Ericsson sees capex crunch extending into 2024

• As expected, a slowdown in telco spending has hit Ericsson’s third-quarter sales 
• And that capex crunch pain will continue in the fourth quarter and into 2024
• Adding to the pressure on the Swedish vendor is the previously announced goodwill writedown against its acquisition of Vonage
• But CEO Börje Ekholm believes its Vonage-based global network platform (GNP) strategy holds good for Ericsson and its telco customers
• The vendor’s share price dips to lowest level in six years

There wasn’t a great deal to cheer in Ericsson’s third-quarter earnings report, published early on Tuesday morning. The giant Swedish vendor confirmed the year-on-year decline in revenues and the non-cash goodwill impairment charge related to its Vonage unit that it unveiled a week ago, and then added to the sense of woe by noting that the current slowdown in mobile operator spending is set to continue not only into the fourth quarter of this year but into 2024 as well. 

Ericsson stated last week that market conditions had had an impact on the value of its Vonage unit and, as a result, its third-quarter numbers were being affected by an impairment charge of almost $3bn. At the same time, it provided some preliminary financial numbers that told a story all too familiar to network technology vendors around the world right now: Customers have tightened their belts and are spending less – see Ericsson takes a $2.9bn hit on value of Vonage.

Now the company is desperate to reassure investors, analysts and customers that the $6.2bn acquisition of Vonage was the right thing to do and that its strategy still holds good.

In the meantime, its financial numbers are reflective of the current state of the telecom infrastructure market. Total revenues are down year on year by 5% to 64.5bn krona (SEK) ($5.9bn), mainly due to the reduced spending on mobile network infrastructure by telcos, particularly in North America. The vendor’s networks business unit, which generates about two-thirds of the company’s sales, reported a 14% year-on-year dip in revenues to SEK 41.5bn ($3.8bn) as major network operators in the US continued to keep their capex investments at a low level – total group sales in North America were down by almost 50% year on year to SEK 13.5bn ($1.23bn), which is an extraordinary dip. 

That sales decline and the impairment charge dealt a hammer blow to Ericsson’s bottom line, as it reported an operating loss before interest and tax of SEK 28.9bn ($2.65bn), compared with a small operating profit a year earlier, and a net loss of SEK 30.5bn ($2.8bn).  

Fortunately, and as noted throughout this year, just as the US telcos have cut their spending, the 5G rollout in India has continued apace and in the third quarter alone, Ericsson’s revenues from India hit SEK 10bn ($914m) – the timing has been somewhat fortuitous as the investments in India have at least helped to slightly offset the dip in the US. However, the initial 5G network rollouts in India are coming to an end and while fourth-quarter sales in that market will still be as strong, they won’t keep ramping up.  

Ericsson CEO Börje Ekholm is keen to calm nerves on the mobile network investment situation as well as on the Vonage-based strategy. He noted in Tuesday morning’s earnings webcast that while there are spikes and troughs in mobile network investments, the market is quite steady when viewed over several years and he’s confident it will pick up again as the drivers for investment have not disappeared. 

“Over the last two decades we’ve seen that investments in mobile infrastructure have had built-in cycles and, in aggregate, it’s been overall flattish,” noted the CEO. “We believe this pattern will continue. We don't believe the peak levels of 2022 will return, but we do believe that investments will normalise from current levels. And the reason for this recovery is that data traffic continues to grow… more capacity will be needed, as will modernisation of the networks. So it’s important to note that while data traffic continues to grow at a very high rate, this implies market normalisation, not an incremental market growth. The reason for a flattish market for mobile infrastructure is that the operators’ service revenues have only had very limited growth. And this is something we actually also see reflected in the operators’ market multiples,” added Ekholm. 

So the operators have invested heavily in 5G but aren’t seeing much of a return on those investments. Is there a solution to this problem? Ekholm believes there is and it is what spurred the Swedish company to acquire Vonage and develop what the vendor calls its global network platform (GNP), he said. 

“To achieve growth in our infrastructure market, we need a catalyst to increase service revenue growth for the operators,” and that will come from “addressing new monetisation opportunities. This is what we’ve been driving with our global network platform,” added Ekholm. 

The overall aim is that the global network platform, combined with the capabilities of their 5G networks, will provide mobile operators with the opportunity to develop innovative new services for enterprise users. Ekholm pointed to the recent application programming interface (API) platform announcement with Deutsche Telekom as an example of how this will play out. 

“Last month, we announced the historic milestone in the network API journey together with Deutsche Telekom,” he noted. “Powered by the global network platform, DT is able to offer a globally scalable one-stop shop for communication APIs, such as voice, SMS, two-factor authentication and enhanced security, as well as network APIs, [such as] location, device status and quality on demand. Through the global network platform, we’re creating a new market for exposing 5G capabilities, an opportunity that… analysts estimate to be [worth] about $20bn by 2028. And we aim to capture a sizable part of the market as we are the front runner today,” claimed Ekholm. 

But that is in the future: Revenues from GNP engagement will start to trickle in late this year but it will be 2025 before they are meaningful, so in the meantime the focus for the company and those who track it is the recovery of the mobile networks market. 

But the Ericsson team doesn’t know when that might happen and the vendor isn’t providing any outlook or guidance for 2024, though Ekholm noted that “we have started to see more positive discussions with operators about network investments, but it’s clearly too early to call this a turning point. We are, though, confident that the recovery will come but the timing is really in our customers’ hands – given that, we think it’s prudent to plan for current market conditions to prevail into 2024,” added the CEO.  

In the meantime, Ericsson is looking to improve efficiencies and reduce costs. To that end it has been cutting jobs, as communicated earlier this year, and has reduced its overall headcount during the third quarter by more than 2,500 to end September with 101,351 employees. 

Ekholm, then, continues to point towards the sunlit uplands of normalised mobile network infrastructure investments and API-driven enterprise service development and monetisation. Investors, though, will take much more convincing: Even though Ericson had pre-warned that the third quarter was grim and the outlook wasn’t positive, its share price took yet another hit today, dipping by 7.5% to SEK 49.90, its lowest price since autumn 2017. 

- Ray Le Maistre, Editorial Director, TelecomTV