Europe is proving slower to adopt 5G than both the United States and Northeast Asia, and this is largely due to spectrum uncertainty and availability as well as costs, according to Ericsson CEO Börje Ekholm.
Ekholm, who was speaking during the presentation of Ericsson’s first-quarter 2019 financial results, criticized national regulators for “trying to maximize the revenues from spectrum auctions instead of considering the macro-economic benefits from building the telecom network,” and noted that the investment climate in Europe is less attractive because of the large number — over 200 — of mobile operators in the region.
The CEO may well have been referring to the recent 5G spectrum auction in Italy, which raised about $7.5 billion, and the ongoing auction in Germany, where bids stood at close to $6 billion on Wednesday.
Ekholm cited Swisscom in Switzerland as an example of how important the timely availability of spectrum is for 5G network rollouts. Swisscom was able to switch on its 5G network at the stroke of midnight on April 16 after the Federal Office of Communications granted the spectrum license. The carrier had already flagged the impending launch of the network earlier in April, and said it will start selling its first 5G smartphone and subscriptions in May.
From Ericsson’s perspective, the U.S. and South Korea are important markets where leading 5G players have already rolled out 5G to meet the demand for increased capacity as data traffic grows. Ekholm said Ericsson is now building real-life experiences from 5G traffic, and it is focusing on providing good network performances. He also noted that the acquisition of the antenna and filter business from Kathrein, expected to close in the third quarter, will further strengthen the 5G portfolio.
North America was primarily responsible for ensuring that Ericsson enjoyed its third consecutive quarter of growth in Q1, with organic sales growth of 7% to $5.3 billion. The gross margin also improved to 38.4%, driven by good performances in the networks and managed services units, and net income increased to $260 million. The underlying operating margin was 7.2%, with improvements registered in all segments on a year-on-year basis. Profits beat expectations for the fifth consecutive quarter owing to cost cuts and the strong growth in North America.
Overall, Ekholm said the results confirmed that Ericsson is pursuing the right strategy by focusing on strengthening its market position and working with leading 5G carriers. The vendor now has 18 5G network contracts with named customers. Although rival Huawei just reported it has now won 40 5G contracts, Ericsson has placed the focus on revealing actual customer names.
Certain headwinds could affect the vendor’s performance in the year ahead. For example, Ericsson is taking on contracts that can challenge profits initially and may impact margins in the second quarter, but they are attractive from a long-term perspective. However, the vendor appears confident that it is on track to achieve its targets of a 10% operating margin in 2020 and 12% in 2022. Citing forecasts from Dell’Oro, it also said it now expects the radio access network (RAN) equipment market to grow 3% this year and see a 2% compound annual growth rate from 2018-2023.
“The 5G market is gaining momentum and we are well positioned to capture opportunities,” the company said in a statement. “We will continue to make substantial investments in R&D, especially in 5G, automation and (artificial intelligence) AI. This is a key part of our focused strategy to strengthen our long-term business and path to reaching our targets for 2020 and 2022.”
Further risk factors include the ongoing investigations by U.S. Securities and Exchange Commission and Department of Justice into Ericsson’s compliance with the U.S. Foreign Corrupt Practices Act. Ekholm noted that Ericsson has recently begun settlement discussions, but he warned that these discussions are at a very early stage and it was not possible to comment further. “We can rule out that there will be no consequences,” he added.
On April 11, Ericsson was also informed by the Chinese State Administration for Market Regulation Anti-Monopoly Bureau that it initiated an investigation into Ericsson’s patent licensing practices in China. Ericsson said it is cooperating with the investigation.