIC), Motorola (MOT), Nokia Siemens, Huawei Technologies and ZTE Corp as the primary technology vendors for the upcoming 4G project in Shanghai.

China Mobile’s TD-LTE network will enable downlink speeds of 60 megabits per second (Mbps), which is 20?30 times faster than the average throughput levels offered by existing 3G networks. China Mobile plans to allocate approximately 60% of its capital expenditure over the next few years to develop its 4G network.

The company’s recently accelerated development plan for TD-LTE stems from the uncertainties related to the success of its TD-SCDMA technology based 3G services. China Mobile is facing challenges regarding the adaptability and performance of this indigenously developed 3G standard.

European and American 3G standards such as WCDMA and CDMA2000, which have been adopted by China Unicom and China Telecom, respectively, offer faster network speeds and already enjoy wide acceptability in the marketplace. Additionally, TD-SCDMA also suffers from certain limitations when it comes to international roaming. These issues may restrict a wider adoption of China Mobile’s 3G network.

China Mobile aims to leverage the 4G TD-LTE opportunity to offset the limitations of the 3G TD-SCDMA network. Moreover, this move will also provide an opportunity to leapfrog the company’s Chinese peers to emerge as the first carrier to deploy 4G LTE based mobile broadband network in China, representing a significant competitive advantage.

Read the full analyst report on “CHL”
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Read the full analyst report on “ERIC”
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(CHL) Wireless Carrier China Mobile Outlines 4G Plan

A typical mobile M2M messaging system establishes a wireless communications link to connect a group of devices to a computer server or another device for the purpose of transmitting data contained within those devices. This emerging M2M market provides the opportunity to mobile-enabled millions of devices, like cars, utility meters, vending machines and consumer electronics devices to get connected to a wireless network.

In last July, Verizon Wireless (VZ) and Qualcomm Inc (QCOM) have formed a joint venture to provide M2M wireless communications and smart services offerings across several market segments. Novatel’s closest competitor, Sierra Wireless (SWIR) has already entered into M2M business with both T-Mobile, a division of Deutsche Telekom (DT) and Orbcomm (ORBC). Sprint Nextel (S) has formed a partnership with DataSmart for M2M solutions. Wireless IP specialist InterDigital Inc. (IDCC) is also entering the M2M sector with a deal to license its 2G/3G patents to Cinterion Wireless Modules GmbH.

According to our view, diversification into M2M market become essential for Novatel since the company is facing significant challenges from newly launched products by large manufacturers, including Qualcomm and L.M. Ericsson (ERIC). Huawei Technologies and Foxconn are also on verge of launching embedded wireless products. Furthermore, Novatel announced that its MiFi product line, which generated more than 40% of its recently concluded third quarter revenue, may face sequential demand weakness. M2M is a rapidly growing market opportunity. Globally M2M connections may reach more than 200 million by 2014 with a total market size of about $57 billion.

Zacks Investment Research

(NVTL) Novatel Enters Machine-to-Machine Market

Net sales in the third quarter were SEK 46.4 billion ($6.6 billion). Sales in the quarter decreased 4% year-over-year for comparable units, i.e. excluding Ericsson Mobile Platforms, and decreased 12% adjusted for currency exchange rate effects and hedging. The third quarter last year was comparatively strong with no normal seasonality.

Sequential sales decreased 11%, negatively impacted by currency exchange rate effects, seasonality and a reduced scope of the renewed managed services agreement in Italy.

Network sales in the third quarter declined year-over-year by 8%. Even though the comparison is tough with last year’s strong third quarter, the market was weaker. The markets are fairly strong in the world’s leading economies, while demand is weaker in several emerging markets affected by the present economic climate.

Professional Services sales increased 9% year-over-year. Growth in local currencies amounted to 4%. Total service sales, including network rollout, now account for 40% of Group sales. In the present financial climate there is strong demand for services targeting the operational efficiency of operators such as managed services and consulting.

However, managed services sales increased by just 3% year-over-year due to the reduced scope of the renewed agreement in Italy. Other professional services sales increased by 11% year-over-year.

The gross margin, was flat sequentially despite the lower sales, and decreased only slightly year-over-year to 36.2%.

Ericsson is a world-leading provider of telecommunications equipment and related services to mobile and fixed network operators globally. Over 1,000 networks in more than 175 countries utilize its network equipment and 40 percent of all mobile calls are made through its systems. It is one of the few companies worldwide that can offer end-to-end solutions for all major mobile communication standards.

We currently have a Neutral recommendation on ERIC.

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(ERIC) LM Ericsson Telephone Company Beats Estimates

The third-largest US wireless carrier posted a net loss of $478 million, 47% more than the net loss of $326 million reported a year ago. Sprint remains significantly challenged by the volatile economic backdrop, which has contributed to the sustained decline in the wireless subscriber base and associated revenues.

Operating revenue fell 9% year over year to $8 billion due to lower contributions from its wireline and post-paid wireless businesses. The company reported adjusted OIBDA of $1.5 billion for the quarter, down 17% year over year, due to decreased operating revenue partly offset by lower SG&A expenses.

Wireless

Consolidated revenue from the wireless segment was $6.9 billion, down 8% year over year, as a result of lower wireless service revenue which declined 8% to $6.3 billion. This year-over-year decrease is attributable to declines in the post-paid segment which more than offset gains in the Boost Monthly prepaid subscriber base.

Sprint lost a net of 545,000 subscribers in the second quarter compared to 257,000 in the previous quarter. A net loss of 801,000 customers in the retail postpaid segment reflects a sequential decline, which was partially offset by a net gain of 666,000 customers in the retail prepaid segment.

At the end of the quarter, Sprint had 48.3 million customers (including 33.6 million post-paid and 5.7 million prepaid) compared to 48.8 million and 50.5 million customers reported in the previous and year-ago quarters, respectively.

Post-paid ARPU (average revenue per user) of $56 remained stable both sequentially and year-over-year basis, as growth in fixed-rate bundled plans was offset by declines in usage. Prepaid ARPU increased to $35 from $34 and $31 in the previous and year-ago quarter respectively, largely favored by the $50 Boost Monthly unlimited plan.

Post-paid churn increased sequentially and year over year to 2.17%, partly due to competition. Prepaid (Boost) churn of 6.65% represents a decline from year-ago quarter, assisted by subscriber growth.

Wireline

Revenues from the wireline segment declined 10% year over year to $1.4 billion due to declines in voice and data revenue. On a positive note, revenue for the Internet Protocol services increased 5% year over year driven by strong demand from enterprise customers. This was, however, offset by declines in voice (down 14%) and legacy data (down 35%) services.

Outlook

Sprint has reaffirmed its 2009 outlook as it continues to expect improvement in both postpaid and total subscriber losses for the year compared to 2008. Capital expenditure for the year is expected to be less than $1.7 billion. Sprint expects to continue generating positive free cash flow in 2009 (including fourth-quarter) driven by its ongoing cost-cutting measures.

Opportunities and Challenges

Sprint is well positioned to leverage the growing wireless smartphone market in the US leveraging a rich portfolio of popular smartphone offerings. In response to the increased competition from iPhones, the company launched Palm Inc’s (PALM) Pre touchscreen smartphone in June 2009. Sprint further broadened its next-generation handset portfolio by launching smartphones based on the Android platform. The company is set to launch Palm’s Pixi (cheaper version of Pre) this November.

In order to improve subscriber retention, the company’s Boost Mobile prepaid subsidiary is offering the $50 unlimited rate plan across all wireless network platforms.

Sprint also launched an unlimited calling plan (“Any Mobile Anytime”), which enables cell phone users to make or receive unlimited calls from the company’s network to any other US carrier network any time using any handset for free.

Sprint is acquiring Virgin Mobile USA (VM) to strengthen its presence in the fast-growing prepaid market. The company recently announced plans to buy its wireless affiliate iPCS Inc (IPCS), which will expand Sprint’s service territories and offer cost synergies.

Sprint is aggressively deploying 4G WiMax mobile broadband service having already launched its service in 17 US cities including 10 markets launched in October. The company targets to launch 4G services in additional US cities during the fourth-quarter 2009. The 4G WiMax service is expected to play a critical role for Sprint’s survival in the domestic wireless market given the continued market share losses to larger rivals.

The company continues to lose market share to its larger peers Verizon (VZ) and AT&T (T) as they continue expanding their respective customer bases at a brisk rate. Sprint is struggling to integrate Nextel’s iDEN wireless network, resulting in subscribers losses to other carriers. However, to improve network performance, the company is outsourcing its networks to Ericsson AB (ERIC).

We believe a lower margin-revenue mix, expenditures related to the wide deployment of the 4G services and weak wireless business will have an adverse impact on financials in the near-term. Additionally, the company may continue to experience steep declines in its post-paid subscriber base, resulting from customer migration to competition.

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(S) Sprint’s Loss Worse Than Estimates

Ciena plans to acquire substantially all of the optical networking and carrier Ethernet assets of its rival Nortel Networks’ Metro Ethernet Networks (MEN) division, for a total of $521 million ($390 million in cash and 10 million in shares worth $142 million based on the Oct. 15 market price).

The company expects to incur integration-related costs of approximately $180 million, the majority of which will be paid in 2010, and expects the transaction to be significantly accretive in fiscal 2011.

The deal is subject to a competitive bidding process under the United States Bankruptcy Code and the Canadian Companies’ Creditors Arrangement Act. In a stalking-horse deal, there is no guarantee that Ciena will get the assets.

Ciena’s Carrier Ethernet platform enables differentiation and provides a competitive advantage to the company. We believe the deal could provide strong growth potential to Ciena’s rapidly expanding metro Ethernet business and optical networking products. The Nortel deal would be its largest ever for Ciena, and would help boost its geographical expansion toward opening a major research center in Canada.

For the third quarter, Ciena generated approximately 14% of total revenue from metro Ethernet products. The company expects the Ethernet division to be a major contributor to growth going forward. Besides, the merger could double Ciena’s revenue.

Moreover, the acquisition would provide tough competition to other players in the networking industry such as Ericsson (ERIC), Nokia (NOK) and Siemens (SI). Longer-term, we view the deal to be positive for Ciena.

However, Ciena is a small player with very small revenues. Therefore, Ciena could face integration problems. The deal could pull Ciena into a net debt (debt exceeding cash) position. Moreover, risk of dilution remains.

Intense competition from companies such as Alcatel-Lucent (ALU), Cisco Systems (CSCO) and Tellabs (TLAB) is eating into the company’s market share.

We have a Neutral rating on the stock.

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($CIEN) Ciena Gets Approval to Bid For Nortel Network’s Optical and Ethernet Division

This grand opportunity provides massive scope for telecom service providers, equipment manufacturers, chipset developers, and wireless tower operators to retain new users and grow revenues moving forward. According to the CTIA Wireless report, at present, the U.S. has more than 246 million data capable devices with 40 million smart-phones or PDAs apart from 10 million 3G cards. This indicates that the mobile broadband service has become an integral part of the U.S. lifestyle.

The smart-phone market has become a long-run growth potential for the overall telecom industry. As a result, this market is getting increasingly crowded with new players and is expected to witness intense competition going forward. In addition to the established smart-phone makers like Research In Motion (RIMM), Apple Inc. (AAPL), Palm Inc. (PALM), and Nokia Corp. (NOK), other large mobile handset makers such as Sony-Ericsson, a joint-venture between Sony Corp. (SNE) and L.M. Ericsson (ERIC), and Samsung have launched a series of innovative products. Motorola Inc. (MOT), Google Inc. (GOOG), HTC, and LG Electronics are other new entrants in this market.

The 3G technology of converged mobile computing enables a smart-phone to function like a fully operational computing device with the help of a strong web browser. 3G handset users are increasingly using their mobile handset to browse the Internet. Furthermore, the growing acceptance of LTE technology has prompted the mobile handset makers to develop phones that will be compatible with this network. Industry sources predicted that the first LTE handsets may arrive on the market in the second half of 2010, but these next-generation smart-phones may to go mass market by early 2012. This will further intensify the growth of the U.S. telecom industry.

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($RIMM) Smart-Phone Wave Grows Rapidly in the U.S.

Currently the smartphone market is dominated by players like Apple, Research In Motion (RIMM) and Nokia Corp. (NOK). Both handset and PC-makers have understood the business potential of the smartphone and Dell is also in the process of grabbing its share. Rumor has it that Dell could launch the phone as soon as early 2010.

As per the projections of the technology research firm iSuppli, global shipments of smartphones are expected to rise 235.6 million units in 2010, an increase of 27.9% from 184.2 million units in 2009. On the other hand, opportunity and competition co-exist in the smartphone market, so Dell is expected to face competition from players like Samsung, Sony Ericsson (SNE)/(ERIC) and Ace who are trying to grab majority share of this growing market.

This is a good strategy by PC makers to venture into the domain of mobile phone manufacturers, as mobile phone manufacturers like Nokia have entered the netbook market with Nokia Booklet 3G. Again, this strategy by Nokia to enter the netbook was a counter move, to combat the growing popularity of the iPhone introduced by Apple. So we believe competition will be cut-throat in the smartphone segment, since the business domain of PC manufactures and smartphone manufacturers will overlap more in the days to come.

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(DELL) Dell to Try Smartphone

Ciena will take over Nortel’s long-haul optical transport portfolio, metro optical Ethernet switching and transport solutions, Ethernet transport, aggregation and switching technology, multiservice SONET/SDH product families and network management software products.

Moreover, Ciena expects to incur integration-related costs of approximately $180 million, the majority of which will be paid in 2010 and expects the transaction to be significantly accretive in fiscal 2011.

Nortel had filed for bankruptcy protection back in January in Canada, and has since then planned to sell off its assets. Nortel had sold its wireless carrier business to Sweden’s Ericsson (ERIC) for $1.13 billion in July. This was followed by the sale of its Enterprise unit to Avaya for $915 million.

Ciena is expected to employ at least 2,000, or 85% of Nortel employees. The acquisition would significantly enhance Ciena’s existing Canadian development resources, making Ottawa the company’s largest product and development center. Deutsche Bank Securities Inc. and Foros Securities LLC served as financial advisors in the deal.

Ciena’s Carrier Ethernet platform enables differentiation and provides a competitive advantage to the company. We believe the deal could provide strong growth potential to Ciena’s rapidly expanding metro Ethernet business and optical networking products.

For the third quarter, Ciena generated approximately 14% of total revenue from metro Ethernet products. The company expects the Ethernet division to be a major contributor to growth, going forward. Besides, the merger could double Ciena’s revenue. Ciena had total revenue of f $902 million in 2008, while Nortel’s Ethernet business generated $1.36 billion in revenue in 2008 and $556 million in the first six months of 2009.

Moreover, the acquisition would provide tough competition to other players in the networking industry such as Ericsson, Nokia (NOK) and Siemens (SI). Longer-term, we view the deal to be positive for Ciena.

However, Ciena is a small player with minimal revenues. Therefore, Ciena could face integration problems. For example, Nortel had $10.4 billion in 2008 revenue compared to Ciena’s $902.5 million. Moreover their products overlap and may affect Ciena’s Ethernet business in future quarters.

Second, we believe that the deal could pull Ciena into a net debt (debt exceeding cash) position. The company exited the most recent quarter (second quarter) with $1.07 billion in cash, short-term investments and long term investments and had $798.0 million in long term debt (convertible notes payable). Moreover, risk of dilution remains.

Ciena said that the agreement is subject to a competitive bidding process under the United States Bankruptcy Code and the Canadian Companies’ Creditors Arrangement Act. The deal is subject to approval of courts in Delaware and Ontario.

Intense competition from companies such as Alcatel-Lucent (ALU), Cisco Systems (CSCO) and Tellabs (TLAB) is eating into the company’s market share. However, we do expect a recovery in 2010 due to operational execution and growth in data traffic.

We have a Neutral rating on the stock.

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(CIEN) Ciena Corporation Takes Over Nortel Networks’ Unit

China Unicom launched commercial trials of its WCDMA technology-based 3G services in 56 cities (including Beijing and Shanghai ) in May 2009 and subsequently extended that to 44 more cities. The company also initiated commercial 3G trials in 168 more Chinese cities in August 2009.

To facilitate the deployment of its 3G WCDMA network, China Unicom has collaborated with Ericsson (ERIC) under a $700 million deal. The company has also announced that it will adopt a uniform 3G tariff package in an effort to reduce prices for its 3G customers. Moreover, China Unicom will roll out several 3G handsets following the commercial 3G service launch.

China Unicom will spend RMB38.7 billion (US$5.6 billion) to develop its 3G business in 2009 and expects to achieve 74% penetration of the Chinese population by the end of the year. The company plans to invest RMB800 million (US$117 million) for 3G network deployments in Shanghai.

China Unicom operates in a highly competitive environment and faces stiff competition from its peers China Mobile (CHL) and China Telecom (CHA), who are also aggressively preparing for nationwide commercial launches of their respective 3G services.

Expansion of 3G services represents a key element in China Unicom’s future growth as high-bandwidth advanced data applications are expected to boost revenue per user through increased usage.

While we remain bullish on China Unicom’s prospects in the domestic 3G wireless market, the high level of capital expenditure associated with aggressive network deployments is expected to constrict margins and free cash flow moving forward.

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(CHU) China Unicom Launching 3G Service in 285 Cities

To meet the needs of service providers in the U.S., Alcatel-Lucent has developed a high-performance compact base station designed to help operators launch services quickly to take advantage of their recent investments in digital spectrum bands. Alcatel-Lucent’s solution complies with the latest 3GPP standards and incorporates innovations from Alcatel-Lucent Bell Labs such as Self-Organizing and Self-Optimizing (SON) capabilities that enable seamless introduction of services and ensure optimization of resources.

Based in Paris, Alcatel-Lucent is a diversified global manufacturer of telecom equipment with over 77,000 employees in 130 countries worldwide. Alcatel-Lucent leverages the technical and scientific expertise of Bell Labs, one of the largest entities in the communications industry. Major competitors are LM Ericsson Telephone Company (ERIC) and Cisco Systems Inc. (CSCO).

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(ALU) Alcatel-Lucent Gets Next Generation Broadband FCC Validity

This expansion has nearly doubled the number of cities and towns that MetroPCS serves in the US to more than 11,000. The expanded coverage is being offered to the company’s customers (on $40 or higher monthly rate plans) without any additional cost.

MetroPCS offers a broad range of wireless broadband services in the selected metropolitan areas in the US, leveraging its proprietary CDMA technology based network. The company remains one of the lowest cost wireless service providers in the US, which enables it to roll out a range of cheap service plans that start as low as $30 per month.

MetroPCS is currently enjoying meaningful traction in the Northeast region as approximately 94% of the new customer additions came from this region in the most recent quarter. A significant part of the company’s network infrastructure deployment initiatives are currently centered in the Northeast region.

Despite a leading position in the unlimited prepaid segment, MetroPCS contends with a customer retention problem as evidenced by significant increase in churn (customer switch) in the last quarter. The company has been increasingly challenged by competitive discounted service plans by some of its larger rivals, such as Sprint Nextel’s (S) Boost Mobile, America Movil’s (AMX) Tracfone and Deutsche Telekom’s (DT) T-Mobile USA.

MetroPCS has initiated several steps to counter intense competition and drive subscriber accretion. The company is broadening its portfolio of discounted price plans, rolling out new product/services and entering new markets for growth. Moreover, MetroPCS has recently collaborated with Ericsson (ERIC) and Samsung for its forthcoming 4G Long Term Evolution (“LTE”) wireless broadband service.

While the company’s expansion initiatives into new US markets appears encouraging for sustaining subscriber growth, associated expenditures may strain the balance sheet condition.

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(PCS) MetroPCS Reaches More US Markets

The company will test run its 4G LTE network in six countries across Europe and Latin America. The outcome of the trials will help Telefonica to chalk out its next phase of network deployment strategy.

Telefonica will conduct 4G LTE trials during the next six months in multiple European countries such as Czech Republic, Germany, Spain and the UK, while the Latin American trials will be staged in Brazil and Argentina. The company has already conducted its first LTE trial in Madrid in April 2009, which has demonstrated encouraging throughput levels.

Telefonica has also announced network infrastructure and equipment vendors to facilitate the field testing. It has reportedly selected six technology providers: Alcatel-Lucent (ALU), Ericsson (ERIC), Huawei, NEC, Nokia Siemens Networks and ZTE.

Leading carriers across the world have adopted LTE as the base technology standard for 4G network upgrade initiatives due to its fast data transfer capability. LTE offers rapid downlink and uplink speeds that averages 100 megabits per second (Mbps) and 50 Mbps, respectively, which is competitive or faster than other leading 4G standards, including WiMax.

Telefonica has recently expanded its strategic alliance with the second-largest Chinese carrier China Unicom (CHU). This extended collaboration is expected to offer significant technological and operational synergies. Additionally, the companies are likely to collaborate in future technology upgrades, such as the development of 4G LTE technology.

By moving to the 4G LTE network, Telefonica will offer its customers super-fast mobile broadband experience, representing an encouraging opportunity to improve customer retention. The company hopes to offer peak network speed of up to 340 Mbps in ideal conditions. Moreover, the ultra high-bandwidth multimedia data applications fostered by the 4G LTE network will boost revenue per user through increased minutes of use.

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(TEF) Telefonica Prepares 4G LTE Trial

Intended for immediate incorporation in e-book readers, GPS navigators and other popular portable consumer electronics, the CE module can be integrated into media players and durable goods as embedded mobile broadband gradually enters everyday life.

The new Ericsson CE module, C3607w, gives device manufacturers the flexible, self-contained connectivity solution needed to create next generation intuitive and innovative consumer electronics by decoupling processor and connectivity design. A third in size compared with earlier Ericsson modules, the C3607w comes with an extensive operator approval program and outstanding IPR protection which eases integration and reduces time to market.

The C3607w is Ericsson’s smallest, lightest and fastest mobile broadband module to date, capable of getting uplink speeds of 5.76 Mbps with up to 40% less power consumption than previous modules. Equipped with Ericsson’s wake-on-wireless feature that facilitates remote wake-up commands from sleep mode, the CE module will also feature a new set of security and messaging applications.

Ericsson’s C3607w consumer electronics module is expected to be available in the first quarter of 2010.

Headquartered in Stockholm, Sweden, LM Ericsson Telephone Co. 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 from next generation systems as more broadband content is being streamed to mobile devices, prompting network providers to upgrade their networks. GSM is the dominant wireless standard in Europe and most of the world.

Sony Ericsson, the company’s 50/50 mobile handset joint venture with Sony, is one of the top-five largest manufacturers of cell phones in the world. Alcatel-Lucent (ALU) is the company’s chief rival.

We currently have a Neutral recommendation on Ericsson.

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(ERIC) LM Ericsson Telephone Co. Launches Mobile Broadband Module

Following the overhaul of the Chinese telecom industry, the Chinese government issued three 3G licenses in early 2009 with China Unicom being awarded the license for WCDMA, a widely adopted 3G technology with approximately 70% share of worldwide 3G subscribers.

China Unicom launched commercial trials of its 3G services in 56 cities (including Beijing and Shanghai) in May 2009 and subsequently extended that to 44 more cities. The company also initiated commercial 3G trials in 168 more Chinese cities in August 2009. China Unicom has already amassed 350,000 3G users across its network footprint.

The company has earmarked RMB38.7 billion (US$5.6 billion) to develop its 3G business in 2009 and aims to lure 30 million users in one year after service launch. To facilitate the deployment of its 3G WCDMA network, China Unicom has entered into a $700 million agreement with Ericsson (ERIC). The company targets to capture one third of the Chinese 3G market by 2010.

China Unicom contends with an increasingly competitive domestic wireless market. The company’s peers China Mobile (CHL) and China Telecom (CHA) are also aggressively preparing for nationwide commercial launch of their respective 3G services. China Telecom is currently leading the 3G deployment process with a target of reaching approximately 500 cities by the end of 2009. Moreover, China Mobile is investing heavily on 3G network build-outs and plans to cover 238 Chinese cities in 2009.

Expansion of the 3G network coverage represents a key element in China Unicom’s business strategy as higher speed offerings and advanced data applications are expected to boost revenue per user. Leveraging its 3G WCDMA network, the company is set to launch iPhone 3G in fourth-quarter 2009 under a three-year agreement with Apple Inc (AAPL). Moreover, China Unicom plans to roll out several 3G handsets following the commercial 3G service launch.

While we remain bullish on China Unicom’s future growth prospects in the 3G wireless market, the associated expenditures for nationwide deployments are likely to impact short-term profitability, tighten free cash flow and impact margins.

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(CHU) China Unicom to Roll Out 3G Services

Motorola or any of its carrier partners has not given any price information for either CLIQ or DEXT. However, industry sources predict that price may be within the range of $100 – $150 throughout the world.

Dr. Sanjay Jha, the co-CEO and the Mobile Device division chief of Motorola, has also announced that the company will introduce its second 3G smart-phone within next few weeks. That device will also be based on Android software. Motorola is trying hard to expand this platform using its proprietary MOTODEV program. Management declared that another 30 3G high-end mobile handsets are in the offing during fiscal 2010.

We believe that the introduction of CLIQ/DEXT will place Motorola as a formidable player in the high-end mobile device market. Although the basic mobile phone industry is facing a downturn, the feature-rich smart-phones are seeing strong consumer preference.

However, this is also our assessment that the company needs to do more to become a major force in the intensely competitive smart-phone market. Our analysis is based on following observations:

• (1)   In the U.S., CLIQ will be available with T-Mobile, which is the smallest nationwide wireless service provider. The large carriers like Verizon Wireless (VZ), AT&T (T) and Sprint Nextel Corp (S) enjoy more than double subscriber base than that of T-Mobile. This means CLIQ will target a limited customer base with smaller upgrade potential and lower promotional budget.
• (2)   Besides developed economies, Motorola needs to give more emphasis to emerging markets. China is quickly building nationwide 3G networks, and India is likely to see this technology from early 2010. So far, Motorola has failed measurably to capture these high growth potential markets. Its iconic Razr phone failed to make any decisive impression in these markets due to lack of marketing skill. On the other hand, Nokia Corp. (NOK), Samsung LG and Sony-Ericsson — a joint venture of Sony Corp. (SNE) and LM Ericsson AB (ERIC) — all have nicely catered these markets.
• (3)   Motorola has a history of maintaining large and complex product lineup. This may make the revival of its ailing handset division more difficult. In contrast, Apple Inc (AAPL) is having only one product lineup of iPhone; Research In Motion (RIMM) is concentrating on BlackBerry Bold, Storm and Tour; Palm Inc (PALM) is focusing purely on Pre and its smaller edition Pixi. Motorola’s decision to offer 30 3G handsets may further complicate its operating cost structure. In the last quarter, this division incurred an operating loss of $253 million on sales of $1.8 billion.
• (4)   The smart-phone market is quickly getting flooded with Android-based mobile devices. At present, T-Mobile itself is offering two Android-running high-end phones developed by HTC Corp. of Taiwan. From mid-October, Sprint Nextel will also offer a new Android-based mobile device of HTC Corp. Samsung Electronics is also developing a smart-phone based on Android platform. This means Motorola has to differentiate its upcoming 3G phones from with new features.

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(MOT) Motorola Moves Into High-End Mobile Device Market

OIN consists of member companies such as RedHat (RHAT), International Business Machines (IBM), Phillips and Novell (NOVL), which use open source technology in their products. OIM licenses the patents but typically does not resell them.

AST is in the business of acquiring patents from owners, licensing the technology back to them and ultimately selling off the patents. The member firms include big names in the technology space, such as Motorola (MOT), Cisco Systems (CSCO), Sun Microsystems (JAVA), Hewlett Packard Co. (HPQ), Verizon Wireless (VZ), Google (GOOG) and LM Ericsson Telephone Co. (ERIC).

For a long time now, Microsoft has been complaining about Linux software violating its patents and even filed suits against companies using the Linux-based software for the offense. The outcome of such suits has been varied. The recent allegation against navigation device maker, TomTom NV for instance, was settled out of court.

The company has also started licensing out these patents to firms distributing or using open source software. This seems like a smart thing to do since it enables Microsoft to generate some revenue from the open source segment as well.

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(MSFT) Microsoft Patents Change Hands

Ericsson will be able to firmly focus on its research and development, strengthen relationships with third-parties, streamline relevant business practices and ensure wireline access product integration to provide AT&T with the best and most innovative solutions available.

Already having approved Ericsson’s GPON Fiber to the Home (FTTH) solution for general deployment, AT&T will now start integrating Ericsson’s DSL portfolio for Fiber to the Node (FTTN) and IP DSLAM solutions to support its offerings like IPTV, High Speed Internet and VoIP over an all IP network infrastructure.

As the technology and market leader in GSM-based equipment, Ericsson stands to benefit from the continued growth of the wireless industry, especially in emerging markets. Of the 4.16 billion wireless subscribers worldwide, about 3.84 billion use GSM-based networks and with global wireless penetration of around 50%, subscriber growth is expected to remain fairly strong.

Having established partnerships with local firms and 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. The company has also been winning more than its share of 3G contracts, including one to provide High Speed Downlink Packet Access (HSDPA) technology to Cingular Wireless. HSDPA is an improvement on the basic W-CDMA technology offering faster data rates (similar to fixed broadband).

Ericsson is the world’s leading provider of technology and services to telecom operators. As the leader in 2G, 3G and 4G mobile technologies, the company provides support for networks to over 1 billion subscribers and has a dominant position in managed services. Its portfolio comprises mobile and fixed network infrastructure, telecom services, software, broadband and multimedia solutions for operators, enterprises and the media industry. Alcatel-Lucent (ALU) is a major competitor.

We currently have a Neutral recommendation on ERIC.

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(ERIC) LM Ericsson Telephone Wins AT&T Contract

Other members in this collaboration are Alcatel-Lucent (ALU), LM Ericsson AB (ERIC), Fujitsu Ltd., NEC Corp., and Nokia-Siemens Network; a joint venture of Nokia Corp. (NOK) and Siemens AG (SI). This mechanism includes a service composition component that coordinates various applications using IMS session management service.

IMS is a set of specifications that describes the next-generation networking architecture for implementing IP-based telephony and multimedia services. It defines a complete architecture and framework that enables the convergence of voice, video, data and mobile network technology over an IP-based infrastructure.

IMS uses Session Initiation Protocol (SIP) for easy integration with the Internet. This architecture was originally formulated to deliver Internet services over GPRS. Later, the wireless standard body 3rd Generation Partnership Project (3GPP) evolved IMS as a fixed-mobile convergence standard to support networks such as Wireless LAN, CDMA 2000 and fixed line.

The DoCoMo-headed collaboration has given technical specification for two major services – (1) converting a photographic image into water printing and (2) translating text messages from Japanese language to English. As of now, IMS is capable of either sending or receiving data. According to this partnership, the underlying specification is applicable to any wireless service provider in any geographic location.

The consortium has submitted these specifications to the GSM Association as candidate features for its Rich Communication Suite (RCS). RCS was designed by the GSM Association to enrich and speed up development of advanced IMS features for various wireless networks.

Besides NTT DoCoMo, several wireless service providers throughout the world have taken steps to innovate the IMS architecture. Verizon Wireless (VZ) started this initiative a few years ago. Last June, three South Korean wireless operators, KT Corp. (KTC), SK Telecom (SKM) and LG Telecom, decided to work on RCS specifications. China Mobile Ltd. (CHL), the leading wireless service provider in China, may also invest for IMS innovation.

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(DCM) NTT DoCoMo Spearheads IMS Space

Although Nokia management claims that it holds the substantial share of the smartphone market, we believe that consumers’ choices are tilted toward iPhones and BlackBerrys. On the one hand, most tech enthusiast wants to own the iPhone, while on the other hand BlackBerry is ruling the corporate segment. So Nokia’s N97, with its enhanced features and competitive pricing, is basically trying to catch up with this competition.

Technology research firm Gartner projected that the smartphone category grew by 27% in the second quarter, although there is a 6.1% decline in the overall mobile phone market. So large players in this segment including Samsung and Sony Ericsson (SNE)-(ERIC) are trying to grab a majority share of this growing market, while Nokia is trying to retain its high market share and gain new customers.

Nokia especially is trying to strengthen its position in the smartphone market by releasing a new product with a Linux operating system. This apart, the company is planning to launch a slimmer version of the N97 smartphone. This shows the company’s intention to enhance its smartphone capability in order to draw more customer attention.

On the other hand, there have been complaints about the Apple iPhone and iPods catching fire, which raises a question as to the quality of these popular products. So Apple has to think about improving the quality, while Nokia needs to introduce a product that can attract customers with its features and usability. The war between these tech giants is expected to continue, and we believe this will ultimately lead to better product innovation.

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(AAPL) The Smartphone Battle

Alcatel-Lucent will use all or part of the proceeds to repurchase some of its outstanding debt, including a 1.02 billion Euro convertible bond due in 2011. The nominal value of each bond will correspond to an issue premium of 35% over the reference share price on Euronext Paris and bear interest between 5% and 5.5% per year. The conversion / exchange ratio of the bonds will be one new or existing Alcatel-Lucent share per bond, subject to potential adjustments.

The bonds will bear interest at a rate of 5% to 5.50% per annum payable semi-annually in arrears on Jan. 1 and July 1 of each year, starting 2010. The bonds will be issued at par on Sept.10, 2009 and will mature and be redeemed in cash at par on Jan. 1, 2015. They may be redeemed early at the option of Alcatel-Lucent subject to certain conditions. Determination of final terms of the issue is expected today. The expected date of issue and settlement and delivery for the Bonds is Sept. 10.

Alcatel-Lucent is the trusted partner of service providers, enterprises and governments worldwide, providing solutions to deliver voice, data and video communication services to end users. A leader in fixed, mobile and converged broadband networking, IP technologies, applications and services, the company leverages the unrivalled technical and scientific expertise of Bell Labs, one of the largest innovation powerhouses in the communications industry. Its major competitors include Cisco Systems Inc. (CSCO) and LM Ericsson Telephone Co. (ERIC). We currently have a Neutral recommendation on Alcatel-Lucent.

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(ALU) Alcatel Offers Convertible Bonds

Integration of EG Technology’s video processing assets will further strengthen Arris’ existing portfolio of digital video offering that includes Video-on-Demand, Switched Digital Video and Ad Insertion.

EG Technology is primarily a supplier to Tier2 and Tier3 cable MSOs. However, Arris will now accommodate these state-of-the-art video processing technologies on its existing D5 edge QAM platform to provide superior digital video network solutions. The company has a solid clientele of Tier1 US cable MSOs. Acquisition of these valuable video processing assets will give Arris an edge in this highly competitive industry. Its major rivals include Motorola (MOT), Cisco System Inc. (CSCO), Harmonic Inc. (HLIT) and Tandberg Television.

During the last few years, Arris has been trying hard to enrich its digital video portfolio since these are generally high-margin products. In early 2007, the company failed to buy Tandberg Television as L.M. Ericsson AB (ERIC) offered a much bigger counter bid. Later that year, Arris acquired C-COR Inc. for $730 million to create a formidable pure-play equipment and technology solutions provider in the cable industry. This merger expanded the company’s product portfolio with fiber enabled bandwidth expansion capabilities, OSS management systems, Ad-insertion platforms and Video-on-Demand hardware/software.

Last January, Arris signed an agreement with Verivue Inc. to provide a converged video service network. The company plans to standardize a large part of its next-generation Video-on-Demand and interactive video platform on Verivue’s “solid state” video pump servers. We believe deployment of switched digital video network by cable MSOs will ramp up in 2010. Arris is likely to benefit from continued growth in video and data traffic over cable Internet networks as competition intensifies among cable MSOs, telecom operators and satellite TV service providers.

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(ARRS) Arris Fortifies Digital Video Foothold

To meet the needs of service providers in the U.S., Alcatel-Lucent has developed a high-performance, compact base station designed to help operators launch services quickly to take advantage of their recent investments in digital spectrum bands. Its solution complies with the latest 3GPP standards and incorporates innovations from Alcatel-Lucent Bell Labs such as Self-Organizing and Self-Optimizing (SON) capabilities that facilitate seamless introduction of services and ensure optimization of resources. The company’s next-generation base stations also offer a superior level of integration, thus avoiding traditional losses in feeders and cables.

Based in Paris, Alcatel-Lucent is a diversified global manufacturer of telecom equipment with over 77,000 employees in 130 countries worldwide. Apart from being the world’s leading supplier of digital subscriber line (DSL) equipment, it is among the leaders in telephone switching equipment, optical and data networking gear, mobile infrastructure and communications software. The company has also been a big player in mobile handsets, fiber optic cable, and Internet routers.

Alcatel-Lucent is a leader in fixed, mobile and converged broadband networking, IP technologies, applications and services. It leverages the unrivalled technical and scientific expertise of Bell Labs, one of the largest innovation powerhouses in the communications industry. The company’s major competitors include LM Ericsson Telephone Co. (ERIC) and Cisco Systems Inc. (CSCO).

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(ALU) Alcatel-Lucent Earns FCC Certification Next-generation Wireless Broadband

RIMM has been able to successfully differentiate its BlackBerry products from other offerings in the communications market. BlackBerry smart-phones are admired globally for their best e-mail functionality. However, its web browsing capability is not as powerful as iPhone of Apple Inc. (AAPL), Pre of Palm Inc. (PALM) and Google Android. All of these browsers are based on the WebKit ecosystem. In order to remain competitive, RIMM has decided to strengthen its browser that will be able to support Flash and Silverlight Technologies.

The smart-phone mobile market is growing continuously. As a result, this market is getting increasingly crowded with new players and is expected to witness intense competition going forward. In addition to RIMM, Apple, and Palm, Nokia Corp. (NOK), Sony-Ericsson, a joint-venture between Sony Corp. (SNE) and L.M. Ericsson (ERIC) and Samsung have launched a series of innovative products. Motorola (MOT), Google, HTC, and LG Electronics are other new entrants in this market.

The next-generation technology of converged mobile computing enables a smart-phone to function like a fully operational computing device with the help of a strong web browser. Consumers are increasingly using their mobile handset to browse the Internet. This creates a growing market for third party software. Acquisition of Torch Mobile will now give RIMM a solid foothold in the WebKit development community.

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(RIMM) RIMM Bolsters Web Browser

The provider of optical networking equipment, software and services diversified beyond emerging carriers, and now counts the world’s largest telecom service providers as its customers, including Verizon (VZ), AT&T (T), BT Group (BT) and Qwest Communications (Q).

Ciena’s cost cutting efforts will trim operating expenses, helping it achieve breakeven results in the coming quarters.

Moreover, the company has a healthy balance sheet with improving cash metrics. The company exited the current quarter with $922.6 million in cash and short-term investments, compared to $917.0 million in the previous quarter. Long-term debt (convertible notes payable) at the end of the quarter remained at $798.0 million.

However, the company’s sales cycle is lengthening, as Tier 1 carriers proceed with caution, given the economic uncertainty. Moreover, the telecommunications market is full of competitors, such as Alcatel-Lucent (ALU), Cisco (CSCO), Ericsson (ERIC), Nokia Corp. (NOK), Nortel Networks (NT) and Tellabs (TLAB), which are premier companies in the telecommunication space posing a threat to Ciena.

Shares of Ciena, surged 2.5% to $13.53 in after-hours trading yesterday and closed at $13.20, a rise of 3.04%. In our view, the sharp increase in price is due to a recovery in the telecommunications sector.

Among key industry indexes, the Dow Jones U.S. Fixed Line Telecommunications Total Stock Market Index increased 0.8% to 904 points, while the Dow Jones U.S. Telecommunications Equipment Total Stock Market Index increased 1.1% to 5,169 points yesterday.

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(CIEN) Ciena Rises as Telecom Index Recovers – Analyst Blog

Telecom service providers are now typically looking at providing the converged IP-based network, offering bundled solutions for triple play voice, video and data. This requires the implementation of complex network architecture.

The telecom outsourcing market generally includes network implementation & maintenance, system integration & managed services, and consulting. In order to minimize their costs, carriers try to concentrate on developing new services, implement a service-oriented business model, and marketing.

The market for basic network operation is increasingly seeing the entry of infrastructure suppliers. This generates a huge opportunity for telecom equipment manufacturers to encash.

According to various industry research, the approximate global size of this market is likely to be between $250 billion – $275 billion. Asia alone is expected to generate 25% of the total.

As of now, the undisputed leader in the telecom managed services market is LM Ericsson AB (ERIC). Nokia-Siemens Network; a joint venture between Nokia Corp (NOK) & Siemens AG (SI), and Alcatel-Lucent (ALU) are the two closest rivals.

During the first half of 2009, these three entities won 20 large managed services deals across the world. Currently, Ericsson generates approximately $2.8 billion of quarterly revenue through managed services, whereas Nokia-Siemens Network generates around $2 billion and Alcatel-Lucent generates around $1.25 billion of quarterly revenue.

We believe other wireless gear makers that are best positioned to gain from this opportunity include the two Chinese giants Huawei Technologies Co. Ltd., and ZTE Corp. Cisco Systems Inc (CSCO) could also emerge as a major player in the long-term.

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(ERIC) The Next Big Opportunity -next-generation (3G/4G) wireless networks