Watch Ericsson Fall, Then Ride It Back Up

I wonder what tomorrow has in mind for me
Or am I even in its mind at all?
Perhaps I'll get a chance to look ahead and see --
Soon as I find myself a crystal ball!

-- From "Crystal Ball," by Styx, from the 1976 album Crystal Ball

Spend money to make money. Sunshine after rain. And if you're Swedish telecom giant LM Ericsson (Nasdaq: ERIC  ) , you have to build out low-margin networks before collecting the high-margin payday on software sales.

Ericsson just reported earnings of 2.7 billion Swedish crowns (about $460 million, or $1.70 per American depositary receipt) on 44 billion kronor ($7.4 billion) of revenue. That's a 55% earnings drop year over year and only 4% higher sales, but still much better than Mr. Market had expected -- the stock jumped today as much as 15% over last night's closing price. Now it's back to the price levels of last November.

The exuberant market reaction comes despite a cool and quiet update of the near-term market. This quarter was good because of strong network infrastructure sales in places like China, India, and Latin America, where growth is easier to come by than margins. The 2008 development there was described as "flattish."

It is a testament to Ericsson's unique strengths and commanding market share on communications infrastructure that other providers like Nokia (NYSE: NOK  ) , Siemens (NYSE: SI  ) , and Alcatel-Lucent (NYSE: ALU  ) hardly moved at all on this report. These results may not point to a broad market resurgence after all, and even Ericsson itself prefers to take a long view of the moneymaking opportunities.

As we move forward, Ericsson will become somewhat less of a pure-play telecom supplier. The future of the company lies in wireless broadband equipment and in IPTV infrastructure, along with software and services for the wireless and wireline telephone systems already installed.

The expensive part of that transition is now, and the company could be in for another year or two of low margins and frustrating stock-price moves. After that, it's all high-margin gravy and more competition against Cisco (Nasdaq: CSCO  ) than Nokia -- at least according to my crystal ball.

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