Ericsson trims its software and services division

• Ericsson created its Cloud Software and Services business unit last year
• It has been struggling to even break even, let alone turn a profit
• Now the vendor is shrinking the unit’s portfolio and axing “subscale agreements”

Ericsson is cutting certain products and will “exit certain subscale agreements” as part of its effort to help its Cloud Software and Services business unit “reach break-even in full-year 2023 on EBIT/EBITA level”. 

The vendor isn’t commenting just now on which products are being axed and has also declined to explain what it means by the term “exit certain subscale agreements”, as this could refer to customer contracts or deals with suppliers and/or partners. It’s most likely, though, that this will relate to unprofitable managed services deals, as the company has found a way to get out of such deals in the past in an effort to improve its margins.  

The Cloud Software and Services unit, which is led by Per Narvinger, includes the vendor’s core platform systems, its business support systems (BSS), automation and service orchestration tools, and managed services platforms. In the third quarter of 2022, the unit reported revenues of 14.2bn Swedish krona (SEK) ($1.35bn) and a loss before interest and tax of 700m SEK ($67m). 

In its announcement, Ericsson says the move to shrink its portfolio and exit certain deals will have an impact on its earnings before interest and tax (EBIT) for the fourth quarter of 2022 of 800m SEK (US$76m). 

The unit, formed last year as a result of the merger of the vendor’s Digital Services and Managed Services units, has been losing money and underperforming for some time: During the earnings conference call for the third quarter of 2022, Ericsson CEO Börje Ekholm admitted that the Cloud Software and Services division is still a problem child. 

“We have underperformed in this area [cloud software and services] for a long time. But we have also seen a relatively strong improvement compared to 2017 when losses were running much higher than today, so it's always a journey. We're not happy at this level. We need to fix this – it should be a profitable business. With our market position and the technology we offer, this has all the potential to be profitable,” noted the CEO, who called out the company’s business support solutions (BSS) as a line of business that has been revitalised. 

“But where we now have challenges is with our 5G core – that has taken a bit longer to get to market than we expected, and it has carried a lot more system integration costs than we anticipated a year ago. But we have also had a lot of geopolitical developments [the de facto ban in China] that have impacted the cloud software and services business very detrimentally, so it's a multitude of factors… that's why we combined managed services and digital services, to leverage the synergies between the two” in terms of operational savings but also “on the R&D side as we invest in AI and machine learning, and the distribution of software to our customers. That's where we get the big benefit [but] that will take some time.” 

The vendor says it will provide further details about the Cloud Software and Services business unit cuts when it reports its full-year 2022 financials on 20 January. 

- Ray Le Maistre, Editorial Director, TelecomTV