Ericsson feels the squeeze as big customers slash 5G spending

Ericsson CEO Börje Ekholm is known to be a fan of ice hockey, where players are routinely pulverized against the sideboards and whacked with sticks. It seems fitting given the share of painful blows that his own company has suffered in the last year. From US fines over a bribery scandal in Iraq to write-downs at its loss-making cloud business, Ericsson has had to absorb the knocks and keep skating. But some damage was visible in the results it published today.

The good news is that Ericsson, outside China, remains the company to beat in 5G. Its share of the market for radio access networks (RANs) appears to have increased several years in a row – from 33% in 2017 to 39% now – and Ericsson is healthily profitable, which could not be said when Ekholm took charge in 2017. Boosted by recent takeover activity and a major licensing deal with Apple, its headline sales for the final quarter of 2022 were up 21%, to 86 billion Swedish kronor (US$8.4 billion), compared with the same period a year before.

But Ericsson also experienced one of its biggest profit slumps since the first half of Ekholm’s tenure. Hurt by higher costs and SEK4 billion ($390 million) worth of one-off charges – relating to US fines, write-downs and divestiture – its net income dropped by 39%, to SEK6.2 billion ($600 billion). Worse, all the various profit margins thinned, with Ericsson’s closely monitored EBIT (earnings before interest and tax) margin shrinking to just 9.1%, from 16.1% a year earlier. And the outlook is frosty.

The mini-boom in 5G spending appears to be over – temporarily, at least. Last year, the market for RAN products, where Ericsson now generates about 70% of its revenues, grew by around 5%, according to data from Dell’Oro, a market research firm that Ericsson uses. This year, RAN market sales are expected to fall by 1%. And in North America, responsible for nearly 30% of Ericsson’s overall revenues, Dell’Oro predicts they will drop by a worrying 7%.

Tightening the purse strings

The explanation for that was summarized by Ekholm on his quarterly call with analysts earlier today. After investing heavily in network rollouts during the last couple of years, many operators are cutting their expenditure amid signs of an economic downturn, and reducing the equipment stockpiles they built up when supplies were tight. “We expect operators to adjust inventory levels as the supply situation eases and we plan for these trends to continue during the first half of 2023,” said Ekholm.

On a like-for-like basis, then, full-year sales inched up only 1% year-on-year in the quarter. Margins suffered partly because of new business in markets such as India, with projects initially featuring a bigger share of margin-dilutive services work than they do in their later stages. The message is that 2023 represents a valley the industry must cross before it begins climbing once again.

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