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Ericsson’s BSS strategy has failed; like Nokia, it will make more cuts in 2019

Huawei may be under the most severe pressure (see separate item), but that does not mean times are easy for Nokia and Ericsson. The former is set to cut over 1,300 jobs in Europe as it seeks to cut costs, while Ericsson has warned it will take a SEK6.1bn ($690m) charge in its fourth quarter 2018 results, blaming its troubled digital services unit and the failure of its new BSS (business support systems) strategy.

Nokia warned last week that it would axe about 1,330 jobs in its bid to cut annual costs by another €700m ($797m) over the next two years. The jobs will split between Finland (350), Germany (520) and France (460). Nokia currently employs around 6,000 people in Finland and 3,500 in Germany but has not disclosed its French headcount. In total, it had about 103,000 employees as of the end of 2017.

The redundancy program will not affect three Nokia France affiliate companies – Radio Frequency Systems, Nokia Bell Labs France and Alcatel Submarine Networks. Nor will it affect R&D in any location, given the need to stay ahead of rivals in early 5G technologies.

The new round of cuts aim to boost profitability amid price pressures in core markets and after the firm’s previous cost reduction program, designed to eliminate about €1.2bn ($1.4bn) in annual costs between 2015 and 2018, failed to deliver sufficient savings.

Nokia is targeting an operating margin at its main Networks business of between 9% and 12% in 2020, but has a steep hill to climb – for the first nine months of last year, this margin was just 2.6%, down from 7.2% a year before.

Like Nokia, Ericsson has also been reducing its workforce to try to improve profits and operating margins. It has cut about 17,000 jobs since the beginning of 2017 and employed about 94,500 people globally as of the end of September 2018.

Now the Swedish vendor will spend a further SEK1.5bn ($170m) on restructuring charges this year, in addition to the SEK16.1bn Q418 charge.

Although there have been some signs of improvement at the core Networks business unit over recent quarters, digital services continue to be challenging, particularly the section of that unit dedicated to BSS. Ericsson admitted that Revenue Manager, its next generation BSS offering, has failed to generate any revenues despite the strategy of putting it at the heart of a “full-stack” service for operators. The company will now abandon efforts to sell Revenue Manager to new customers and, instead, enhance its older, established platform, Ericsson Digital BSS.

In its statements, Ericsson said its BSS unit was not showing “satisfactory progress” and was jeopardizing the chance for the overall digital services business to achieve its 2020 profit targets. In particular, the strategy of targeting large transformation projects with pre-integrated BSS solutions had failed.

The investor statement continued: “The anticipated customer demand for a full-stack pre-integrated BSS solution has not materialised. Delays in product and feature development has also made the full-stack Revenue Manager less competitive. R&D resources in BSS have been focused on full-stack Revenue Manager, causing further delays in product releases of the established platform. In addition, certain complex transformation projects experienced delays and cost overruns.”

Of the SEK6.1bn in Q4 charges, about half (SEK3.1bn or $350m) is categorized as a “restructuring charge”, so that suggests Ericsson is writing off about SEK3bn ($340m). As well as writing down the value of some intangible assets, the company said it would incur charges because of customer compensation payments and to cover project delays. Those payments will have an impact on cashflow for “several years” from 2019, it said.

The full SEK6.1bn will hit Ericsson’s gross margin for the final quarter of 2018. Ericsson made about SEK52bn ($5.9bn) in gross profit over the first nine months of 2018, but only SEK9.6bn ($1.1bn) came from digital services, which made an operating loss of SEK6.8bn ($770m) for the same period. That improved on the loss of SEK15bn ($1.7bn) for the same period of 2017, but is well off Ericsson’s target to achieve a digital services operating margin in the low single digits for 2020.

Ericsson will spend another SEK1.5bn ($170m) on restructuring this year and has warned of further job losses.

Börje Ekholm’s key strategy, since taking over as CEO, has been to reverse the diversification program of his predecessor, Hans Vestberg, closing or selling several businesses, backing away from direct-to-enterprise sales, and placing most of the emphasis on 5G for growth. Given this dramatic failure in BSS, and the challenges for digital services in general, Ekholm has shown his capacity for decisive action, but the future of this division must surely be in doubt if significant improvement does not happen in 2019.

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