Ericsson Eyes Takeovers to Bolster Digital Services Unit
NICE, France -- TM Forum Live -- Ericsson is considering buying companies that could strengthen its digital services business and is predicting a "tangible turnaround" at the ailing unit next year.
Speaking to Light Reading on the sidelines of this week's TM Forum Live event in Nice, Ulf Ewaldsson, who heads up the recently formed digital services business area, revealed that takeover activity could figure in the Swedish vendor's strategy if it helps Ericsson AB (Nasdaq: ERIC) to be "the partner of choice for customers digitalizing their systems."
The news comes several weeks after a strategic update during which Ericsson said it would focus on restoring profitability by "doubling down" on core activities, which appear to include the OSS and BSS business.
Ericsson has been hit by a downturn in the network equipment industry, with major customers scaling back their spending following a wave of investment in mobile broadband infrastructure. It expects the addressable market for radio access network (RAN) equipment to shrink at a rate of between 2% and 6% this year. (See Ericsson's Q1 Even Worse Than Feared.)
Ewaldsson hinted that acquisition targets could include companies focused on revenue and customer management, as well as players in the analytics and automation areas.
"We see a big focus on customer experience … revenue management and customer management systems," he said in commenting on the development of the market. "I'm using words deliberately here because it is changing from traditional customer care systems to customer management systems. And the other area where we see traction is in new types of OSS [operational support systems] based on analytics and automation."
Revenues from billing support systems (BSS) and OSS, which were previously reported as "support solutions" but now sit within Ericsson's cloud and IT division, shrank by 17% last year, to about 12.5 billion Swedish kroner ($1.4 billion).
The unit also made an operating loss of about SEK1 billion ($110 million), compared with a profit of SEK1.5 billion ($170 million) in 2015, prompting some analysts to question Ericsson's commitment to the business.
While the company has hinted at potential divestments of its media and cloud hardware assets, it has insisted that BSS and OSS is of "strategic" importance.
Ericsson has blamed the decline at that business on lower sales of legacy products, but Ewaldsson is aiming for a big improvement over the next 12 to 18 months.
"The digital business results were not so flattering," he says. "That is not because the idea of digital services is wrong, but we do need to focus the portfolio on new investments and get out of some of the legacy. We expect a tangible turnaround in 2018."
The comments come several weeks after James Crawshaw, a senior analyst with the Heavy Reading market research group, said Ericsson needed to start buying some innovative players to make a success of its OSS and BSS strategy. (See Ericsson Must Hit M&A Trail to Boss B/OSS – Analyst.)
"What kind of companies should they buy?" Crawshaw wrote in a comment on the Light Reading website. "Something to help operators manage inventory in a dynamic environment like NFV (the legacy systems can't cope), something to help operators provide a cool consumer-facing front end to the BSS to enable self care, and something to help increase the automation of network management."
The suggestion that Ericsson is on the takeover trail could prompt concern among investors: The company built up its media and TV business largely through takeover activity, and yet the loss-making division has evidently struggled to make an impact.
On the other hand, attractive takeovers might help to restore some confidence in Ericsson's growth prospects. Ratings agency Moody's recently downgraded the company to junk status out of concern it remains too focused on cost cutting and profitability.
"They have the right to be concerned," said Ewaldsson when asked about his reaction to that downgrade. "Our performance is not where it should be and we are not satisfied.
"In the area of digital services a lot of effort needs to go into streamlining the portfolio and making sure we have more efficient service delivery," added Ewaldsson. "We also need to invest enough in new systems to make them pick up even faster."
— Iain Morris, , News Editor, Light Reading