Ericsson’s turnaround plans may be working, but analysts fear the vendor’s aggressive push to cut costs and focus on the 5G RAN space could limit its future.
“Though Ericsson’s focused strategy has proved to be a viable approach to stabilize the company, return it to profitability, and provide incremental organic growth, the key concern will be how sustainable that stability and growth will be over the long term,” wrote Chris Antlitz, a senior telecom analyst at Technology Business Research (TBR), in a new report.
Antlitz cited Ericsson’s focus on the wireless access domain that he noted was undergoing significant competitive disruption due to the launch of 5G networks and increased use of virtualization technologies. He explained that Ericsson’s focus could allow it to take market share from rivals, particularly Nokia, Huawei, and ZTE, but that business trends like virtualization, cloud, and white box could impact those efforts down the road.
“Ericsson is betting its [Radio Systems RAN gear] will offset the impact of these adverse trends and hasten its shift to a more software-centric entity with a more recurring, license-based software model that carries relatively high, sustainable margins, but this shift will take years to unfold, and there is significant legacy business at risk of disappearing in the interim,” Antlitz noted.
Ericsson was not able to provide comment on the report.
The TBR report highlighted differing paths between Ericsson and its Nordic rival Nokia in how they are approaching the 5G space. Specifically, it noted that Ericsson is focused on its core business of selling RAN and mobile core gear directly to service provides, while Nokia is taking a broader approach in constructing more robust dedicated business units to sell directly to enterprise customers.
“Though Industry 4.0, 5G, and digital transformation are underlying themes that find commonality between the two vendors, their divergent tracks are noteworthy,” Antlitz wrote.
A separate TBR report positioned Ericsson as the 5G RAN market share leader.
As for its China-based rivals, the TBR report noted a potential opportunity for Ericsson to gain market share due to continued geo-political issues. This includes a growing number of countries that are pushing for their telecom operators to quit using network equipment from Huawei and ZTE due to security concerns.
“If the list of countries that ban China-based telecom infrastructure vendors continues to increase, it could accelerate Ericsson’s path to full recovery and attainment of its financial targets,” Antlitz explained.
Ericsson recently posted its second consecutive quarter of solid year-over-year growth, including its first profitable quarter since 2016. Company CEO Börje Ekholm told investors 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, are paying off.
Specifically, Ekholm said that the company expects its annual net sales to be in the realm of $23.4 billion to $24.4 billion in 2020, up from a previous forecast of $21.1 billion to $22.3 billion. Ekholm said he expects this growth to primarily come from the company’s networks division. However, the company will continue to invest in R&D in the networks area, which means that Ericsson expects its operating margin to remain in the 15 percent to 17 percent range.
The recent turnaround followed several years of uncertainty for the vendor highlighted by a corporate-wide cost savings plan instituted in 2014. That plan eventually resulted in around 18,000 job cuts and a restructuring of its management team.
The investment community has started to jump on board the turnaround with a number of firms updating their outlook for the vendor.