Ericsson CEO: Cisco Merger Not On the Cards
Ericsson's Hans Vestberg is a CEO under pressure: His company's share price is down almost 25% this year, revenues and margins are falling and, according to Swedish media reports, major shareholders want a new chief executive.
But he's putting on a brave face: He believes his company has the staying power to see off the current headwinds that are pummeling its top and bottom line and remain as an independent, standalone company.
Following a disappointing second-quarter earnings report Tuesday that sent Ericsson AB (Nasdaq: ERIC)'s stock down by 5.6%, Vestberg told Light Reading that a full merger with partner Cisco Systems Inc. (Nasdaq: CSCO), a move that would create greater scale and enable additional operational efficiency, was "completely off the cards," and that the company was in the midst of a transition that would eventually return it to growth. (See Ericsson 'Doubles' Savings Goal as Sales Slump and Cisco + Ericsson: From Soup to Nuts.)
That journey, though, has been made all the more difficult by the state of the mobile broadband infrastructure market, which is in something of a slump currently. Ericsson's second quarter was hit by a downturn in sales in multiple markets and regions, with Brazil, Russia and the Middle East identified as key pain points for the vendor: Vestberg does not see those markets "coming back" during the next six months.
Yet despite the 14% year-on-year decline in networks revenues in the second quarter, Vestberg doesn't believe Ericsson is losing out to rivals in the mobile broadband infrastructure market: Market share by value fluctuates in the short term depending on the volume of activity in the two largest single markets -- China and the US -- but in terms of competing for deals, "we don't feel we are losing out."
Clearly, though, things could be a lot better. So how can Ericsson reverse its fiscal trends?
The focus appears to be threefold: Continue to concentrate on what Ericsson calls "targeted areas" -- IP Networks, Cloud, OSS/BSS, TV/Media and Industry & Society (vertical market sectors) -- so that they add profits as well as revenues; cut costs; and invest in R&D.
Those targeted areas currently account for about 20% of revenues and are growing (by 5% in the second quarter, once adjusted for currency fluctuations) but are still a cost center: "In time the targeted areas will impact the top line and be accretive to the bottom line," says Vestberg, though the questions remains about when that time will come, particularly if Ericsson's traditional/core business of mobile broadband and professional services, which generates 80% of revenues, continues to flatline or shrink further.
Cutting costs is nothing new for Ericsson: It has been taking steps to reduce its operating costs for a couple of years and announced deeper cuts Tuesday that will affect the whole company, though particularly the IP division that always looked vulnerable once Ericsson had forged its partnership with Cisco. The latest cuts will involve job losses but the numbers aren't known yet: The CEO says finding extra efficiencies will be made simpler by the new corporate structure that came into effect on July 1, a move that ties together product lines with their associated support services: "Connecting services to products is very important to cost management," according to Vestberg.
Investing in R&D is, of course, key to any vendor that simply wants to survive, let alone thrive. Vestberg says Ericsson is investing more in 5G R&D but notes that R&D spend is on the decline and will be cut further as part of the new cost-cutting measures (investment in IP platforms will be a notable area of reduction).
Like its rivals, Ericsson is plowing resources and marketing effort into its 5G pitch and, as you'd expect from a mobile networks giant, is working with the leading operators -- AT&T, NTT DoCoMo, Telefónica -- on their 5G plans. That, notes Vestberg, means much more than just delivering the next generation of radio access platforms (though the CEO says Ericsson is already doing that in preparation for 5G's front runners). "Virtualization and delivering end-to-end quality assurance from the cloud to the radio" is absolutely key to 5G success, he notes. "There is lots of transformation needed in the telecom cloud."
The 5G market is moving faster than anyone had envisaged, adds Vestberg, though he still believes it will be 2019-2020 before there will be anything shipped in meaningful volume. "A lot depends on the devices. The chipset companies are making progress but the devices are still the size of half a table."
So the focus right now is on driving additional revenues from those "targeted areas" and stabilizing the mobile broadband and professional services lines of business. A full merger with Cisco may not be planned, but the fruits of that relationship will need to become apparent, and be quantified, soon if investors and analysts are to be convinced it can be successful. The two companies have recently expanded the partnership into the enterprise market (which ties in with Ericsson's Industry & Society focus) and the companies announced Tuesday that they now have 30 joint customers (though no financial details were shared). (See Enterprise Pitch for Ciscosson.)
And while Cisco may not be part of Vestberg's M&A plans, other actions might be taken: The CEO says that while Ericsson already has 24,000 systems integration staff, "we need them in the right places," so strategic acquisitions of IT services firms looks likely to continue. The other area of M&A focus is "industry verticals -- there might be some application in telematics that could help us."
— Ray Le Maistre, , Editor-in-Chief, Light Reading