![Ericsson’s headquarters in Kista, Sweden. Ericsson’s headquarters in Kista, Sweden.](https://assets.telecomtv.com/assets/telecomtv/ericsson-headquarters-source-ericsson-18628.jpeg?w=896&h=504&crop=auto)
Ericsson’s headquarters in Kista, Sweden.
- Ericsson’s sales are still shrinking and it has reported a large operating loss because of its latest Vonage writedown
- North America was the only region with sales growth in the second quarter
- CEO Börje Ekholm warns that the Chinese vendors are becoming more aggressive
- And CFO Lars Sandström hints at further job cuts
Any hopes that the global mobile network infrastructure sector might bounce back in the second half of this year, as had been previously suggested by some of the major equipment suppliers, were dashed Friday morning by Ericsson’s CEO Börje Ekholm during the company’s second quarter earnings report: “We expect market conditions to remain challenging this year,” he noted as the Swedish vendor reported yet another dip in revenues.
Ericsson and its peers have been feeling the pinch during the past 18 months as network operators around the world tightened their purse strings: The slowdown in spending was particularly sharp in the US but, for a while at least, was countered by a burst of 5G rollout spending in India that helped to prop up the mobile network infrastructure sales at both Ericsson and Nokia for a while.
While the worst might be over in the North American market, that slight recovery has been countered by reduced spending everywhere else: The Ericsson team noted today that in the second quarter, year-on-year revenues declined in every region except for North America, where like-for-like sales increased by 14% to 16.6bn krona (SEK) ($1.6bn). For Ericsson, at least, things are picking up in the US thanks mainly to the Swedish vendor’s $14bn Open RAN deal with AT&T that was announced late last year and which has now started to impact the vendor’s top line.
The problem in most of the rest of the world is the business case for network investments, noted Ekholm. “Return on capital employed has been under pressure for quite some time and that has driven our customers to cut investments and sweat assets, which is something you can do for a period of time. The good thing for us is that traffic [volumes] continue to grow at a very healthy rate… [and ultimately] you will get deteriorating customer experience, where customers basically cannot use the network and [then] you will see investments come back.
But the overall industry problem remains – unless we can monetise the new capabilities of the network, investments will only be done to manage capacity in the network… overall, the industry is actually in a very difficult spot,” stated the CEO.
And that difficulty is still manifesting itself in Ericsson’s business performance, as the slight pickup in North America hasn’t been enough to halt the ongoing slide of Ericsson’s sales. The company reported second quarter revenues of SEK59.8bn ($5.7bn), down 7% compared with the same period a year earlier. The all-important network infrastructure division generated revenues of SEK37.7bn ($3.6bn), down by 11% year on year, while the cloud software and services division’s sales were roughly level with a year ago at SEK15.2bn ($1.44bn).
The Enterprise division, which comprises the Vonage (Global Communications Platform) business and the Enterprise Wireless Solutions unit, generated revenues of SEK6.5bn ($617m), up by 2% year on year. That slight growth was thanks to an increase in enterprise wireless solutions sales, while Vonage suffered a 7% year-on-year decline in revenues to SEK3.8bn ($361m).
Vonage hopes pinned on network APIs
The Ericsson team has high hopes for Vonage as a leading player in the telco-as-a-platform sector – it is aiming to become the leading aggregator of telco network APIs – but its faltering legacy business is causing issues and has resulted in two major non-cash valuation writedowns, the most recent of which was announced earlier this month. The recent SEK11.4bn ($1.08bn) impairment charge has been recorded as part of the second quarter results and pushed the vendor to an overall loss.
While Ericsson’s second quarter gross margins improved, thanks to cost-cutting measures and a new 5G patent licensing deal, the vendor reported an operating loss of SEK13.5bn ($1.28bn) due mainly to the Vonage writedown.
That impairment, which now means that more than $4bn of value has been wiped from a company that was acquired for $6.2bn in late 2021, came under scrutiny during the vendor’s earnings conference call on Friday morning, with one analyst asking who is “accountable for this level of value destruction”.
“It’s clear that I’m accountable as CEO,” stated Ekholm. “But hold your horses a bit before you assess the overall transaction until we know if we can create a separate new market for network APIs. That’s where our focus was the whole time. Maybe we have not delivered on the current performance of the existing [legacy Vonage communications platform-as-a-service] business – we need to improve that. So let’s take a look at this once we see how the market for network APIs pans out,” added Ekholm.
Earlier the CEO had stated that “for the industry to grow long term, it’s necessary to find new revenue streams for our customers beyond the mobile broadband subscriptions… the strategic rationale for the Vonage acquisition remains – to create new ways to monetise the network capabilities and the network features. Long term we see these to be crucial for the telecom industry and actually, if we cannot generate extra revenues from the features of the network, it’s very hard to justify future [network] investments… We believe this is a critical initiative for us and for the industry. Network APIs and the global network platform we’re creating remain central to this portfolio and the strategy, and we continue to see good traction,” with two additional mobile operator partnerships announced in the second quarter (Telstra and Singtel) to take the total to 12.
But that market will take time to evolve, so Ericsson needs to maximise the potential of its mobile networks business to keep the corporate wheels turning and also keep its costs in check, though that’s hard to do while remaining competitive. Ericsson has been increasing its R&D spending to ensure its products are cutting-edge and has had to spend more on its Vonage business to meet contractual and regulatory requirements, so it needs to reduce its spending elsewhere. The vendor has already been trimming its workforce, cutting 8,500 staff last year and announcing a reduction of 1,200 staff in Sweden earlier this year alongside a slew of other cost-cutting measures, but it sounds like there may be further headcount reductions coming down the line: Ericsson’s CFO Lars Sandström told Bloomberg that the company is “continuously taking further actions as we are still in a declining market… A big portion of our cost base is connected to people. We need to look into that going forward,” added the CFO.
Aggressive competition
And while the Swedish vendor is, of course, one of the global leaders in the wireless network infrastructure sector, it’s still hard to win and retain business as it faces stiff competition from the likes of Nokia, Samsung, Mavenir and, of course, the Chinese duo of Huawei and ZTE. Ekholm called out the Chinese vendors in the conference call as he gets the impression that some industry observers believe those particular competitors are no longer a threat.
“In contrast to what many on the outside think, we’re actually seeing a sharply increased competition from Chinese vendors… in Europe but particularly in Latin America,” stated Ekholm, who suggested that Huawei and ZTE are cutting their prices to win deals. “We see them quite aggressive in the market. Ultimately, it’s a choice customers will have to make, how they think about their network resilience… It’s really in the customers’ hands to choose [but] we see them increasingly aggressive.”
- Ray Le Maistre, Editorial Director, TelecomTV
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