Telecom network and software major Ericsson faces a RAN market in structural decline, driving revenue and profits lower, says Patrick Filkins, analyst at TBR.
The TBR report said that revenue and profit losses accelerated as RAN investment by Ericsson’s customers contracted.
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Ericsson notched a third consecutive quarter of lower revenue year-to-year, primarily spurred by lower demand for mobile broadband solutions in a majority of regions. Without the benefit of extensive deployment opportunities ahead of 5G investment, Ericsson will be challenged to grow revenue and sustain margins in the short term. TBR expects a small uplift in capex in 2020, driven by 5G standardization and larger deployment opportunities.
In the meantime, TBR expects Ericsson to mine its existing 3G and LTE customer base to sell its next-generation LTE, NFV and SDN, cloud and core networking solutions, as investment in these areas will grow, but lower demand for traditional networking solutions will continue to drive down overall sales.
To cope with the new market reality, Ericsson is shifting its focus to reigning in costs and paring back operations.
Faced with a weaker RAN market, Ericsson recognizes it must restructure to drive new growth opportunities tied to pre-5G, Internet of Things and cloud-enablement solutions. This includes driving sales with enterprise customers and increasing its focus on digital infrastructure.
To accelerate this shift, Ericsson plans to close its domestic manufacturing operations and lay off 3,000 Sweden-based employees by 4Q17. Ericsson will partially offset the layoffs by hiring 1,000 Sweden-based engineers to support its growth initiatives.
For years Ericsson has actively reduced headcount in its Western operations while hiring employees in lower-cost regions, such as India, where it plans to double headcount by 2020. However, TBR expects Ericsson to reduce headcount overall as it grapples with weak earnings over the next several quarters.
Further, the company is consolidating its executive leadership team, as evidenced by the impending departure of its chief human resources officer, who is stationed in the U.S. Ericsson plans to move the position to its headquarters in Sweden.
Additionally, Ulf Ewaldsson will oversee Ericsson’s strategy along with his CTO duties. Streamlining decision making at the top will help Ericsson swiftly enact new policy amid restructuring and execution of its cost and efficiency program.
Driving TV and media sales is critical to Ericsson building new revenue streams.
Ericsson approaches the TV and media markets by positioning itself as a holistic enabler of digital media, as evidenced by its newly established Business Unit Media. Ericsson’s new business unit is further segmented by its cable and broadcast customers, which can include telecom operators investing in TV and media solutions. The primary goal is to grow software and services revenue and leverage partners, such as Cisco, to fill in the hardware gap in select cases.
Additionally, Ericsson is constructing ecosystems that place it at the center of its customers’ media transformations. Ericsson’s Unified Delivery Network, a global content distribution network that enables operators to combine and scale the delivery of video content and OTT services, is an example of this strategy.
While a higher volume of digital media engagements are unlikely to offset lower RAN sales in the long term, Ericsson will leverage its end-to-end portfolio of software and services to grow its market presence.
