Ericsson will take a $687 million charge to support an overhaul of its digital business support systems (BSS) business unit that will impact its results for the fourth quarter of 2018. Approximately $348 million of that amount will be treated as restructuring charges. In addition, further restructuring charges related to the planned measures, including headcount reductions, are anticipated in 2019, and are estimated at about $168 million.
Ericsson conceded at its Capital Markets Day last November that its previous approach to digital BSS was not working. The Sweden-based vendor said it will now accelerate the restructuring of its BSS unit amid fears that a continuing poor performance in this area could prevent the Digital Services division from reaching its profitability targets.
The financial support mainly relates to estimated costs associated with expected changes in the scale of projects, including customer compensation payments, provisions for project delays, and write-down of intangible assets.
In November, Ericsson management appeared to be cautiously optimistic about the company’s financial future. CEO Börje Ekholm said that the company was seeing more traction with its product portfolio and that its investment in research and development, particularly around growth areas like 5G and IoT, were paying off. It set a profitability target for the Digital Services division, which includes digital BSS, 5G and IoT, of a low single-digit operating margin for 2020, and between 10 percent to 12 percent for 2022.
However, the company is now saying that the BSS area “is not showing satisfactory progress, jeopardizing Segment Digital Services’ overall profitability target for 2020.” It believes that the additional measures will now “materially contribute to reducing losses in the BSS area” in 2019, “setting the Digital Services segment on a strong path to achieving the operating margin targets.”
Resetting the Digital BSS Strategy
Digital BSS is expected to help mobile operators move away from legacy BSS by supporting new business models for 5G and IoT services. Ericsson had previously touted customer demand for a full-stack, pre-integrated BSS solution, and focused R&D resources in the BSS unit on the development of the full-stack Revenue Manager product.
However, this anticipated demand failed to materialize. Furthermore, the focus on Revenue Manager caused further delays in product releases of what Ericsson describes as its “established platform,” meaning the Digital BSS portfolio of billing, charging, mediation, order management, and catalog services.
Thus, during the Capital Markets Day, Ericsson presented a revised BSS strategy that meant it would no longer invest in the development of Revenue Manager and would merely fulfill existing customer commitments for the product. It now intends to focus on the established Digital BSS products and will continue to apply a more selective approach to large transformation projects by focusing on projects based on available products.
“Under the revised strategy, investments will be increased in the established portfolio, Ericsson Digital BSS – making it ready for new business models related to 5G and IoT, including technology evolution to cloud native and microservices. Developed capabilities in Revenue Manager will be added to the established portfolio,” Ericsson said.