Ericsson’s senior management was in bullish mood as the Swedish vendor posted financial results for 2018 that it believes put it comfortably on track to achieve its financial targets and exploit the expected growth in demand for 5G technology.
CEO Börje Ekholm trumpeted the fact that Ericsson returned to full-year organic sales growth in 2018 for the first time since 2013. Sales improved quarter on quarter throughout the year, culminating in a 10 percent increase (or 4 percent adjusted for comparable units and currency) to $7 billion in the fourth quarter. In the full year, sales rose by 1 percent after adjustments to $23 billion.
The operating margin excluding restructuring charges also improved to 4.4 percent in the full year, up from minus 12.8 percent a year previously. Including charges, the operating margin was only just in the black at 0.6 percent. The company is confident it will achieve its targets of at least a 10 percent operating margin in 2020 and 12 percent in 2022, excluding any restructuring charges.
“We exited the year as a much stronger company,” Ekholm said during a conference call with investors. This was achieved through a “relentless focus” on the vendor’s new strategy to turn round its business, with measures including the transition to the new Ericsson radio system in the networks division, an overhaul of the digital services unit, and a review of 42 low-performing customer contracts in managed services — all of which have now been addressed.
The turnaround of the digital services division remains a work in progress, but the company is confident that its “reshaped BSS strategy” announced in early January has put the unit on track to achieving a low single-digit positive operating margin in 2020.
Ericsson announced 10 commercial 5G deals by the end of 2018 and said 42 5G trials were ongoing. Citing a Dell’Oro Group report from November 2018, the vendor said the market share of Ericsson radio access network (RAN) equipment increased to 29.4 percent for the first nine months of 2018 compared with 28.2 percent for the same period in 2017.
Ekholm said Ericsson sees a return of momentum because of the technology shift to 5G, which in turn is being fueled by the growing demand for data. He attributed the market share gains in the networks division to a competitive radio product portfolio. “Growth was partly due to a higher than anticipated activity level in North America driven by increased 5G demand among the U.S. operators,” Ekholm added.
The CEO was questioned about the potential opportunity to gain additional market share because of the security concerns surrounding rivals — clearly a reference to Huawei and ZTE. But he remained circumspect, saying only that it was a “speculative” question that had created uncertainty among customers, “and that is never good for investments.”
“But we are also in the middle of a technology shift that creates opportunities, so where this is going to take us, we don’t know. We can only invest in our own solutions that solve and address customer problems. We know if we lead the way in 5G we can create a bright future for ourselves,” Ekholm said.
5G Costs Will Impact Margins
Ekholm also noted that the cost of 5G trials and “strategic” 5G contracts will impact margins in the short term, but will build a stronger company in the long term. “What we see globally is an accelerated demand to move into 5G,” the CEO said, who placed North America and markets in North East Asia, including China, Japan, and South Korea, firmly in the lead in terms of 5G developments to date. “Those two areas lead the way,” he said.
In terms of standalone (SA) and non-standalone (NSA) versions of the 5G New Radio (NR) standard, the CEO said Ericsson is “well-positioned” in both areas and predicted that most markets will start with NSA, “although some countries may move to SA immediately.”
In conclusion, Ekholm said Ericsson’s R&D investments over the past two years “have secured a highly competitive and industry-leading offering. We will continue to invest in 5G, automation and artificial intelligence to create both customer and shareholder value. Even though costs related to strategic contracts and 5G field trials will impact margins short term, they will help reaching our targets for 2020 and 2022 as well as strengthen our business in the long term.”