Revenues missed analysts’ expectations by more than $130 million
Ericsson on Thursday reported third-quarter results, missing Wall Street expectations for the second quarter in a row. Despite some positive spin from CEO Börje Ekholm during the company’s call with analysts, Ericsson shares took a sharp tumble after the opening bell on Thursday, dropping more than 10 points by the end of trading to close at 61.45; that tepid pace continued into Friday.
Ericsson reported adjusted operating earnings of SEK 7.1 billion (US$633 million). That’s 19% off from the same quarter last year; analysts expected second quarter revenue in the ballpark of SEK 8.7 billion ($770 million), not far off the mark than the SEK 8.8 billion ($780 million) Ericsson reported for the same quarter a year ago. Quarterly revenue rose to SEK 68.0 billion ($6.03 billion) from SEK 56.3 ($4.99 billion) for the same quarter a year ago, a 3% year-over-year increase. The company’s gross margin dropped from 47.8% to 44.4%; it indicated attributed the decline to lower revenues from its licensing and patents, as well as increased costs connected to the expansion of its network business into new markets.
Ekholm noted that Ericsson has grown its Radio Access Network (RAN) marketshare outside of mainland China from 33% to 39% globally, since 2017. Ekholm said that Ericsson expects North American operator RAN capex to be lower in 2023 than it was in 2022, but painted a rosy picture of Ericsson’s RAN efforts overseas.
“We continue to further strengthen our position by increasing our global footprint which we expect will lead to overall growth in 2023,” said Ekholm, also cautioning that large-scale projects may give Ericsson a bigger global footprint but underscored that such efforts “tend to have a dilutive effect on gross margins.”
Ericsson’s RAN marketshare is expanding as Huawei’s global influence recedes following pressure from the U.S. government to strip the Chinese gear from national communications infrastructure both at home and abroad. Analysts expect Ericsson and rival Nokia to both benefit broadly from India’s foray into 5G, capturing marketshare away from Samsung as large Indian telcos like Bharti Airtel and Reliance Jio Telecomm ramp up efforts to modernize their networks. Earlier this month, Reliance Jio Telecomm announced partnerships with both Ericsson and Nokia to build out a 5G standalone (SA) network in India.
Ericsson’s Networks business saw 7% growth for the quarter, driven by North American Communication Service Provider (CSP) 5G deployment, said Ekholm. There’s a lot of work to do, though – Ekholm pointed out that less than one quarter of all LTE nodes globally have been upgraded with mid-band frequency support. Ericsson anticipates strong uptake of 5G in emerging use cases like Fixed Wireless Access (FWA) and new consumer and enterprise applications that drive the need for network performance.
Ericsson completed its acquisition of VoIP pioneer Vonage in July. Ekholm said that Vonage provided Ericsson to “access to a powerful range of cloud communication services” in the growing enterprise space.
“One cornerstone in our expansion into Enterprise is Vonage. 5G offers unique capabilities such as high speed and low latency. We expect to see these capabilities be exposed, consumed and paid for through network APIs,” he said. Ericsson’s Enterprise Wireless Solutions business has almost doubled since the same quarter a year ago, he noted.
There wasn’t a lot of good news in Ericsson’s new Cloud Software & Services business unit, which saw SEK 14.2 billion ($1.3 billion) in revenue with a SEK 800 million ($71.6 million) loss. Ekholm attributed the muted business unit numbers to a few factors, including the early stage of 5G’s worldwide rollout and new product introductions.
“Gross income was stable after offsetting ongoing 5G Core deployment costs. We have an ambition to unleash the great potential that we believe is present in this business,” said Ekholm. He added that Ericsson was focused on driving down costs with continued business unit consolidation, in order “to turn around the business and establish a satisfactory profitability.”
“We are also simplifying operations across the company and will continue to be proactive in reviewing options to reduce costs, whilst continuing to develop best-in-class products and services. We are fundamentally strengthening cost competitiveness through an intense focus on internal end-to-end efficiency gains and structural costs,” he added.
