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25 April 2023

Ericsson hangs on grimly, cuts more jobs, Nokia breezes Q1

Ericsson’s finances continue to see choppy waters. The company will have issued a huge sigh of relief for all the good that has come out of India, because it has failed in every other part of the world to make any consistent headway.

The dominating theme through this quarter’s results meeting was that Ericsson had already told us about all the bad news items, with lots of “just as we forecast” or “just as we warned before” statements.

It was desperately trying to play down any further harm which might come from the fact that Ericsson has lost control of its customers’ 5G roll out plans, which it undoubtedly has, outside of India. Compared to Nokia, Ericsson’s balance sheet makes for grim reading.

The meeting kicked off with the news that CFO Carl Mellander would be standing down at the end of this year, but given that he has almost the entire year to remain in the job, this is clearly not anyone blaming him for the company’s fall from grace.

The very first question went to the heart of the matter; restructuring charges yet again, how much and where are they focused? Mellander claimed cuts would be widely spread, and in the presentation, suggested that 1,700 jobs had already gone in the quarter and did not say there would be no more.

Right now, if you are a manager inside Ericsson, you are being asked to deliver cuts – period. And SEK 2 billion ($194 million) of extra cuts have come out of operational expenditure. Ericsson insists that its strategy relies on it being in front technically, so R&D has not been quite so heavily hit.

However, time and time again Ericsson execs were asked why they were convinced 2024 would be better, and they failed to convince anyone that this optimism was justified.

Whether margins would go up in Networks was another issue, which relates purely to getting local deals in India and taking some manufacturing there, which Mellander assured us was going well. “The speed of rollout is incredible. So, we are ramping up very fast as well in the local production there. On the import duty side, I would not say it’s material when we look at the Networks gross margin. But of course, it’s sizable enough for us to work really actively on trying to reduce that and localize production.”

Drawing from this, we can apparently expect more manufacturing in India. However, this year will see the revenues peak from India, so Ericsson will have to look elsewhere for growth.

The broader brush strokes are that Q1 net sales were up 14%, to SEK 62.6 ($6 billion), with gross income rising 7% to SEK 24.9 ($2.4 bn), but on far lower margins – down to 39.8% from 42.3% this time last year, with R&D spending up slightly.

The explanation was attributed to the slower deployment pace in early 5G markets, compounded by customers in these cutting inventories, which has pushed Ericsson straight to cost savings, which will cut in further in Q2. The company tried hard to say that it now sees a buildup of next wave revenues, but there were few takers.

So, despite overall sales being flat, Ericsson says it saw a 5% rise in Cloud Software and Services reducing losses and on target for break even by end of 2023, and there was a 19% rise in Enterprise, so that it now represents 10% of sales. The completion of its divestiture of its IoT business reduced losses somewhat.

Back in January Ericsson said it was cutting back in the Cloud Software and Services business unit that it created last year, with the portfolio reduced and Ericsson promising to walk away from “sub-scale agreements.”

The Cloud Software and Services unit was formed last year through a merger of Digital Services and Managed Services divisions, it includes the mobile core as well as BSS, automation and service orchestration products, and managed services platforms.

All the Networks growth was in India. Ericsson has identified yet more savings of SEK 2 billion ($190 million) and it plans to reduce costs by SEK 11 billion ($1 billion) by year-end, mostly by cutting 800 internal jobs, and said for investments in Enterprise as well as India, the reduction was about 1,700 internal and external headcount.

India has grown by 5x year on year for Ericsson, to almost SEK 7 billion in revenue ($680 million) in Q1 at the same time that North America has fallen by SEK 4 billion ($390 million).

CEO Börje Ekholm promised that the company is in the middle of a journey to leverage a network API platform, which it says will redefine its addressable market. He reminded us that last year Ericsson tested Ericsson Dynamic and User Boost with SmarTone in Hong Kong, which showed that it can be done and gave indications of users’ willingness to pay for network API.

The main Ericsson push at this year’s Mobile World Congress was to showcase its multi-operator, quality of service network API alongside Telefonica, Orange and Vodafone on their commercial networks. The idea is to expose Ericsson’s network functionality to the global developer community to drive new apps.

Network APIs were really a big topic at the Mobile World Congress, and Ericsson believes it leads here and anticipates first revenues late this year, which will ramp in 2024 and 2025 as its transformation into a platform company accelerates.

In fact at Mobile World Congress the GSMA announced an initiative called GSMA Open Gateway, a framework of universal network APIs, designed to provide universal access to operator networks for developers. It was announced with the backing of  21 mobile network operators, aimed at creating an API mobile economy.

These included APIs for device location, carrier billing and authentication, one in immersive gaming and a HD video showcase – from Orange, Telefónica, Vodafone and Ericsson/Vonage, based on the Quality on Demand (QoD) API.

Enterprise Wireless Solutions had clear losses in the enterprise segment, partly because its new subsidiary Cradlepoint offers a subscription model with payments spread over 3-year contracts, which means revenue is deferred, and not taken immediately. So, the bigger Cradlepoint gets with its Mobile as a Service model, the more revenue is deferred.

Cradlepoint develops routers, gateways and software for wireless WAN edge networking, using 4G and 5G carriers for connection and grew its revenues 60% in the quarter.

Ericsson says this is ramping up enterprise revenue but at the same time that it scales its go-to-market organization, which costs it money. If it is scaling this business, then we must believe that the job cuts it has announced were even bigger than suggested, and they only net out at minus 1,700 jobs.

Ericsson has also just acquired Ericom, which is the basis of a full stack security solution optimized for 5G. But all this is early growth, but not big growth – a must have for enterprise growth.

This is only the third quarter that Vonage revenues have been taken into Ericsson figures, but 2022’s year-on-year quarter did not have them. This flatters enterprise revenues, but once again Ericsson uses Vonage to claim a lead in network APIs, particularly Unified Communications as a Service and Contact Center as a Service, which delivered SEK 3.9 billion ($380 million) in the quarter, operating at breakeven.

The net shift in revenues was 132% growth in Southeast Asia, Oceania and India, mostly from India; a decline in North America down 26%; Europe down by 16%, Latin American up by 6% on its first 5G deployments, while Northeast Asia (China, Japan Mongolia, North Korea and Russia) fell by 19%, with the Middle East was down by 8% too.

Free cash flow at SEK 15.8 billion ($1.5 billion) is low, at 5.7% of net sales versus a declared target of 9% to 12%, so not too enticing, and of course Ericsson has restructuring charges of SEK 1 billion ($100m) in the quarter – and suggested these might go as high as SEK 7 billion ($680 million) by year end, with much of that coming next quarter.

All of which perhaps explains why Ericsson’s share price has fallen for two years straight, from a market cap of $46 billion to just $17.7 billion since May 2021.

If this was not Ericsson and just a blank P&L we were looking at, we’d say that it was a company falling irrevocably behind its peers. With the valuation of Nokia over the same period rising to $23.3 billion, it has taken years for its value to ascend above Ericsson’s after the sale of its handset division and the merger with Alcatel.

In Q&A, execs said that 5G capacity is rising and so its customers’ inventory will come back into line – but still bemoaned the hurdles facing its MNO customers, specifically energy costs and inflation.

Nokia by comparison later in the week showed the same boost from India that Ericsson felt, but without hardly any of the headwinds, except of course a softening North American market and general concern for a recession.

India delivered a 13% increase in net sales in mobile networks business, contributing to a 9% increase overall.

Nokia net sales were $6.43 billion on the quarter and enterprise sales were up 62%, although there was a lower contribution from Nokia Technology. Gross margin, like Ericsson, had slipped somewhat to 37.5% but the profit was up 20% year on year.