- Vendor weathers the China sales storm in 2021
- Its business outside China is strong, driven by 5G investments
- Now it’s gearing up to grow its enterprise business during the coming few years
- It sees faster growth and higher margins beyond its traditional telco infrastructure market
- But it’s not all positive news – Ericsson is still waiting to find out if it will be punished for failing to comply with an agreement brokered with the US Department of Justice
Ericsson’s global reach and strength saved its skin in 2021, as while its business in China was decimated as the result of a well-documented geopolitical wrangle, its sales growth across the rest of the world, driven by 5G network investments, made up for that damaging shortfall, the vendor noted in its fourth quarter and full year results announcement on Tuesday morning. What is also clear is that while Ericsson is doing generally quite well in the telecom network infrastructure market right now, its current strategic focus is on building a significant enterprise networking and applications business that can deliver long-term growth and profitability.
Full year revenues in 2021 totalled SEK232.3 billion (US$25 billion), almost exactly the same as the 2020 figure, but the vendor notes that its “organic sales” (adjusted for comparable units and currency exchange rate fluctuations) in 2021 were 4% better, despite the dramatic downturn in its business in China: The company estimates that if its sales in China had not been adversely impacted by political retributions and crashed by about SEK7.7 billion ($828 million), it would have recorded full year organic sales growth of 8%.
Ericsson also managed to improve its margins and increase its profitability: Earnings before interest and tax (EBIT) for the year hit SEK31.8 billion ($3.4 billion) and a margin of 13.7%, up from 12% in 2020. Net profit ramped up by 30% year-on-year to SEK23 billion ($2.47 billion). You can see the full set of numbers in the company’s earnings press release.
The company’s Networks division was the key driver of its success. On the earnings call held Tuesday morning, President and CEO Börje Ekholm noted the vendor currently has its technology deployed in “109 live 5G networks, we have 170 agreements or contracts with customers on 5G networks, and we have been able to capitalise on this leadership position to gain market share as well.”
That claim was borne out by a research report that came out on Monday from Mobile Experts that showed Ericsson had snatched Huawei’s RAN market crown during 2021.
But Ekholm doesn’t want anyone thinking his company is only now the top dog because Huawei has taken a beating: He will tell anyone who will listen that the gains are mainly the result of years of R&D investment and having the best 5G technology in the market, with geopolitical trends delivering just some of the spoils.
All in all, then, things look very solid for Ericsson right now and the improving margins, and news of an improved dividend proposal, cheered investors, as the company’s stock gained almost 7.7% in value to SEK108.02 on the Stockholm exchange by Tuesday lunchtime.
It’s what happens next, though, that’s most interesting. Ericsson has been clearly signalling its ambition to ramp up its presence in the enterprise communications sector with its acquisitions of indoor/private network wireless tech specialist Cradlepoint in 2020 and its planned $6.2 billion purchase of Vonage (which not everyone thinks is a good idea) – but developing and building that business will take time, and it’s obviously not alone in wanting to capitalize on the growing demands of the global enterprise community. (See Enterprise ambition drives Ericsson’s $6.2 billion swoop on Vonageand Ericsson buys Cradlepoint in $1.1 billion deal.)
So the vendor intends to ride the 5G wave in telco for as many years as possible – it is expecting a strong 2022 and continues to invest in 5G R&D – and use that as the launchpad for its longer-term focus on enabling enterprise connectivity and services.
Ekholm noted in the company’s earnings announcement: “Based on current business momentum, we expect fundamentals to remain strong in our core mobile infrastructure business during 2022. We will continue to increase investments in R&D to sustain our technology leadership and strengthen our competitive position to take advantage of the rollout of 5G networks. At the same time, we will continue our efforts to expand our presence in the enterprise market.”
And here’s the killer line: “Over time, we expect the enterprise segment to provide higher growth and profitability than our mobile infrastructure business.”
But Ericsson knows it can’t achieve its goals through organic internal development, hence the new M&A strategy. Ekholm stated: “Our commitment to pursue value from growth in wireless enterprise took a significant step forward with the announcement of our ambition to acquire Vonage, which will give us the foundation to develop a Global Network Platform to drive innovation on top of the 5G networks. This adds to already strong progress in 2021 in our organic enterprise portfolio - Dedicated Networks and IoT - and follows the successful integration of Cradlepoint.”
And no matter how many times Ericsson says this doesn’t mean it will be abandoning or competing with its current core customer base of mobile network operators, essentially that’s exactly what it is going to do as and when the business opportunity presents itself, though of course it will also partner with the telcos to target the notoriously tough enterprise market. (See Telstra deploys industry-first Ericsson Private 5G for enterprise.)
The question is – does Ericsson have the skillset to pull off this transition? It might not look like a giant leap, but the enterprise market is a swamp in which it is very easy to get stuck unless you know how to stay afloat. Obviously, it’s hoping to bring a lot of insight on board with the Vonage acquisition but that’s unlikely to be enough (and I bet the Ericsson top team know it).
In the meantime, Ekholm sees things moving pretty fast. Here’s how he closed out the earnings conference call: “We're continuing to execute on our strategy to extend the leadership in the mobile infrastructure business, where we see very strong demand for 5G. As we have discussed, we also see a great opportunity to pivot the company towards a
enterprise business which will establish over the coming few years, and in two-to-three years it will be a meaningful contributor to reaching the [company’s] long-term target of an EBITDA margin of 15 to 18%... we are extraordinarily excited about the outlook for the 5G market, but also what we can do in the enterprise field.”
Let’s see how he feels in 2025.
But while it’s full of optimism looking forward, Ericsson’s past is still causing problems, and the Swedish vendor doesn’t appear to be helping its own cause too much. “In October, we received correspondence from the Department of Justice that we had breached our obligations under the Deferred Prosecution Agreement by failing to provide certain documents and factual information. At this point in time, we cannot provide further information or predict the outcome.” The $1 billion Deferred Prosecution Agreement was agreed by the vendor in December 2019 to resolve criminal charges related to violations of the Foreign Corrupt Practices Act (FCPA). We reported in October that the situation didn’t sound very encouraging for the Swedish vendor and, three months later, it doesn’t sound any better. Ericsson says it continues to invest in “improving our Ethics and Compliance program in accordance with our strategy and objectives.” As part of that, it might want to focus on delivering against the agreement because it doesn’t need this to linger any longer than it needs to.
- Ray Le Maistre, Editorial Director, TelecomTV
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