Ericsson bangs the enterprise drum as costs and inflation weigh heavy

• Ericsson reported strong sales growth in its second quarter
• Network equipment sales in North America and Europe drove that growth
• Vendor claims it is growing radio access network (RAN) gear market share outside of China
• Inflation and supply chain issues are squeezing the vendor’s margins 
• It is looking to the future and its growing enterprise-focused business developments

Ericsson reported healthy sales growth for the second quarter of the year that ended in June, but its management was as keen to talk about the potential of its enterprise sector plans and the pressures of inflation and supply chain issues during its earnings conference call. 

The Swedish vendor reported Q2 sales of 62.5bn krona (SEK) (US$5.9bn), up 14% year on year in reported numbers, but when adjusted for currency exchange fluctuations and comparable business units the increase was (a still creditable) 5%. Increasing network sales in North America and Europe accounted for much of the sales growth. Earnings before interest and tax also increased, by 26% to 7.3bn SEK ($690m), but gross margins fell to 42.1% from 43.4% a year ago, with the vendor citing lower intellectual property rights revenues and increasing costs for that dip. 

Part of the costs have come from the company’s strategy of buying the components needed for its systems well ahead of when they will be needed, a move that is not cost efficient but ensures a more consistent product delivery cycle, which is important to network operator customers.

“The global supply chain situation remains really challenging and inflationary pressures are significant,” noted CEO Börje Ekholm during the company’s early morning earnings conference call. “We're investing and we have been investing actually dating back several years to de-risk our supply chain... This has included creating a more flexible manufacturing footprint, but we have also invested in building buffer inventories and this, of course, leads to a larger inventory [and the associated costs that comes with that strategy]. 

“However, we see this as a key driver of our ability to expand the footprint and strengthen our scale, and from a long-term perspective, we believe this is critical. I remain convinced that lost sales cost more from a long-term perspective than carrying a bit of extra inventory short term over a few quarters – that's basically like an insurance premium for the future. So this ability to deliver despite a very challenging supply situation, we believe, is critical to establish a stronger footprint and also [achieve] bigger scale, which will drive our long-term profitability,” noted Ekholm.

That ability to deliver, plus other factors (including Huawei’s gradual decline in multiple markets outside of China), is helping Ericsson to cement its position as the leading RAN vendor.

The CEO said Ericsson’s RAN equipment market share is currently at 39% (excluding mainland China, where Ericsson is no longer being chosen by the operators), compared with 33% in 2017, while “50% of the world's 5G traffic outside of China is carried over Ericsson radio networks and 80% of the top-20 operators in the world are using our 5G core”.

That’s a good position to be in, especially as the RAN market is expected to be a $40bn-plus market for at least the next five years (according to the Dell’Oro Group research team), but as noted on multiple occasions over the past couple of years, Ericsson is looking elsewhere for its future sustainable growth.

The company continues to invest in its mobile network product development, but its R&D strategy now also encompasses investments in the enterprise technology market, which Ericsson has been bolstering with some significant acquisitions, notably the $1.1bn acquisition of indoor/private network wireless tech specialist Cradlepoint in 2020 and the $6.2bn purchase of Vonage that is set to be completed in the coming weeks. Ericsson has been preparing for a much bigger role in the enterprise tech sector by creating a dedicated business unit, Enterprise Wireless Solutions, which started operations on 1 June – see Ericsson restructures, creates Enterprise division.

The completion of the Vonage acquisition will enable Ericsson to create what it calls a global network platform, which “we believe will drive a paradigm shift in the industry. And that's because the network will be a horizontal platform whose capabilities will be exposed, consumed and paid for through global network APIs [application programmable interfaces]. The global developer community can, therefore, start to innovate on top of the network and really leverage all the capabilities of the network. This will be very important in establishing 5G as the strongest innovation platform history has ever seen. We believe this will inspire innovation but, most importantly, it will give our customers, the service providers, another avenue to monetise the network investments,” added Ekholm.

It’s a bold move, for sure, and a big bet, but one that, in theory, could pay off if the Vonage technology is good enough, automated, secure and adopted by the developer community.

In addition, Ericsson is looking to develop the current Cradlepoint business to significantly ramp up its capabilities and presence in the private wireless networks sector.

And despite talking about the focus on building expertise that will help Ericsson and its service provider customers do business with enterprise users, Ekholm clearly thinks it’s not given enough credence.

“It's important to remember the growth potential in enterprises – sometimes we focus only on the [telco network] infrastructure market,” noted the CEO. He added that while the network equipment business will continue to generate the bulk of Ericsson’s sales, “we also see the applicability of our technology in enterprises and that's a segment that is going to be very large, it can possibly be even larger than the infrastructure business in a few years’ time. So the investments we make now should be financed by our infrastructure business... the applicability will allow us also to capture the enterprise segment going forward,” he added.

In the meantime, Ekholm and his fellow management team members will be trying to figure out how to appease shareholders, who don’t seem happy with the sales and market share growth, as Ericsson’s share price tanked by 9% to 72.07 SEK on the Stockholm stock exchange on Thursday.

- Ray Le Maistre, Editorial Director, TelecomTV