Sales at Ericsson slip as cost-cutting pays off.
Swedish vendor Ericsson saw its gross margin jump to 34.2 per cent, from 15.7 per cent a year ago, as its continued cost-cutting has started to pay off. Revenue slipped nine per cent, to SEK43.4 billion (US$5bn) in the period. The company said it was confident of increasing its market share with 5G sales through 2018 and 2019.
Börje Ekholm, president and chief executive at Ericsson, said the company was on the right track, but needs to do more. “The improvements in the quarter are encouraging. However, more work remains to be done. We have confidence in the strategic direction laid out and remain fully committed to our long-term targets,” he said.
Ekholm refused to be drawn on whether the US ban on companies selling raw materials to rival vendor ZTE will benefit its own performance in the market, although he acknowledged operators were asking questions. “Our focus has to be on having a competitive portfolio in the market. That’s the thing we can impact. Then we will see what the consequences of this are,” he said.
At the same time, he noted noted continued momentum in LTE upgrades and early 5G-related deployment, and said Ericsson is hopeful of an improving share of new 5G contracts. In particular, the company is seeing “renewed interest” in its portfolio in the US, he suggested. “We see positive momentum in North America, which comes from preparing networks for 5G.”
He added: “The data traffic our customers see in the network on a global basis doubles every 18 months. That will continue, and drive demand for equipment. We see a renewed focus on network quality and user experience. That is a global phenomenon – operators are starting to upgrade capacity to fulfil demand.”
Ericsson’s efficiency drive, started in late 2016, was felt across Ericsson’s networks, digital services, and managed services departments. Gross margin in network sales increased to 38.9 per cent, from 31.7 per cent a year ago. At the same time, it surged from -27.5 per cent to 38.5 per cent in digital services, and from -8.9 per cent to 7.9 per cent in managed services.
Ericsson said it will hit its original target to slash costs by SEK10 billion (US$1.2bn) by the middle of 2018, having already removed SEK8.5 billion (US$1bn) from the business. The company has axed 20,400 jobs since the end of 2016, including 3,174 net job losses in the last quarter – despite adding 500 engineers in the period.
Its total workforce stands at 110,276, from 130,840 in the fourth quarter of 2016. Senior jobs. “Cost is something we have to work on continuously. We have to have that mind-set – that we will continuously improve our cost position, even after mid-2018,” said Ekholm.
Quarterly net sales declined from SEK47.8 billion (US$5.7bn) to SEK43.4 billion (US$5bn) in the 12 months to March 31. The nine per cent reverse follows a 12 per cent decline in sales in the fourth quarter.
Ericsson today reported a 12% decline in Q4 2017 sales and a 10% full-year sales decline in what company President and CEO Börje Ekholm described as a “challenging 2017.” One of the key determinants, according to the company, was an expected downturn in LTE-related equipment and services in mainland China.
Sales declined by 10 per cent in its networks business, with lower LTE investments in China and early completion of major projects in South East Asia, notably.
Network sales increased in Latin America, primarily, as well as parts of Europe. Network modernisation in the Middle East and Africa also saw sales rise. Sales rallied in North America, with investment in network expansion and early “5G readiness” deployments driving currency-adjusted numbers, at least, up by six per cent.
Sales of digital services declined by nine per cent. Ericsson claimed some momentum for its 5G-ready and cloud-native products, with major customer wins in the quarter. But sales of new products could not compensate for the decline in sales of legacy items in the period, it said.
In line, sales of managed services fell by eight per cent, with the revision down of managed services contracts. Margins improved at the same time as low-performing customer contracts were weeded out.
The Swedish vendor’s operating income improved, from a SEK11.3 billion (US$1.34bn) loss a year ago to a slight reverse of SEK0.3 billion (US$36m) for the three months to the end of March. The improvement was all down to the impact of its cost-cutting, with operating expenses falling from SEK18.9 billion (US$2.24bn) to SEK15.3 billion (US$1.81bn) and gross margin jumping in tandem.
“Looking ahead, we expect the rapidly increasing focus on 5G to continue, with initial business discussions focusing on enhanced mobile broadband. We continue to work closely with customers to define the optimal business models to enable them to tap into new revenue streams and capture the full value of 5G,” said Ekholm.
Ericsson noted continued momentum in LTE upgrades and early 5G-related deployments. Ekholm said the company is hopeful to take an improving share of new 5G contracts, contributing already in terms of sales, and increasing though 2018 and 2019.
“The data traffic our customers see in the network on a global basis doubles every 18 months. That will continue, and drive demand for equipment. We see a renewed focus on network quality and user experience. That is a global phenomenon – operators are starting to upgrade capacity to fulfil demand,” said Ekholm.
The company is seeing “renewed interest” in its portfolio in North America, he said. “We see positive momentum in North America, which comes from preparing networks for 5G.”
Most of Ericsson’s business in the first quarter was in the Americas. Its regional groupings put Europe and Latin America, as a single entity, first, with 30 per cent (SEK13.1 billion) of total sales, up seven per cent in the period, mainly because of network sales in Latin America.
North America contributed 26 per cent (SEK11.3bn, US1.55bn) of the total, with sales slipping six per cent. South East Asia, together with Oceania and India, put through 14.7 per cent (SEK6.4bn, US$760m), with performance down 24 per cent in the period.
Ekholm pointed to moves by operators in the Middle East to modernise their LTE networks. The Middle East and Africa contributed 13.4 per cent, rallying eight per cent overall. Sales in North East Asia fell hardest in the period, down 39 per cent; it contributed 7.8 per cent of total sales.
Ekholm said of the Chinese market: “We knew it would taper off as it completed the build-out of 4G networks. And that’s what we have seen. That was to be expected. If look at number of nodes, more than half of the global market is in China, but at some point you reach the coverage and capacity you need.”
He noted, as well, Chinese operators are preparing for the next upgrade cycle, as 5G looms. “Operators are also preparing for 5G,” he said.
Network sales contributed two thirds (66 per cent) of its total business in the period; digital services and managed services contributed 17.7 per cent and 12.7 per cent, respectively. North America contributed 32.3 per cent of network sales; Europe and Latin America contributed 26 per cent. Europe and Latin America contributed most digital and managed services sales, with 35 per cent and 52.7 per cent, respectively.
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