China, supply chain dent Ericsson’s Q3

• Ericsson has been doing well in many regions with its 5G portfolio
• But decimation of its business in China had a significant impact on its Q3 revenues
• It will restructure its China operations, headcount and cost impact unknown
• Numbers also impacted by supply chain issues and lower managed services sales
• Those supply chain issues will also impact the fourth quarter, says CEO Börje Ekholm

After four consecutive quarters of organic revenue growth, Ericsson shunted into reverse gear in the third quarter with a slight dip in sales mainly due to the well-documented decimation of its business in China, where it is vendor non grata for geopolitical reasons.

Revenues for the three months to the end of September totalled SEK56.3 billion ($6.54 billion), down by 1% year-on-year on a like-for-like basis (comparable revenue-generating business units, consistent currency exchange rates). The vendor’s gross margin ticked up slightly to 44.0%, while its earnings before interest and tax (EBIT) margin also edged up slightly to 15.7%.

According to the Swedish giant, the year-on-year decline in Mainland China sales of SEK3.6 billion ($418 million) hit its revenue growth rate by 6%. And while the company will try to win back business in the Chinese market, it will be scaling down its presence and efforts there for now. “As a consequence of the loss of sales in China, we have to rightsize our sales and delivery organisations in China, and that will start [this quarter],” said the company’s CEO Börje Ekholm, resulting in unspecified restructuring costs and job losses. “I like to think that when you lose a contract, you [immediately] start to fight to win it back. It’s the same thing with China. I do believe we have a chance to win back the trust to deliver products in the future. So, we're focused on regaining that, but of course in the short term we just simply need to adjust the cost structure, to right-size that as much as we possibly can. But we're going to try to be there,” said the CEO.

Apart from China, business was strong, Ekholm noted during a webcast presentation Wednesday morning. “We are winning footprint across our portfolio... we have 95 live 5G networks, we have 149 commercial 5G agreements across our portfolio... and we've seen good growth in Europe and Latin America as well as North America,” where Ericsson now has major 5G contracts with all three main network operators, “but I also want to highlight that Africa also saw growth following a very difficult period during the pandemic.”

But China that wasn’t the only downwards pressure on its sales: The global technology component supply chain issues that are impacting other companies in the communications networking sector as well as many others in multiple sectors (particular transportation) finally caught up with Ericsson towards the end of the quarter, though according to Ekholm the situation is not unmanageable. 

“We have had very limited to no impact on our customers up until the end of the third quarter. We've taken very proactive efforts and we have built inventory... but late in the third quarter we saw some impact on shortages of individual components that resulted in the loss of some sales,” and that impact will also stretch into the current fourth quarter, noted Ekholm. 

But he added, “we have reasonably good visibility, and we have quite good management of the supply chain. I wouldn't exaggerate the risk going forward, but it poses some threat, put it that way. It's very hard to tell you exactly how Q4 is going to look, but we feel quite comfortable about our supply situation going into the quarter.” 

The CEO also highlighted activity in the ‘Emerging Business’ unit, where the Cradlepoint enterprise wireless business is “developing strongly” and growing in international markets (the outfit’s sales were almost exclusively in North America when Ericsson acquired it late last year). 

And in the Digital Services unit, Ericsson’s CFO Car Mellander highlighted the “business momentum in our 5G core portfolio... The standalone 5G core market window is open. Customers now are making long-term commitments in the choice of vendors, and we are winning a lot of these deals and this is really a cornerstone in our journey... we have increased R&D significantly when it comes to 5G core and orchestration. It adds expenses in the short term but builds value clearly for the mid- and long-term...  We also continue to make R&D investments in automation... and in service orchestration” to help operators offer 5G network slicing and edge solutions to their enterprise customers, noted the CFO. 

Mellander noted that with 5G core contracts, Ericsson derives revenues when the core platform is live and linked to the operator’s customers, and as 5G cores are now going into live production, “revenues will start towards the end of the year and then continue to grow over time.” 

According to the CFO, Ericsson has 45 standalone 5G core contracts, of which eight are live and starting to generate revenues. “It’s really based on our containerized cloud native technology that we win these days and we anticipate that we will continue to lead the 5G core market and add more customers as well,” added Mellander.

You can find a full breakdown of Ericsson’s third quarter financials in this investor relations report.

- Ray Le Maistre, Editorial Director, TelecomTV