Ericsson remains the best-positioned of its main rivals such as Huawei, Alcatel-Lucent and Nokia Networks to capitalize on the convergence of IT and telecom.
Competing more frequently with companies such as Cisco, IBM, HP and innovative start-ups presents new challenges to Ericsson.
Telecom network vendor Ericsson is capitalizing on demand for network upgrade projects and managed services in emerging markets.
Ericsson’s Q2 2015 results indicate a shift in global telecom capex spend distribution. Many of Ericsson’s major Tier 1 customers in developed markets slowed spending, leading to lower revenue year-to-year in North America, Japan, the Nordics, and Russia.
However, the Swedish company offset lower spend in these markets by growing its presence in the Middle East, Africa, and India. Additionally, spend on LTE in China continued to surge. This shift, while driving revenue growth of 10.6 percent year-to-year, also drove gross margin down 320 basis points to 33.2 percent.
The RAN and mobile core network deployment cycle will continue to drive Ericsson’s results for the foreseeable future even as the company restructures to transform into an ICT provider.
Ericsson accelerated the pace of restructuring to facilitate faster transformation into an ICT company.
Ericsson, which competes with Nokia Networks, Alcatel-Lucent, ZTE and Huawei, has accelerated the execution of its “global cost and efficiency” restructuring program in Q2 2015 and will begin to demonstrate cost savings from the initiative in Q4 2015. The goal of the program is to make the company leaner and more readily able to respond to market changes as Ericsson expands its role as an ICT company.
Ericsson reiterated its goal of saving SEK 9 billion (or $1.1 billion) by 2017, but restructuring charges in 2015 will total between SEK 4 and 5 billion (or $475 and $594 million), compared to the company’s earlier estimate of SEK 3 to 4 billion ($356 to $475 million). Ericsson began to execute headcount reductions in all markets, with the exception of Sweden, where in June the company identified the 1,700 employees it found redundant.
Ericsson’s financial metrics and balance sheet are healthy compared to rivals that have undergone restructuring, but the company is foregoing an opportunity for a deeper restructuring that involves sunsetting legacy product lines and making divestments.
While Ericsson does not have the extensive legacy base that pre-restructuring Alcatel-Lucent did, shifting a sizable portion of R&D away from legacy, rather than just increasing aggregate R&D spend, would help alleviate short-term margin pressure and better position the company for long-term success as an ICT player.
Michael Soper, telecom analyst, Technology Business Research
editor@telecomlead.com
