Ericsson boss Borje Ekholm is prioritising a return back to profit over any long-term growth ambitions, but scepticism remains as the company was forced to revise an operating margin target set just seven months ago while also admitting its Cisco partnership won’t hit a much-vaunted 2018 sales target.
At the struggling vendor’s Capital Markets Day 2017, Ericsson said it was now targeting an operating margin, excluding restructuring, of at least 10 per cent by 2020, revised from a target revealed by Ekholm in March of 12 per cent beyond 2018.
Ekholm put the downbeat forecast down to a “challenging starting point”, blaming foreign exchange impacts, a weaker than forecast appetite for equipment and tougher environments in both IT and cloud.
Explaining the revision, he said the company wanted to be more transparent with evolving situations, unlike past approaches, describing the new target as more “conservative”.
Lost technology leadership
After only a few months in the role and an honest evaluation of company performance (see image below, click to enlarge), Ekholm took the lid off a major restructuring initiative that put the focus back on its core networks business after several years of targeting growth in adjacent industries.
In reality, however, this path led the company to spread its investment too thin and jeopardised its technology leadership, added Ekholm.
“Our share of LTE volumes over five years fell from 40 per cent to less than half,” said Ekholm. “The chase for top line growth led us to take on a number of large transformation projects, with a risk profile we were not used to. That’s what we see today in our IT, cloud and managed services business. We weren’t disciplined enough in our M&A activity, again relying on too optimistic cases for future growth. This surge for new growth led to deteriorating financial performance.”
Indeed, Ekholm admitted that Ericsson’s M&A strategy had resulted in “largely unsuccessful acquisitions.”
Throughout the capital markets day, Ericsson business heads outlined how they aim to push the company back to growth through four major areas; networks, digital services, managed services and its other business units (see image left, click to enlarge).
In his group update, Ekholm said it was putting a big effort on pushing its digital services business towards being more software led, investing in its footprint with a bigger focus on China, and an ongoing review of its unprofitable managed services contracts.
He also said the company had made progress on simplifying its complex internal structure, with a bigger focus on accountability.
On 5G, Ekholm added the technology will offer new revenue opportunities for the company, as well as the wider industry, given that sales remain largely flat.
After striking a network partnership with Cisco in 2015, the companies initially said they each expected to generate additional revenues of $1 billion by 2018.
In another candid statement, Ekholm said achieving that particular target “will not happen”.
“It’s important for us to have that partnership and rely on partnerships like that… we have however not spent much time on how we can evolve it,” he added.
Ekholm was inevitably forced to answer questions on why investors should maintain confidence in Ericsson, given that a new management team (Ekholm took the helm in January) has already delayed and reduced operating margin targets in a relatively short space of time.
“I think the candid answer is that we said on purpose beyond 2018, without a specification before. Yes, we expected to reach 12 per cent earlier than we do today, and the reason is FX has an effect on our target. I’m not a good predictor of currency. I take what’s currently visible and use that for our plans. That’s maybe a mistake but that’s what we did. The next is that we see the RAN market being weaker in the short term than we thought at the time, so those two externalities have pushed out the target a bit.”
The target also does “not factor in any significant 5G sales during this time period”.