Ericsson finally seems to be back on an even keel, delivering a third robust quarter of results and an encouraging start to 2021.
CEO Börje Ekholm divided investor opinion when he took the helm four years ago and proceeded to reverse the diversification strategy of his predecessor, Hans Vestberg. He pulled back from many enterprise activities and adjacent products to focus single-mindedly on carrier networks, especially 5G. He has made undramatic but steady progress ever since, and in the second half of 2020, and now the first quarter of 2021, his concentration of efforts and resources to win 5G market share early is paying off – helped, of course, by Huawei’s geopolitical challenges and Nokia’s mis-steps with its first 5G base station architecture.
The figures are still not eye-catching at Ericsson. Group revenues were flat year-on-year at SEK49.8bn ($5.89bn), though on a like-for-like basis and disregarding currency changes they would have been up 10%. Operating margin was 10.6%, up from 8.7% a year ago, and net income rose by 39% to SEK3.2bn ($380bn).
The Networks business was the strongest, with a 3% rise in sales to SEK36.3bn ($4.32bn), a rise that would have been 15% if adjusted for the factors noted above. Networks accountd for about 73% of sales.
The engine of this welcome growth is, of course, 5G, as well as the broader RAN segment – many operators are still focused on expanding or modernizing 4G. As customers start to deploy 5G Standalone, in the wake of early movers such as T-Mobile USA (an Ericsson/Nokia customer), there will be a new boost from this platform and particularly the accompanying 5G core.
Ericsson has also, in recent months, added new compact Massive MIMO radio/antenna units to its portfolio, as well as its Cloud-RAN platform for operators that are embarking on the journey to virtualized RAN. It is particularly upbeat about the MIMO products, which feature the vendor’s own silicon. Ekholm emphasized an increase in R&D spending in recent quarters, and a top end Massive MIMO unit that weighs just 20 kilograms is one result of that.
“We do see that customers are putting us at very good competitiveness with this new-generation massive MIMO,” Ekholm told analysts.
The emergence of a next generation of 5G – including vRAN, Massive MIMO and 5G SA – will help drive growth in the RAN market, and Ericsson thinks this may be stronger than currently predicted by many forecasters. It cited research house Dell’Oro’s estimate that the RAN market will grow by 3% this year to just over $36bn, and Ekholm said the actual rate may be higher.
However, operators are working hard to constrain their RAN spending, and so it is critical that Ericsson continues to gain market share, as it has been doing thanks to the troubles of its two main rivals, and its own successful ‘5G-ready’ offering. By selling 4G systems that could be upgraded relatively easily to 5G at the right time, Ericsson encouraged operators to start spending on new RANs at an early stage, and then achieved a measure of lock-in when they did move to 5G, especially in the Non-standalone architectures that have dominated the first phase of roll-out – it is difficult to deploy NSA, which still uses the 4G core, using different suppliers for 4G and 5G base stations.
The 5G-ready strategy, which also saw Ericsson pricing aggressively, is one reason that it has maintained more than 10% share in China’s 5G RAN, where Nokia lost out altogether in the last round of RAN contracts. But China will not be such a big factor in the current second quarter, since the next tenders from the three operators are likely to come later in the year – and the outcome may well be affected, more than previous rounds, by rising tensions between China and other countries over Huawei.
Referring to China, Ekholm said on the analyst call after the results announcement: “There was a big gear tender last year that we entered into and won an increased market share. The next tender will probably come in the next few months but that’s a bit unpredictable… we have no insight into how that would look like.”
He did highlight India and Japan as strong growth targets, though it is possible that the former’s 4G and 5G plans may be disrupted by its current devastating experience of Covid-19. Ekholm would not be drawn on the potential for taking market share if Huawei is banned in India, but commented: “India is a very big market clearly, and a market where we have strengthened our position over the last few years. It is a major focus market because it can give us scale. So that is an important area where we prioritise growing our footprint.” Ericsson also has a strong position thanks to the managed services deals it has done in India, though the growth in the market is mainly being driven by Reliance Jio, which is a Samsung customer.
In Japan, Ekholm said most of the 5G roll-out is still ahead so he is determined “to strengthen our position and take advantage of that”.
He also pointed to his new strategy for the enterprise. He had pulled back from any kind of direct-to-enterprise 5G offerings, by contrast with Nokia, which has been galloping ahead in the private 4G and 5G market, sometimes bypassing its operator customers in the process. But Ekholm made a mistake by defocusing so heavily on enterprise, and is now looking for growth there, with the new approach heavily focused on Cradlepoint, the indoor cellular specialist that Ericsson acquired last year for $1.1bn.
“We see growth opportunities now materializing in the numbers from Cradlepoint, so that’s encouraging,” Ekholm said. “The enterprise opportunity is still small in size, but we’re starting to see a healthy growth rate.”
The main cloud on the Q1 horizon as a sharp drop in revenues from IP licensing, down 68% year-on-year to SEK800m ($94.6m). This was partly attributed to a licensing dispute with Samsung, but also, according to Ekholm, to “contract renegotiation with a couple of different parties …. Plus we also have one licensee with significantly lower volume in the market and that results in much less royalty revenue for us. Partly, of course, that is an effect of geopolitics. Where that will end up at the end of the year, we don’t know.” That licensee is, of course, widely assumed to be Huawei.
There was also some impact from semiconductor shortages and other supply chain issues that have accompanied the global pandemic. CFO Carl Mellander said “buffering up on critical components” had hit operating cashflow, which fell by 26% in the quarter, to SEK3.2bn ($380bn). Ericsson said it was working to ensure multiple suppliers or locations for each critical element, and insisted it had secured enough chips to avoid product delays so far, but acknowledged that in some areas, dual-vendor strategies are hard to implement.