Ericsson CEO pulls no punches as he maps a long hard road to recovery

There are many question marks over Ericsson’s new CEO Börje Ekholm and how effectively he will address the firm’s biggest crisis for 15 years. But one way in which he differs from many predecessors and peers is in his directness.

Investors and customers are not given any false hopes, and that was clear from the new, uncompromising tone of the company’s annual Capital Markets Day – ironically held in the same week as the annual summit for Facebook-led Telecom Infra Project (TIP), which seeks to undermine the foundations on which Ericsson’s business has rested for so many years.

The gloom was profound. Ekholm downgraded an operating margin target, set only seven months ago, and admitted the Cisco alliance would miss its objectives this year. He said trading conditions in 2017 have been even worse than he expected, so other targets will also be reduced. In March, Ekholm had pledged to achieve an operating margin of 12% by the end of 2018, but the current figure is around 3%, and he is now shooting for 10% by 2020 and 12% as a long term goal.

He told investors: “Yes, we expected to reach 12% earlier than we do today, and the reason is FX has an effect on our target. I’m not a good predictor of currency. I take what’s currently visible and use that for our plans. That’s maybe a mistake but that’s what we did. The next is that we see the RAN market being weaker in the short term than we thought at the time, so those two externalities have pushed out the target a bit.”

He said he was chasing a return to improved and sustainable profitability, rather than short term revenue growth. Ericsson is forecasting a drop in overall revenues to between SEK190bn and SEK200bn ($22.7bn to $23.9bn) by 2020, compared to SEK 211bn ($25.2bn) in the past year.

The defocus on revenue is unsurprising – he has reversed his forerunner Hans Vestberg’s policy of reaching out into new markets such as enterprise and media, and is focusing on core businesses of networking, services and cloud. This meant that he presented sales targets which omitted the broadcast and media division (rebranded RedBee as a precursor to a presumed sell-off); and which were modest in other areas too. The company is now divided into three main business units – Networks, Digital Services and Managed Services. He is looking for 2020 Networks sales of between SEK128bn and SEK134bn in 2020, with an operating margin of 15%-17%. This would compare with expected 2017 figures of SEK133bn-135bn with a margin of 13%-14%.

For Digital Services, the target is SEK42bn to SEK44bn, slightly up from 2017’s anticipated SEK41bn-43bn but with “low single-digit” margin. That would be an improvement on its current negative operating margin of -15% to -17%. Ekholm wants this unit to be more software-driven.

Managed Services is targeted to take SEK20bn-22bn with a margin of 4% to 6%. Its 2017 sales should be SEK24bn-26bn with negative margin of -4% to -6%. There is an ongoing review of some unprofitable managed services contracts – along with Nokia, Ericsson has admitted that it chased market share at the expense of margins in some cases. In future, it aims to invest in devising new and high value services offerings, and in making its managed services platforms more intelligent and automated. Ekholm told attendees that “the R&D of managed services” will be important – analyzing data on existing contracts and managed networks, in order to optimize the way new customers’ networks are managed and optimized.

Overall, Ekholm said: “Our job and commitment is to rebuild Ericsson to be successful long term. Near term we will prioritize profitability over growth.”

He added: “Healthy profitability is the base for long term success and will give us the freedom and resources to invest for the long term. We have plans in place for all segments that combined sum up to an operating margin of between 10% and 12% by 2020, but since there are execution risks in all plans and we start from a weaker starting point than originally planned for, we prefer to be cautious and commit to the lower end of the range.”

His aim is to be realistic for investors now, but to give them sufficient hope – focused around 5G, in particular – that they continue to stay with the ship. Not that 5G will be a quick fix – Ekholm said he expected some sales in 2018-2019, “but it will not be significant … We don’t know the timing yet.”

But he insisted: “5G is not just another G. Even though we are not planning for significant 5G sales before 2020, we are convinced it will create value for our customers in their mobile broadband business, enabling them to manage very high traffic growth. But even more important, it has the potential to create new businesses and revenue streams for service providers based on use cases such as industrial applications.”

This, of course, conflicts somewhat with the pull-back from enterprise markets that Ekholm has announced – it is questionable that traditional vendors will be able to plough the supposedly rich furrow of 5G IoT and vertical industry services if they do not reach out to those industries in a more meaningful way than just via MNOs.

Of course, the Cisco alliance, also forged by Vestberg in 2015, was supposed to be a route into the enterprise market which the US company understands so much better than the Swedish one. At the time the hugely strategic partnership was announced – amid much speculation that it might lead to a full merger in time – the companies said they expected it to generate additional revenues of $1bn each by 2018. Now, a marriage looks less likely – both organizations have significant challenges, and it is not obvious that their respective strategies would do anything to alleviate each other’s woes. And the $1bn apiece looks like a pipe dream too.

Ekholm admitted that target “will not happen”, though he did not shed much light on what progress has been made by the alliance, whose concrete results have been shrouded in mystery, and certainly not very obvious on either firm’s top or bottom lines.

The Ericsson CEO said very little about Cisco, and what he did saw was muted. He told the attendees: “It’s important for us to have that partnership and rely on partnerships like that … We have however not spent much time on how we can evolve it.”

He did provide some justifications for his wider policy of retrenchment after Vestberg’s expansionism, and of course he is new enough in the CEO post to be able to appear honest and transparent to investors, because he is largely expressing regret about a predecesssor’s decisions (though he was on the Ericsson board at the time). He said the strategy of diversification was adopted to try to “compensate for our falling core network business”, in which “our share of LTE volumes over five years fell from 40% to less than half of that”. However, this forced Ericsson to spread itself too thinly and risk its leadership of markets where it had real expertise.

Ekholm said: “The chase for top line growth led us to take on a number of large transformation projects, with a risk profile we were not used to. That’s what we see today in our IT, cloud and managed services business. We weren’t disciplined enough in our M&A activity, again relying on too optimistic cases for future growth. This surge for new growth led to deteriorating financial performance.” Most of the resulting acquisitions had been “unsuccessful”, he added.

Other mistakes and challenges which he highlighted in his overall assessment of the state of play in late 2017 included an over-complex organization which customers found hard to navigate; a high cost structure and over-internal focus; rising competition from traditional and cloud vendors; and various problems of execution. These included limited impact from a succession of cost-cutting programs since 2013, delivery delays, and a services-led strategy which had largely failed.

There were some positives to be discussed. He pointed to industry though leadership which is “second to none”; a highly skilled and engaged workforce; a leading position in core and OSS/BSS; and the support of customers as positives. He also harked back to Ericsson’s key strength, radio networks, highlighting the Ericsson Radio System as a very competitive offering with a path to 5G, and insisting that network performance was business-critical to operators. The ERS is particularly seen as a weapon with which to tap into China’s 5G migration when that comes, and to increase Ericsson’s Greater China footprint in general.

This list of plusses, however, could have come from an Ericsson presentation of a decade ago, and there was too little recognition of new architectures such as virtualized RAN, or the potential end of OSS/BSS as we know it amid a shift to software-defined networks. Meanwhile, the belief that the services, enterprise and M&A strategies had all been failures, and even the cost-cutting had not delivered what it needed to, did point to a company in crisis.

Ekholm is trying to address these challenges, but in a way that seems dangerously narrow in focus. At a time when rivals are taking on the risks and challenges of moving towards enterprise, industrial and services markets, Ericsson is retrenching to its comfort zone, while engaging in even more cost-cutting and restructuring (see inset).

It seems optimistic to believe that a CEO who admits that he is “not a good predictor of currency” – but knows exchange rates are a key element in performance – and who says so little in-depth about the great network trends of virtualization and SDN, will have a sufficiently radical approach to turn the traditional RAN into gold once again, without the help of lateral markets including enterprise and industrial.

This is especially true when Facebook, together with many of Ericsson’s largest customers, was gathered across the Atlantic to discuss exactly how to slash the revenues that traditional vendors could hope to make from wireless networks in future.

More senior executives axed at Ericsson:

It may look like rearranging deckchairs on the Titanic, but Ericsson CEO Börje Ekholm has been undergoing a significant restructuring of the company, from the bottom up, with even more job reductions than his predecessor managed; and from the top down, with an ongoing reshuffle of the management teams.

Jan Frykhammar, a 26-year Ericsson veteran who manned the ship as interim CEO when Hans Vestberg was ousted, has left his post as EVP and advisor to the CEO, rather abruptly. The EVP status will now be granted to Fredrik Jejdling, who heads up the Networks business.

Another EVP and advisor to the CEO, Magnus Mandersson, has also left the company, effective immediately.

“Jan Frykhammar has been invaluable to the company during his 26 years at Ericsson, not least when stepping up as interim CEO in a time when leadership and momentum was of utmost importance,” Ekholm said in a statement. “Magnus has been instrumental in building up the company’s services business, and in establishing and nurturing some of our most important customer relationships.”

Earlier this year, Rima Qureshi, SVP and head of North America, also left Ericsson.

Many other employees are waiting to know their future with the company. There were reports in August that about 25,0000 more jobs could go as part of the stringent cost-cutting exercise, and while those figures have not been confirmed, an Ericsson spokesperson did say that layoffs are “under way across the world”. Some are coming from moves to reduce general overheads and streamline R&D activities (though overall investment in R&D is set to rise to ensure a lead position in 5G). Other jobs are being lost as a result of a move to combine products and services activities to create a more agile and customer-centric organization.

Ericsson rebrands media division in readiness for a sale:

Ericsson has revived the dormant Red Bee brand for its media division and relaunched it as an independent subsidiary, clearly in preparation for a hoped-for sale as CEO Börje Ekholm retrenches to core businesses, particularly Networks.

Ericsson inherited the brand when it acquired UK-based Red Bee as one of a series of acquisitions to try to make the Swedish company a powerhouse in broadcasting and media. In March, Ekholm said the company would back away from this market.

The new-look Red Bee has operations in nine countries across three continents  and employs 2,500 staff, with its official headquarters in the UK>

“The Red Bee Media brand has a long and rich heritage in TV and media and is well recognised across the industry,” said Steve Nylund, formerly head of Ericsson’s Broadcast and Media Services division, and now CEO of the new entity.

“Adopting this brand will enable us to strengthen our position as an independent and agile media services organization. It will provide the basis for our business, our people and our clients to unify around a shared identity that represents our purpose, brand positioning and values.”