Ekholm's Vision of Slimmer Ericsson Lacks Detail & Dazzle
After former CEO Hans Vestberg was sunk by the proverbial iceberg of a major earnings setback last summer, Ericsson finally settled on Börje Ekholm as his successor. Ever since, market watchers have been speculating about the role the acolyte of the Wallenberg family, one of Ericsson's main shareholders, would come to play after taking charge at the start of this year. A finance expert but self-confessed "rookie" in the telecom world, he seemed just as likely to flog the ailing Ericsson business, or parts of it, as steer the company toward a brighter future. (See Is Ekholm Ericsson's Savior or Seller?)
A new strategic vision was promised, however, in which emerging business opportunities in Ericsson's wheelhouse seemed bound to be a focus. The much-hyped 5G mobile standard was the most obvious. (See Ericsson's Ekholm Trumpets 5G Role But Still Lacks Plan.)
The update that finally emerged today, after weeks of eager anticipation, confirmed a number of suspicions but lacked the wow factor analysts had craved and was woefully short on detail. Dodging hard-edged questions about the future outlook, Ekholm promised to "at least" double Ericsson AB (Nasdaq: ERIC)'s operating margin, to about 12%, without really indicating how he plans to achieve this -- other than through further cost cutting -- or when. "I would like to be convinced by the plan," said one analyst during a call earlier today, sounding wholly unconvinced, while others questioned some of the latest decisions. (See Ericsson Tightens Focus, Warns of $1.7B Q1 Hit.)
Those will cover -- in all probability -- a sale of Ericsson's unprofitable media business, which the vendor has spent years assembling through a considerable amount of takeover activity. Despite those efforts, media was responsible for just 4% of Ericsson's sales in 2016 and an operating loss of SEK1.8 billion ($210 million). Besides exploring "options" for those particular assets, Ericsson also looks set to jettison its cloud hardware business, a small part of its similarly loss-making IT and cloud division.
That will leave the company with its vast networks business, which accounted for nearly three quarters of sales last year, a digital services outfit that includes the OSS/BSS product portfolio and a slimmed-down managed services unit, whose chief focus will be on "automation."
If the decision to retain the OSS/BSS division hardly came as a surprise, it is one that some analysts find troubling. How much Ericsson generates in revenues from OSS/BSS business is unclear, but its entire IT and cloud division contributed about 47.9 Swedish krona billion ($5.5 billion) in sales last year, 8% less than in 2015 and only about a fifth of Ericsson's total revenues. More worryingly, the unit's operating loss -- even excluding restructuring charges -- doubled to SEK4 billion ($460 million) in 2016.
Ekholm insists that OSS/BSS is "strategically important" both to Ericsson and to its customers. That makes perfect sense, given the importance so many service providers now attach to their digital transformation. And Ekholm believes he can restore profitability here by ditching legacy activities and channeling resources into exciting new areas. The sale of the media and cloud hardware businesses could support that move, assuming Ericsson can raise a decent amount from the divestment of what remain relatively small (and currently loss-making) assets.
Yet this gambit could expose Ericsson to an assault by China's Huawei Technologies Co. Ltd. After all, many service providers feel the need to continue maintaining their legacy systems even as they invest in new ones, and Huawei has the wherewithal to satisfy their various demands. The Chinese vendor already appears to have chewed into Ericsson's share of the networks market. The fear now is that -- with its determination to dominate any new opportunity -- Huawei could have a similar impact in the OSS/BSS arena. (See Is There No Stopping Huawei?)
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