After a $1 billion write-down at Vonage, described as “value destruction” by one financial analyst, the results Ericsson published last week could have been much worse. Strip it out and the Swedish vendor would have managed a small net profit of 400 million Swedish kronor (US$38 million) for the recent second quarter instead of an SEK11.4 billion loss ($1.1 billion). That would have marked an improvement on the SEK600 million ($57 million) loss a year before. Sales fell year-over-year just 7%, to SEK59.8 billion ($5.7 billion), after dropping 9% in the same period of 2023. At 43.1%, Ericsson’s gross margin was 5.7 percentage points fatter.
Thanks for that must go partly to North America, where telcos finally seem to have depleted all the excess inventory they built up in the aftermath of the pandemic. “We see the US market increasing 14% in the quarter,” Fredrik Jejdling, the head of Ericsson’s main networks unit, told Light Reading. Revenues hit SEK16.6 billion ($1.6 billion) as telcos dusted off their wallets and resumed spending.
What also helped was the $14 billion contract Ericsson recently landed with AT&T, which is swapping out Nokia kit. Ericsson’s Finnish rival, which counts T-Mobile as its last remaining big US customer, might not have enjoyed the same recovery (it reports later this week). A new licensing deal with OPPO, a Chinese smartphone maker, was a further sales boost for Ericsson.
It also remains a prudent manager of expenses under CEO Börje Ekholm. As revenues fell 7%, cost of sales shrank 16%, to about SEK34 billion ($3.2 billion), in the second quarter. Headcount has fallen by 1,155 employees, to 97,985, since the end of March, and by 7,544 since late 2022. Yet research and development, which had suffered in the pre-Ekholm era, looks sacrosanct. Investment in this area rose 8%, to SEK14.9 billion ($1.4 billion). More competitive products equal juicier gross margins, executives seem justified in arguing.
The Vonage fiasco
The main black mark against company performance is Vonage. Ericsson bought the US software company for $6.2 billion in 2022, but its deteriorating performance and outlook have prompted write-downs that now total almost $4 billion. “Who’s ultimately responsible for this level of value destruction?” said Richard Kramer, an analyst with Arete Research, on Ericsson’s quarterly call about results.
Ekholm, to his credit, accepted full blame. “Clearly, I’m accountable as CEO,” he responded. “But hold your horses a bit before you assess the overall transaction, until we know if we can create a separate new market for network APIs. I think that’s where our focus was the whole time. Maybe we have not delivered on the current performance of the existing business.”
That existing business works in the field of communications APIs, such as two-factor authentication via text messages. Vonage write-downs reflect both revaluation of rival stocks like Twilio, down 85% in the last three years, as well as Vonage’s own weak sales performance. The Ericsson focus, however, is on realigning Vonage to support industry-standard network APIs, giving developers access to previously unexposed 5G features.
“You build it to provide one interface of APIs that access all the networks in the world,” said Jejdling. “The attractiveness of the 5G network becomes higher when that same application can be developed across multiple customers.” An initiative called Camara, managed by the open-source Linux Foundation, is trying to make sure the world’s telcos adhere to one standard.
But the value of these APIs to developers is hotly disputed, and customers’ willingness to pay more for a quality-of-service boost or other 5G features is also uncertain. Other companies, including the hyperscalers, might be more attractive platforms in a market for standardized rather than telco-specific APIs. Why Ericsson needed Vonage to pursue a network APIs strategy is not clear to some analysts.
“Vonage can boast a CPaaS ecosystem but Vonage’s traditional developers do not necessarily have much use for advanced network – as opposed to communications – APIs,” said Caroline Chappell, an analyst at Analysys Mason, in a paper earlier this year. Nokia’s approach, which is not built on a $6.2 billion takeover, “looks more promising,” she added.
Permanent weakening
Why is Ericsson bothering at all? Largely because of what has happened to the big part of its 5G networks business outside North America and its inventory correction. “All the other markets are actually reducing for us,” said Jejdling. Research firm Dell’Oro expects the radio access networks market to shrink 4% to 8% this year, and Ericsson deems that optimistic. “We think that is probably a bit positive and see a little bit more contraction in the market, so it is a challenging market environment,” said Jejdling.
The Swedish fear is that such contraction is not a pause for breath, before telcos start on the next leg of the 5G race, but a permanent weakening. Despite rising mobile data consumption, telcos have not made a good return on their 5G investments so far, Ekholm acknowledged last week. And the rate of traffic growth is slowing, say numerous analysts. Ericsson’s last mobility report shows it previously overestimated traffic levels by tens of exabytes. None of this makes a recovery in 5G spending look imminent.
Which is where Vonage fits in. “If we cannot generate the extra revenues from the features of the network, it’s very hard to justify the future investments in later generations as well,” said Ekholm. In other words, if their financial situation does not improve, telcos will have no interest in building more advanced 5G networks in future – let alone in rolling out a new 6G network.
It puts huge pressure on Vonage. And Ekholm has offloaded many of the assets acquired by Hans Vestberg, his predecessor, making Ericsson the most heavily dependent of the big kit vendors on the 5G outlook. Acquisitions outside this market seem unlikely, with Ekholm appearing to rule out any bidding for optical vendors after Nokia’s $2.3 billion takeover move for Infinera in late June.
“I think they’re in a very different position than we are,” said Ekholm, commenting on the bid. “They already have a business there. So, for them, it’s kind of a rational acquisition. I think that’s a market we serve through the access technology. But seeing us sell directly to data centers is rather unlikely.”
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