Is Ekholm Ericsson's Savior or Seller?
Pity Börje Ekholm. No sooner had Ericsson's incoming CEO been appointed, it seemed, than Ericsson told investors its main market would shrink again next year. Last week, Democratic nominee Hillary Clinton, his choice for US president, lost an election to Republican rival Donald Trump. The president-elect has scared global technology companies with his protectionist rhetoric, and previously accused Ericsson of bribing Clinton. These are hardly the conditions in which to engineer a turnaround or prepare Ericsson for sale. Yet the latter option may prove the easier. (See Blond Buffoon a Worry for Telecom Vendors.)
Like its Finnish rival Nokia, Ericsson AB (Nasdaq: ERIC) is in a rut. Sales at both equipment vendors have been falling this year, and the outlook is bleak. During a recent earnings presentation, Nokia Corp. (NYSE: NOK) forecast that revenues in its main addressable market would continue declining at a low "single digits rate" next year. Ericsson, at an investor update last week, predicted that the mobile infrastructure market -- which accounts for the bulk of its sales -- would decline by 2-6% in 2017, after shrinking 10-15% this year. (See Ericsson Swings to First Net Loss in 4 Years and Nokia Forecasts Sales Decline in 2017, Shares Fall.)
Amid economic uncertainty, telco customers are tightening their belts. Moreover, the industry has reached the low point of one of its spending cycles. Having already invested heavily in the rollout of 4G networks, service providers are waiting for the appearance of 5G before they open the purse strings again. Hoping to gee up investors, Ericsson last week said the first 5G networks would arrive in the second half of 2017. Yet the widespread view is that standardized 5G technology will not see launch until 2020, at the very earliest. (See Ericsson Expects Initial 5G Networks in H2 2017.)
Ericsson and Nokia will obviously hope to buck the market decline, but they have failed at that so far. Headline figures suggest they are still losing market share to Chinese vendors Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), which continue to report impressive growth in sales to service providers despite the slowdown in spending. While Huawei has been able to recruit staff and boost per-employee revenues at the same time, Ericsson and Nokia have been struggling to resize their operations efficiently. (See Is There No Stopping Huawei?)
Having already gone through several rounds of restructuring, Ericsson sacked former CEO Hans Vestberg in July only weeks after announcing its latest redesign. Critics say it has become too cautious and reactive. Like others, it is trying to focus on growth opportunities in cloud computing, media, all-IP networks and back-office IT. That means its overall addressable market will grow by 1-3% over the 2016-18 period, it insists. But whether Ericsson can restore topline growth, with its mainstream market in a squeeze, remains in doubt. (See Ericsson Ejects CEO Vestberg and Vestberg's Seeds May Yet Bear Fruit for Next Ericsson CEO – Analyst.)
Table 1: Market Size and Outlook
|Addressable market 2016||CAGR 2016-18|
|Networks||$100 billion||-0% to 2%|
|IT and cloud||$100 billion||5% to 7%|
|Media||$12 billion||9% to 11%|
Right now, the company claims to generate about a quarter of its sales from the IT, cloud and media sectors. But only 21% of total revenues came from what it calls "targeted" growth areas in the recent July-to-September quarter. What's more, revenues in those markets were up by just 313 million Swedish kronor ($34 million) compared with the year-earlier quarter, while overall sales fell by SEK8.1 billion ($883 million). Some of Ericsson's growth-areas initiatives, including a few M&A moves, have been uninspiring, according to analysts. A strategic tie-up with IP giant Cisco, announced late last year, has so far borne little earnings fruit.
The big question now is whether Ekholm, who takes charge in January, is the right man to spearhead an Ericsson recovery. Hired at the end of October to replace acting CEO and CFO Jan Frykhammar in the leadership role, he has worked for several businesses owned by Sweden's Wallenberg family, whose Investor AB fund holds a 21.5% stake in Ericsson. He has also had a seat on Ericsson's board for several years, making him very familiar with the company.
That is not to everyone's liking, however. Some would have preferred to see an outsider in the job, untarnished by association with Ericsson's mistakes. For others, Ekholm's lack of hands-on experience in the technology sector -- despite an academic background in engineering -- may be a concern. The Wallenberg acolyte had little to say about his strategic vision for Ericsson at a press briefing last month, instead highlighting the need for more cost cutting. Ericsson's share price edged up just 0.6% on the day of his public appointment, and has since risen nearly 2%. But it remains 44% lower than at the end of last year. (See Cost Cutting Must Continue, Says Ericsson's New CEO.)
One possibility is that Ekholm simply knocks Ericsson into some kind of functional shape before putting its assets up for sale. His background in finance and consulting, and reputation as a "fixer," make him look ideal for this kind of role. The strategic partnership with Cisco Systems Inc. (Nasdaq: CSCO) has already prompted speculation that a full-blown merger could be forthcoming. But other companies might also be interested in picking away at the juicier portions of Ericsson, like scavengers at the flesh of a dying beast. Attracting bids that appeal to shareholders will not be easy, but getting that animal back on its feet could be the far harder challenge. (See Beginning of the End for Ericsson?.)
— Iain Morris, , News Editor, Light Reading