Ericsson eyes more cuts after slashing 9,000 jobs as outlook dims

It's the Internet on a phone! Such was the marketing of 3G at the turn of the century by telcos and the equipment providers that served them. With their new mobile networks, operators would be able to sell Internet services on top of voice and double their revenues. Even if it didn't quite turn out that way, the campaign was wholly positive. It's a marked contrast with 5G several years into its rollout. Buy it or you and your customers will eventually suffer, seems to be the gist of what vendors are telling operators at the start of 2024.

Outside China and India, big operators have slammed the brakes on network investment in response to inventory build-ups, inflationary pressure and flat revenues. For Ericsson, the world's biggest western vendor of 5G equipment, the consequence last year was a 10% drop in sales on a constant-currency basis and a renewed focus on costs. Reported revenues fell 3%, to 263.4 billion Swedish kronor (US$25.2 billion), and Ericsson's closely monitored gross margin shrank from 41.7% to 38.6%. After impairment charges affecting Vonage, the software company Ericsson bought for $6.2 billion in July 2022, the Swedish vendor went from a SEK19.1 billion ($1.8 billion) net profit the year before to a SEK26.1 billion ($2.5 billion) loss.

Ericsson is effectively camped out with its kiosk of goodies, waiting for the hunger pangs to overcome prospective customers reluctant to indulge. "It is important to note that, looking historically, large declines in the mobile network market are followed by a rebound," said Börje Ekholm, Ericsson's CEO, on his usual quarterly call with analysts. "Operators can sweat the assets up to a point but eventually will need to invest to manage the data traffic growth, cost, energy usage and, of course, network quality, and give the customer the experience that the customer demands."

Sweating the assets, though, is what many will continue to do this year. In December, Omdia, a sister company to Light Reading, expected the market for radio access network products (RAN) to generate sales of about $40.2 billion in 2023, down from $45.2 billion the year before. Its latest ballpark estimate is that revenues will dip further in 2024, to between $37 billion and $40 billion. Dell'Oro, another market research firm, thinks RAN revenues will drop from about $40 billion in 2022 to roughly $35 billion this year.

"As we look ahead, 2024 will be a difficult year and market conditions will prevail, and so we currently expect the market outside China to further decline as our customers remain cautious and the investment pace normalizes in India," said Ekholm. A speedy rollout of 5G in the huge Asian country slowed down massively in the final quarter, explaining why Ericsson's network sales in India fell sequentially by as much as 40%.

Paring back

With no rebound likely this year, Ericsson has warned of further cuts and even a narrowing of its activities. Previous efforts to slash annual costs by SEK12 billion ($1.2 billion) have claimed about 9,000 jobs across what Ekholm described as "internal and external headcount." In its latest quarterly report, Ericsson recorded staff numbers of 99,952 at the end of December, down from 105,529 a year before. But the figure seems likely to continue falling after this week's update.

Preparing for a "challenging market" this year, Ekholm told analysts he would "focus on taking costs out where appropriate" and "really pare back some of the investment areas we've had." The overarching goal is "to be as lean as possible," he said. Further details were not forthcoming, but this will inevitably fuel speculation about a possible retreat from some activities. Research and development (R&D) spending fell by SEK200 million ($19 million) year-over-year for the fourth quarter, to about SEK13 billion ($1.2 billion), after cuts at both the networks and the cloud software and services units, although it grew 7% for the full year, to SEK50.7 billion ($4.9 billion).

Ericsson also remains hopeful that Vonage can bring about a recovery. Along with other parts of the industry, it has been working to standardize the application programming interfaces (APIs) between the 5G network and the apps it would support. The idea is that a software developer would be able to write better 5G apps after paying for access to the Vonage platform where these network features are exposed. Money would trickle down to operators and they, in turn, would be more inclined to invest in network upgrades.

Today, however, it all seems very convoluted, and there have been few signs of commercial progress on network APIs in the last year. Vonage's sales rose just 2% year-over-year for the fourth quarter, amounting to SEK4.1 billion ($390 million) in Ericsson's report. And revenues of SEK6.6 billion ($630 million) at the broader enterprise segment housing Vonage represented just 9% of the company total. Enterprise also recorded a SEK3.3 billion ($320 million) full-year loss (based on earnings before interest, tax and amortization).

The AT&T affair

Much of the attention later this year will be on a $14 billion networks contract with AT&T, struck at Nokia's expense. It has been heavily promoted by Ericsson and AT&T as an "open RAN" affair. That should mean products include new interfaces allowing AT&T to pair Ericsson with other vendors when it would previously have had to buy the whole system from Ericsson.

Yet others, including Nokia, which is to be gradually phased out of the AT&T network, have described it as a "one vendor" deal. Although Fujitsu has been named as another supplier of radios, the contract will clearly make AT&T far more dependent on Ericsson than it is today. Even Ericsson acknowledges that its market share will grow in North America later this year thanks to the AT&T win.

Executives seemed wary of going into much detail about the contract on today's call with analysts, but it is expected to have some impact on revenues in the second half. Ekholm also denied it would lead to "material rehirings" in the US, saying Ericsson is today more dependent on third-party contractors than in-house service engineers.

As for Ericsson's long-suffering cloud software and services unit, it managed sales growth of 5% for 2023, to SEK63.6 billion ($6.1 billion), and narrowed its loss to just SEK200 million ($19.1 million), from SEK1.6 billion ($150 million) the year before. Efforts to boost profitability continue, and they could include additional pruning of the portfolio, said Carl Mellander, Ericsson's soon-to-depart chief financial officer. Less parsimonious telcos would undoubtedly help.