Ericsson continues to transform internally while navigating a downshift in operator demand for the company’s network infrastructure.
Ericsson’s Q3 2015 earnings demonstrate the company is quickly delivering on cost transformation goals to improve margins amidst a backdrop of shifting demand in key markets, driven by currency effects. Ericsson’s restructuring is driving Opex lower, contributing to a 190 basis point year-to-year gain in operating margin. Revenue, while growing 2.6 percent year-to-year in reported terms, fell 9 percent at constant currency as operators in large markets – notably Russia and Brazil – reduced investment due to currency depreciation.
While Ericsson’s internal transformation focuses on shifting resources to growth markets (up 10 percent year-to-year) such as IP, cloud and specific verticals, the global mobile broadband market continues to drive results. Further restructuring over the next two years will spur margin growth, but revenue growth will fluctuate as operator demand for network infrastructure ebbs and flows.
Ericsson’s ICT focus exposes it to new competitors and lays bare the need for scale through acquisition.
Ericsson’s broad focus spans traditional areas where it has dominant market positions, but relatively slow growth – radio, mobile core, and transmission and telecom services – as well as its growth areas of IP networks, cloud, OSS BSS, TV & Media and Industry & Society. In growth areas, Ericsson’s market presence is small, but increasing in line with the size of the addressable market. The company’s strategy is to advance core areas through organic investment and growth areas through a combination of organic development and targeted acquisitions.
Part of this strategy includes driving new ICT products such as the HDS 8000, a cloud portfolio, IoT and 5G developments, but the scale of these efforts is far from what is required to overtake the traditional business in revenue and likely too small to claim new markets ahead of competitors.
Though Ericsson realized this and made tuck-in acquisitions to bring ICT solutions to market faster, the company must make major acquisitions in its growth areas to scale sufficiently to compete with other ICT players. TBR believes more acquisitions in IT and industries such as energy and transport are required to transform Ericsson into a company in which core business areas balance with growth areas to enable new market investment more rapidly.
Ericsson plans to invest heavily in India to support its cost reduction and managed services strategies.
Ericsson plans to double its headcount in India by 2020. TBR believes Ericsson’s global cost and efficiency program, focus on winning managed services contracts, and the expected ramp up in 3G and LTE investment by Indian operators will drive hiring. Ericsson employs more than 21,000 people in India, or over 18 percent of its workforce, and headcount growth in the country has reached double digits every quarter for the past five years.
Ericsson will shift some Europe-based staff – including R&D employees – to India as part of restructuring to capitalize on lower labor costs existent in the country. In Q1 2015 Ericsson laid off 2,100 employees in Sweden, where the company is head-quartered, and TBR expects further employee reductions in Ericsson’s North America, Northern Europe & Central Asia (which includes Sweden), and Western & Central Europe regions. Ericsson is paring headcount to achieve its goal of cutting expenses by SEK 9 billion ($1.1 billion) by 2017.
Michael Soper, telecom analyst at Technology Business Research