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Ericsson’s turnaround is in process, but sustainability of business is in question

TBR perspective

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.

Ericsson’s focus on the wireless access domain tethers the company to the whims of that market, which is undergoing significant disruption as 5G and virtualization take hold and as operators increasingly shift capex budgets from connectivity infrastructure to building digital businesses, limiting Ericsson’s growth potential. Though there is room for Ericsson to take market share, particularly from Nokia (NYSE: NOK), Huawei and ZTE by leveraging its software-upgradable Ericsson Radio System (ERS) RAN gear, Ericsson is not immune to adverse business trends impacting the broader RAN market, namely legacy decommissioning, virtualization, openness, cloud and white box.

Ericsson is betting its ERS 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.

With the architecture of the network fundamentally changing to be virtualized and cloudified and communication service providers (CSPs) focused on relentless cost efficiency and TCO reduction, Ericsson will have to carefully balance its shift from the old world to the new reality, whereby forklift RAN upgrades become lower scale and targeted, and innovation and value migrate to the software layer. This has significant implications for Ericsson’s hardware and close-to-the-box services businesses, both of which are optimized to operate at high scale for efficiency and profitability.

TBR notes Ericsson and its close rival Nokia are pursing different paths during the 5G era. While Ericsson focuses on its core business of selling RAN and mobile core directly to service providers, Nokia is taking an end-to-end infrastructure approach and is building out a dedicated business unit with a full suite of resources to directly sell to enterprises. Though Industry 4.0, 5G and digital transformation are underlying themes that find commonality between the two vendors, their divergent tracks are noteworthy.

 

 

Ericsson (Nasdaq: ERIC) hosted its annual Industry Analyst Forum in Boston, bringing along a range of executives to provide an update on the company’s corporate and business unit strategies, with a focus on Networks, Managed Services and North America. Key topic areas included 5G, Internet of Things (IoT), automation and artificial intelligence (AI). Following the main session, analysts could attend three tracks — Network Evolution to 5G, AI and Automated Operations, or 5G and IoT Industry Innovation — and then participate in one-on-one speed meetings. The tone of Ericsson’s 2018 analyst day was upbeat as the company sees early signs that its turnaround plan is yielding results, evidenced by its 3Q18 earnings results in which organic revenue growth returned and margins improved markedly. Ericsson remains committed to its transformational restructuring and focused strategy, which are key pillars of its turnaround plan.

Telecom vendor revenues trend upward as operators pull forward 5G investment

According to Technology Business Research, Inc.’s (TBR) 2Q18 Telecom Vendor Benchmark, revenue growth improved for the largest vendors as they capitalized on early 5G investment but saw reduced spend in China. Operators, particularly those in the United States, are pulling forward investment in 5G and deploying small cells to densify networks. However, the RAN market will decline in 2018 as operators in China reduce spend significantly following the conclusion of LTE coverage deployments.

TBR believes Ericsson has staked an early lead in 5G, but Nokia (NYSE: NOK) and Huawei can leverage their end-to-end portfolios to regain share. In 4Q17 and 1Q18 Ericsson (Nasdaq: ERIC) aggressively priced its Ericsson Radio System (ERS), which is software-upgradeable to 5G, undercutting competitors to gain market share ahead of commercial 5G build-outs. Nokia and Huawei remain well positioned in 5G due to their ability to leverage end-to-end portfolios as a one-stop shop for network transformation in the 5G era.

ZTE was banned from sourcing components from the U.S. for part of 2Q18, which drove the company to essentially cease operating, leading to drastically lower revenue and a deep operating loss. The company is once again operating, but its reputation was tarnished, particularly in Western markets.

Graph showing 2Q18 revenue, operating margin and year-to-year revenue growth

 

TBR’s Telecom Vendor Benchmark details and compares the initiatives and tracks the revenue and performance of the largest telecom vendors in segments including infrastructure, services and applications and in geographies including the Americas, EMEA and APAC. The report includes information on market leaders, vendor positioning, vendor market share, key deals, acquisitions, alliances, go-to-market strategies and personnel developments.

TIS margins declined in 2017 as vendors invested in service delivery evolution, including automation, tools and training

HAMPTON, N.H. — According to Technology Business Research Inc.’s (TBR) 2017 Telecom Infrastructure Services (TIS) Margin Benchmark, Tier 1 telecom vendor average TIS margins declined year-to-year in 2017 due mainly to restructuring at Ericsson, though growing investment in R&D, particularly for professional services, also had an impact.

“Vendors invested in service delivery evolution to stay ahead of adverse TIS market trends, such as legacy decommissioning and growing SI complexity,” said TBR Telecom Senior Analyst Michael Soper. “Professional services in particular is a focus area for vendors as they invest in tools and training to cope with increasing network complexity.”

Ericsson’s restructuring impacted all facets of its services business, driving margins down across the board. The company’s contract exit and rescoping activity hurt margins in 2017, but will enable Ericsson to emerge on better footing by the end of restructuring in 2019.

Except for Ericsson, vendors grew their maintenance margins, offsetting the impact of legacy infrastructure decommissioning with an influx of support revenue for recently deployed gear in China. Vendors are investing in automation in this space to sustain high margins where the full impact of legacy decommissioning and software-mediated networking are felt.

TBR’s 2017 Telecom Infrastructure Services Margin Benchmark provides annual analysis of deployment services, maintenance services, professional services and managed services margins for Tier 1 telecom suppliers. Suppliers covered include Ericsson, Huawei, Nokia and ZTE.

For additional information about this research or to arrange a one-on-one analyst briefing, please contact Dan Demers at +1 603.929.1166 or [email protected].

 

ABOUT TBR

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, and telecom vendors and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to address client-specific issues further or information needs on an inquiry or proprietary consulting basis.

TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com.

 

 

1Q18 device revenue results were boosted by market shifts and increasing ASPs in PCs and smartphones compared to a weaker 1Q17

HAMPTON, N.H. (July 13, 2018) — Technology Business Research, Inc.’s (TBR) 1Q18 Devices and Platforms Benchmark finds that there is ongoing revenue opportunity in both the PC and smartphone markets. Total benchmarked revenue increased 15.9% year-to-year to $112 billion despite indications of saturation in the high end of the PC market.

Total PC benchmarked revenue increased 12% year-to-year to $32 billion. Total PC benchmarked gross profit increased 10.4% year-to-year to $5 billion despite increasing component costs. “Despite speculation that the PC market is dead, major device OEMs have been able to successfully navigate the shifting market and generate healthy profits,” said TBR Analyst Dan Callahan. “Renewed appetite for premium PCs in enterprise — and PC OEMs shifting their go-to-market strategies to respond — has been the primary driver.”

Total benchmarked smartphone revenue increased 11% year-to-year to $72 billion. Total smartphone benchmarked gross profit increased 14.8% year-to-year to $23 billion. Smartphone OEMs are combating worldwide saturation by increasing average selling prices (ASPs). Apple’s gamble with a $1,000 smartphone paid off, as customers responded with demand, and Android peers are following suit.

Device as Service (DaaS), an expansion of the former PC as a Service market, is transforming into an offering aimed at supplanting traditional PC financing. The benchmark explores how HP Inc. was the first of the big three PC OEMs to capitalize on the emerging opportunity and has been the first with concrete outbound messaging to partners and customers. This has afforded the company a lead, but it is not cemented. Dell Technologies and Lenovo will use the path HP Inc. paved to introduce DaaS to the market and quickly solidify their own unique solutions. Lenovo and HP Inc. see opportunity beyond the PC in PC as a Service, thus the introduction of DaaS.

The DaaS opportunity remains mostly untapped. Customers and partners are still trying to understand how this service differs from traditional financing and are still kicking the tires on the analytics often attached by OEMs as the main selling point of DaaS.

TBR’s Devices and Platforms Benchmark provides insight on interrelated ecosystems, including device vendors, platform providers, supplier relations, and technology partners across the consumer and commercial spaces. TBR’s vendor-centric analysis speaks to industry trends, while market sizing illustrates opportunity. Our Devices and Platforms research includes PC, tablet and smartphone vendors; platform providers; and technology partners.

For additional information about this research or to arrange a one-on-one analyst briefing, please contact Dan Demers at +1 603.929.1166 or [email protected].

 

 

ABOUT TBR

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, and telecom vendors and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to address client-specific issues further or information needs on an inquiry or proprietary consulting basis.

TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com.

Equipment vendors continue to struggle with lower sales volume, while IT services and software-centric companies enjoy growth, thanks to digital

HAMPTON, N.H. (Jan. 5, 2018) — According to Technology Business Research, Inc.’s (TBR) 3Q17 Telecom Infrastructure Services Benchmark, leading vendors are making significant strategy changes and retrenching around their core competencies to weather subdued communication service provider (CSP) spend.

“Leading vendors are realizing they must transform themselves before they can effectively help their customers transform,” said TBR Telecom Senior Analyst Chris Antlitz. “New technologies and processes, particularly in the areas of cloud, artificial intelligence, cognitive analytics, automation and DevOps, promise significant agility, better outcomes and cost savings, and vendors must not only offer solutions that leverage these technologies to their customers but also adopt and employ these technologies internally to be credible, differentiate and remain competitive.”

Tier 1 network solution providers (NSPs) are going back to their product-led roots and doubling down on partnerships. Huawei, Ericsson and Nokia are all transitioning back to being product-led, which is an about-face from their prior strategy of being services-led. This strategy shift indicates that product-centric vendors have realized that the optimal go-to-market model is to stick to their core businesses and core competencies as much as possible and augment capabilities with partnerships.

TBR believes this strategy shift means NSPs will increase emphasis on product-attached services, which is their main telecom infrastructure services (TIS) profit pool, particularly maintenance services. This retrenchment by NSPs will also enable IT services companies to have a clearer path to capitalize on digital opportunities.

TBR’s Telecom Infrastructure Services Benchmark provides quarterly analysis of the deployment, maintenance, professional services and managed services markets for network and IT suppliers. Suppliers covered include Accenture, Amdocs, Atos, Capgemini, CGI, China Communications Services, Ciena, Cisco, CommScope, CSG International, Ericsson, Fujitsu, Hewlett Packard Enterprise, Huawei, IBM, Infosys, Juniper Networks, NEC, Nokia, Oracle, Samsung, SAP, Tata Consultancy Services, Tech Mahindra, Wipro and ZTE.

For additional information about this research or to arrange a one-on-one analyst briefing, please contact Dan Demers at +1 603.929.1166 or [email protected].

 

ABOUT TBR

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, and telecom vendors and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients’ needs. Our analysts are available to address client-specific issues further or information needs on an inquiry or proprietary consulting basis.

TBR has been empowering corporate decision makers since 1996. For more information please visit www.tbri.com.