Ericsson CEO Seeks New Growth Formula

Ericsson CEO Hans Vestberg is facing up to one of the biggest challenges of his career: As macro-economic trends, currency fluctuations and competitive pressures cause a stagnation in the Swedish vendor's business, how does he hit the growth targets he announced for the company in November 2015?

The company announced early Thursday that its first-quarter revenues and gross margins had shrunk compared with a year ago, with CEO Hans Vestberg admitting that he is not satisfied with Ericsson AB (Nasdaq: ERIC)'s growth or profitability. As a result, Ericsson has unveiled dramatic restructuring plans designed to improve the Swedish vendor's chances of hitting previously announced revenue targets while also boosting profitability. (See Ericsson Restructures as Sales, Gross Margins Falter in Q1.)

Ericsson CEO Hans Vestberg: Revamp needed to hit growth targets.
Ericsson CEO Hans Vestberg: Revamp needed to hit growth targets.

Ericsson wants its core networks business to grow at above the expected market rate of 1-3% between now and 2018 and has set a more ambitious growth target of 10% for certain "targeted" areas, which include cloud, IP networks, TV and media, OSS and BSS and non-telecom markets.

Those areas accounted for about one fifth of Ericsson's revenues last year and the Swedish vendor today said it would create new business units, coupled with a new leadership team, to better align itself with customer needs. (See Ericsson Unveils New Corporate Structure and Ericsson Announces New Top Team.)

In an exclusive conversation with the Light Reading team only hours after presenting the Q1 financials, Vestberg noted that the company's strategy had not changed but that the restructuring announced today is deemed necessary to "enhance the possibility" that those growth targets will be achieved. "We're helping to support that strategy with a better structure … to help accelerate our growth. The new structure will cater for different types of businesses and help us improve profitability," he added.

Overview of New Ericsson Structure
Source: Ericsson. 1: Capital Markets Day 2015. 2: Non-IFRS ROI model.
Source: Ericsson. 1: Capital Markets Day 2015. 2: Non-IFRS ROI model.

Competition from the East
As well as looking internally, Vestberg will also have been surveying the broader market dynamics, including the competitive landscape.

So we asked: Is he under pressure from Ericsson's board to emulate the kind of growth being achieved by key rival Huawei Technologies Co. Ltd. ? Even disregarding the Chinese vendor's mobile device business, Huawei's recent and expected growth in the Carrier and Enterprise markets is dramatic by comparison with Ericsson. (See Huawei's Carrier Division Set to Dwarf Ericsson by 2018, Huawei's Carrier/Enterprise Sales Could Hit $80B by 2020 and Huawei: New King of the CSP Market.)

Vestberg isn't so keen on the comparison and did not say if he was being pressed by the board over his Chinese rival's performance. "I don't think you can compare like for like… we compete in networking, yes, but Huawei is very strong in China and we are strong in North America," he responded. But with Ericsson aiming to increase its business in multiple enterprise markets and in the data center sector, the comparison is valid, even if the companies have different geographic strengths.

New Structure to Support Profitability Improvements
Source: Ericsson.
Source: Ericsson.

Huawei has been locked out of major opportunities in the US, where policymakers that deem it to be a security risk have pressured major telcos not to use its equipment, but that situation could always change under a future administration.

In China, meanwhile, operators are set to reduce their capital expenditure on network rollout this year, after investing heavily in 4G deployment in 2015.

Vestberg expressed confidence about the outlook in North America, which has remained a strong point for the company, and insisted that capex cuts in China would not necessarily have an impact on Ericsson.

"In China there continued to be high activity in the first quarter and lower capex can mean they are building less sites and not necessarily that there will be less sales for Ericsson," he said.

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The CEO was also coy about Ericsson's cost-cutting plans, especially as it relates to headcount reductions. Ericsson has been trying to reduce costs to boost profitability but today reported a fall in gross margins due to problems at its large Global Services business, which accounted for about 44% of the 52.2 billion Swedish kronor ($6.5 billion) the company generated in first-quarter sales.

Vestberg confirmed that an increase in restructuring charges, which are set to rise from SEK3-4 billion ($370-$490 million) to SEK4-5 billion ($490-620 million) this year, would affect employees in the Global Services business, but he would not provide firm details when asked about job cuts.

"We have had overcapacity in the quarter," he said. "How many people? I'm not going to go into that but we have already started in March to dimension down and it will continue into this quarter."

Operating income at Global Services fell by 62% in the first quarter because of Ericsson's failure to adapt service delivery operations to a decline in mobile broadband rollout activity.

But the increase in restructuring costs this year has no bearing on Ericsson's broader plans to realize SEK9 billion ($1.1 billion) in net annual savings by 2017 compared with 2014, said Vestberg.

Headcount reductions
Ericsson's boss also refused to comment on speculation the company has been cutting staff at its IP/mobile packet core unit in the US following the formation of a strategic partnership with Cisco Systems Inc. (Nasdaq: CSCO), although he did indicate that redundancies would affect employees in "different places."

Nevertheless, Ericsson blamed some of its 2% year-on-year sales decline in the first quarter on weak sales in the IP and core network divisions.

That weakness appears related to Ericsson's reseller agreement with Juniper Networks Inc. (NYSE: JNPR), which looks to be suffering as a result of the newer deal with Cisco. "We have a reseller agreement that saw a bit less activity [in the quarter]," Vestberg told Light Reading when asked to explain the fall in IP and core network business, though he declined to namecheck Juniper.

While the tie-up with Cisco still has little to show for its efforts, Vestberg insisted the partnership agreement was going "according to plan" and that he was satisfied with progress to date.

"We have six [joint] solutions now and are building a project and still aiming for an extra $1 billion in sales in 2018," he said.

— Ray Le Maistre, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, Editor-in-Chief, and Iain Morris, News Editor, Light Reading

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