Ericsson faces a tough 2023

Ray Le Maistre
By Ray Le Maistre

Jan 20, 2023

  • Ericsson has reported its 2022 financials
  • Revenues were up slightly but margins have been squeezed
  • Now it faces some belt tightening in the major market of North America
  • Its cost-cutting programme will involve job losses
  • The company still isn’t sharing details of the portfolio cuts at its Cloud Software and Services unit

Ericsson is steeling itself for a tough 2023 as major customers cut back on spending and margins look set to be squeezed even more than they were in 2022, the vendor’s management reported on Friday morning while presenting the Swedish giant’s 2022 full-year financial results.  

On paper, the 2022 results don’t look too bad, as total revenues increased by 17% year on year to 271.5bn Swedish krona (SEK) (US$26.3bn), but that number was boosted by foreign exchange fluctuations and the addition of revenues from cloud-based communications platform specialist Vonage, the acquisition of which (for $6.2bn) was completed in the summer. On a like-for-like basis, Ericsson’s sales increased by just 3% in a year that many regard as a high point for 5G network investments. 

More concerning was the dip in profitability, as the vendor’s earnings before interest and tax (EBIT) margin dipped to 10% from 13.7% in 2021, while net profits also dipped, by 17%, to SEK 19.1bn (US$1.85bn). 

And what is weighing heaviest on the vendor is the outlook for the year ahead, particularly the first six months, when Ericsson expects key telco customers, especially those in the US, to curb their mobile access network spending and use inventory that they built up over the past year. The main US operators have signalled recently that capex levels were set to drop – see T-Mobile US confirms capex dip as it boasts stellar 2022.

Spending in some other regions, though, will increase, with India being a prime example. And, while Ericsson CEO Börje Ekholm noted that the vendor has been increasing its market share and has seen rising sales in India as the main operators build out their 5G networks, the initial contracts also involve a lot of low-margin professional services, which puts pressure on the profitability of the deals in the early stages. 

None of which augurs well for Ericsson’s networks business unit, which is the main driver of revenues for the company, and the company’s investors reacted accordingly, with the share price losing almost 5% of its value to dip to SEK 58.89 on the Stockholm exchange in Friday trading. Looking back further, Ericsson’s share price is currently 44% lower than a year ago.  

All of which is why the company is looking to reduce its outgoings: At its Capital Markets Day in December, it announced an “acceleration of initiatives to reduce costs by SEK 9bn” (US$872m) by the end of 2023 and the vendor’s CFO Carl Mellander noted in an interview with the business media that the cost-cutting programme would involve an unspecified number of job cuts, reported Reuters

Ekholm tried to put a brave face on the situation, noting that the operators cannot hold off spending for too long as the constant uptick in data volumes running over their networks means they need to invest in greater network reach and more capacity, and he expects spending in key markets, such as the US, to normalise in the second half of 2023.

He also talked up (not for the first time) the potential of Vonage and the Enterprise business unit, of which it is a key part. Adding Vonage to the portfolio “gives us the foundation to transform Ericsson into a platform company and executing on this strategy remains a top priority for us,” noted the CEO, though not this year. “From 2024 and beyond, our enterprise business will be a major driver of Ericsson’s long-term growth and profitability, however, these investments will weigh on profitability during 2023,” the company noted in its earnings report. 

Indeed, the Enterprise division, which comprises Vonage and the enterprise wireless specialist Cradlepoint, accounted for just 8% of revenues in the fourth quarter of 2022. 

Meanwhile, the vendor is still trying to fix its Cloud Software and Services unit, which is laden with legacy products and unprofitable contracts that counter the profitable growth of key products, such as the vendor’s popular 5G core platform. Ericsson recently announced that, in an effort to get the division to break even by the end of 2023, it is culling some products and contracts, but is still declining to provide any details of exactly which lines of business are being affected by this move – see Ericsson trims its software and services division.

- Ray Le Maistre, Editorial Director, TelecomTV


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