Managed Services

Caution Clouds Ericsson's Outlook

Wild speculation is not a personal trait anyone could quickly (or ever!) attribute to genial Ericsson CFO Jan Frykhammer: "Caution" could easily be his middle name. (Though that, quite frankly, would look a bit weird on his business card.)

Light Reading encountered his penchant for conservative responses when we chatted with him following the Swedish vendor's first-quarter earnings report. (See Carrier Caution Cuffs Ericsson in Q1.)

Frykhammer, who became CFO at the start of this year, was committing neither himself nor his company to anything that might come back to bite him in the proverbial bakända. (See Ericsson's New Numbers Man.)

Except, that is, on one matter... (you'll have to read on to find out what that is).

So here are the edited highlights of our brief phone conversation. We started by asking about the company's prospects for this year, given that, in late January, CEO Hans Vestberg noted that he expected Ericsson to outperform the market in 2010. (See Ericsson Keeps Its Distance From Huawei and Where's the Squeeze?)

Light Reading: Do you still think Ericsson will grow faster than the market in 2010?

Jan 'Caution' Frykhammer: We do not guide. This is one of the long-term ambitions we have, but we're not guiding for 2010.

LR: Were you surprised by the decline in the first quarter's revenues?

JF: We had a few explanations... We were impacted by the component squeeze. [That] has caused a lot of the disappointment. We have a strong team on the supply chain management, and they're trying to remedy the situation. It's not just a telecom industry issue. It's too early to say if we will see the same impact in the second quarter.

LR: Can Ericsson continue to compete, with the same strategy, against rivals that are still predicting significant growth in 2010? Are you always looking over your shoulder at the likes of Huawei, which is predicting its business will grow by 20 percent this year?

JF: If we look at the Ericsson presence globally, we have a balanced presence across the world, and we have a strong services business that supports us as well.

The combination of strong services and technology leadership is how we build a successful strategy. It's absolutely important to change our ways of working, to be smarter... Of course we are looking at all of the different types of competitors. We are not only competing against the traditional telecom vendors, but also against the systems integration companies. So we are looking, but we have full confidence in our strategy.

LR: Will Ericsson need to be more flexible in its terms and conditions to continue to retain and win new business? For example, will it need to be more flexible with the way it charges for software upgrades?

JF: I don't want to comment on the software upgrade cycle -- that goes too deep. We have been around a long time, we have a strong market position, and we put our customers first. It's always important to listen to the customers... It's always important to show innovation around business models, for example, what we are doing in terms of managed capacity.

LR: Currently there's a real land grab to build positions in the managed services market. But what safeguards do you have to protect your margins once those deals reach a mature stage in four or five years time? Those deals have a lot of cost up front, with the hope that some way down the line there will be profitable returns, but how can you be confident that those longer-term margins will be attainable in managed services deals?

JF: What we are selling is transformation. We win a deal, help to transform, and have a long-term partnership. We view these deals like acquisitions. We make an early investment in tools and resources, so we need contracts that are long enough, but when the deals are up for extension, then it's always important for us to be on our toes. The most important safeguard we have is the value we provide, in terms of the quality, innovations, and cost reductions. Of course there are commercial safeguards, too, but the most important thing is to deliver to the customer.

LR: Has Ericsson seen an increasing appetite for vendor financing deals, especially in some of the emerging markets where access to capital is still constrained?

JF: Demand has been high for many years. We have strong support from the export agencies in Sweden and Canada, which are very knowledgeable about the telecom sector. Demand is high, but we have not seen much change.

[An Ericsson media support staffer says time is up and that Frykhammer has another interview to conduct.]

LR: One very quick last question on a very important topic. It's the soccer World Cup in South Africa this summer -- who's going to win?

JF: [Without a moment's hesitation] The UK, of course! Hahahahaha...

Of course, Frykhammer was referring to England, as the sole representative of the UK in the finals. (Sweden, by the way, didn't make the cut, in case you were wondering why he didn't opt for the home team.)

The CFO's World Cup selection, though, shows he'd be best retaining his cautious demeanour and avoiding snapshot predictions, as England has about as much hope of winning the World Cup as Nortel Networks Ltd. has of coming out of Chapter 11 with a raft of new R&D projects and becoming a top five player again within five years.

— Ray Le Maistre, International Managing Editor, Light Reading

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