Managed Services

Ericsson Offloads 700-Strong Field Service Biz

Ericsson has sold its Swedish field services business to a local infrastructure company called Transtema for an undisclosed fee as part of its strategy to boost margins by ditching units that do not meet strict profitability criteria.

Ericsson Local Services, which builds and maintains fixed and mobile networks in Sweden, has about 700 employees, while Ericsson AB (Nasdaq: ERIC) had overall staff numbers of 97,581 at the end of March.

That number fell from 111,464 at the end of 2016 as Ericsson aimed to hit a savings target of 10 billion Swedish kroner ($1.14 billion) in annual costs by June.

Whether Ericsson realized that goal will become apparent when the company reports second-quarter earnings next week, but annual costs were down by as much as SEK8.5 billion ($970 million) in the first quarter, according to Ericsson's last update.

Besides cutting staff numbers, Ericsson has been renegotiating or scrapping what it calls "non-performing contracts" to bolster margins. Helena Normann, the vendor's chief marketing officer, told Light Reading in April that Ericsson had finished this process for 31 of 42 managed services contracts that were up for review, and eight of 45 digital services contracts. (See Ericsson Takes Giant Leap Toward Profitability.)

The sale of Ericsson Local Services will reduce staff numbers while also getting rid of what is likely to be a low-margin operation. Helping operators to build new networks has typically been a drag on profit margins, but vendors have previously engaged in these projects in anticipation of higher-margin capacity business at a later stage.

Ericsson's overarching objective is to restore its operating margin to about 10% in the next couple of years. With a margin of 2% (excluding restructuring charges) in the first quarter, Ericsson looked way off that target, but the impact of some recent cost-saving measures had not shown up in financials.

Moreover, the company's operating loss narrowed to just SEK300 million ($34 million) in the first quarter from SEK11.3 billion ($1.3 billion) a year earlier.

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Ericsson said it would retain a minority stake in the Swedish field services unit it is selling to Transtema, without providing more details. Ericsson will no longer sell new standalone field services projects following the move.

"We believe Transtema has an excellent opportunity to develop the field service operations while also executing on existing customer commitments," said Per Navinger, the head of Ericsson's customer unit for Europe and Latin America, in a company statement. "Together we will ensure a quick and smooth transition and a good relationship."

Transtema said it would operate the Ericsson business as a separate legal entity. "They will become the backbone of our field service operations business," said Magnus Johansson, the Transtema CEO. "Our goal is to continue to grow the service business for telecom networks."

Ericsson and Transtema expect to close the deal in the third quarter of 2018.

The sale of Ericsson Local Services comes after Ericsson sold a 51% stake in its video networking business -- rebranded MediaKind earlier this week -- to a private equity firm in January for an undisclosed sum. (See Ericsson Rebadges Media Unit, Eyes Smart Cities, M&A.)

That unit had been a substantial drag on profitability. In the first quarter of 2017, the last time it was included in Ericsson's detailed financial reporting, its sales were down 20% year-on-year, to SEK1.96 billion ($220 million), and it was losing nearly as much as it was bringing in.

— Iain Morris, International Editor, Light Reading

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