Ericsson and Nokia flaunt cash as open RAN pack strugglesEricsson and Nokia flaunt cash as open RAN pack struggles

When Börje Ekholm took charge of Ericsson at the start of 2017, his number one mission was to persuade customers contemplating long-term commitments that the Swedish vendor of network gear would survive. Its share price had nearly halved between January and October of the previous year after a shocking run of financial results. By the third quarter, Ericsson had turned unprofitable, reporting a small net loss of 200 million Swedish kronor (US$17.8 million), compared with a profit of SEK3.1 billion ($280 million) a year before, as sales dropped 14% year-over-year, to SEK51.1 billion ($4.6 billion). Net cash fell 37%, to SEK16.3 billion ($1.5 billion). Ericsson's ability to meet financial obligations was suddenly in doubt.

In Europe and some other parts of the world, there had a dramatic loss of 4G market share in previous years to Huawei, a Chinese rival with seemingly voluminous pockets. Ericsson, meanwhile, had been slashing investment in research and development (R&D), which fell 16% for the first nine months, to just SEK22.7 billion ($2 billion). That raised further awkward questions about the future competitiveness of its network products. The experience has shaped Ericsson's subsequent financial strategy and may partly explain why smaller vendors in a contracting market have struggled to land deals.

"That has been one thing that has actually been important in order to capture customers, and we came from a spot in 2017 when this was a topic in every customer interaction," Ekholm told equity analysts on the company's recent call about quarterly results. "It hasn't been since then, but every customer I met was focusing on if Ericsson is going to stay alive etc."

Eight years later, Ericsson looks in dramatically better health. Its net cash position for the just-ended fourth quarter – following a $1.1 billion takeover of Cradlepoint in 2020 and the $6.2 billion acquisition of Vonage nearly two years later – had risen to SEK37.8 billion ($3.8 billion). A customer, Ekholm explained, typically makes a ten-year commitment when it puts Ericsson's gear into operation. "They would prefer that we are solid from a financial perspective so they can comfortably make that commitment," he said.

There were similar efforts to highlight net cash by Nokia, Ericsson's big Nordic rival, following recent setbacks in the North American 5G market that fueled speculation by some analysts about its future involvement in mobile networks. After returning €1.4 billion ($1.4 billion) to shareholders in dividends and share buybacks, Nokia was left with net cash of €4.9 billion ($5 billion) at the end of 2024, CEO Pekka Lundmark said in the introduction to the company's recent financial report. The goal is to maintain net cash at between 10% and 15% of annual net sales, he added.

A bigger pile of net cash has also given Ericsson the ability to boost long-term spending on R&D, which had been allowed to suffer under Hans Vestberg, Ekholm's predecessor. Expenditure slumped to as little as SEK31.6 billion ($2.8 billion) in 2016, a year when Huawei spent $10.6 billion on R&D, at current exchange rates. Back then, the Chinese vendor derived about 56% of its revenues from sales to network operators. Last year, Ericsson's R&D spending hit SEK53.5 billion ($4.8 billion), while Nokia's rose 5%, to about €4.5 billion ($4.6 billion), compared with the amount spent in 2023.

"It is our firm commitment to really ensure that we have capacity to do the investments in R&D over time," said Lars Sandström, Ericsson's chief financial officer. "I think that has been the guiding star for the company for quite some years and I think, if you go long back into history, we felt that has been hurting our ability to invest when not having the right cash position."

Open RAN survival in doubt

But the 2017 scenario described by Ekholm poses a dilemma for many other companies trying to crack the market for radio access network (RAN) products. Without big multi-year contracts, smaller vendors appear to have haemorrhaged cash to sustain R&D investments. In a Catch-22, that is likely to have made telcos even more nervous about handing work to those companies. "Why do I want to even look at a guy that's maybe around for the next five to ten years but after that could be dead?" Earl Lum, the president of EJL Wireless Research, told Light Reading late last year.

His remarks came just weeks after Mavenir, a company seen as the main US alternative to Ericsson and Nokia, was reported to have missed interest payments on debt. In October, S&P Global warned it faced imminent default or restructuring. Sources subsequently indicated Mavenir was laying off staff at its RAN business and had lost John Baker, the senior vice president of business development and its main RAN spokesperson. His departure was confirmed by Mavenir, which had no comment about wider staff cuts.

Two years earlier it had been Parallel Wireless, another US RAN developer, that was suffering. In July 2022, the company was widely reported to have made hefty cuts after failing to advance against incumbent suppliers. Developments prompted Yago Tenorio, then head of network strategy for Vodafone, to express sadness about the fate of some vendors touting "open RAN," which allows operators to combine different suppliers at the same mobile site.

"We were working together well with them and particularly the name that no one mentions now is Parallel Wireless," Tenorio, now chief technology officer of Verizon, told Light Reading in October 2023. "They were very prominent at the beginning and now they are not a reference anymore."

Market shrinkage has not helped. Overall RAN sales fell 11% in 2023, to about $40 billion, said researchers at Omdia, a sister company to Light Reading. At the midpoint of its most recently published data, it was anticipating another contraction of 12.5% last year, to $35 billion. Operators in many countries paused spending after their initial 5G rollouts did not lead to meaningful improvements in sales or profitability. There have been relatively few opportunities for new entrants.

Last March, another US company called Airspan Networks filed for Chapter 11 bankruptcy protection after revenues plunged 54% in 2023, to about $77.6 million. Despite cutting heavily into R&D and other costs, Airspan was left with a net loss of $78.9 million. Under a restructuring agreement, it announced plans to go private and secure up to $95 million in equity financing.

The most recent notable loser is Comba Telecom, a Hong Kong-based maker of radio equipment. In a profit warning issued last week, Comba said it expected to record a loss of HK$600 million ($77 million) for 2024, compared with a profit of HK$6.7 million ($860,000) the year before, blaming delays by global telecom operators to network construction. The update provides further evidence the 5G slowdown also affects China, where Comba is thought to generate most of its revenues.

Wariness of dealing with smaller suppliers has left the market shares of the big kit vendors unchanged in recent years. While data for 2024 is unavailable, the leading five vendors – Huawei, Ericsson, Nokia, ZTE and Samsung – served all but 4.9% of the global market in 2023, according to Omdia. That marked a slight increase on their combined share in 2022 and meant a slice worth less than $2 billion in annual sales was split between numerous other players.

The growing importance of software

Ericsson might not always need to maintain so much net cash, said Ekholm on the last earnings call. As it becomes more heavily reliant on software sales, its financial profile could change, he told analysts. "It is going to take some time for customers to realize we are increasingly becoming a software business," he said. "If you go back 15 years, we were much more hardware-centric, and then it was a bigger question for customers. As you move into becoming a software vendor, the working capital becomes less and less and less."

Growing profitability in recent quarters is attributed partly to a higher share of software sales than Ericsson previously had, with the gross margin up 5.1 percentage points year-over-year for the final quarter of 2024, to 44.9%. With open and virtual RAN, Ericsson increasingly deploys software on equipment made by someone else – whether radio units from a RAN competitor like Mavenir or server and semiconductor gear from Dell and Intel.

Yet the hardware options remain limited in the absence of many successful specialists. Mavenir, perhaps counterintuitively, has moved into hardware manufacturing and systems integration, implying it is or intends to be less reliant on software sales than it was several years ago as a pure software developer. Loss-making Intel is Ericsson's only commercial option for virtual RAN chips. "Hardware will continue to be an important part of what we do," Fredrik Jejdling, the head of Ericsson's mobile network business group, told Light Reading in January. That net cash strength could make certain other component makers seem like a very risky bet.