Company sees more opportunity in services, software
Ericsson reported fourth quarter sales and operating income that were significantly improved from last year and from the third quarter, but fell short of analysts’ expectations. Sales for the quarter were $8.6 billion, below the $8.7 billion analysts had projected, and the Swedish company’s stock price tumbled.
Ericsson has for years led the market for wireless network radio equipment, but it’s looking to other markets and other customers as it plans for the future. The company is investing heavily in network software and video delivery, as well as in global services, which is the business of building networks.
“Our global services business is addressing a market that in dollar terms is growing between 3% and 5%, while the networks business is addressing a market that is probably growing 1% to 3%,” said Ericsson CFO Jan Frykhammar. “So from that point of view, for these businesses to stay where they are in terms of market position, then services should really grow faster than networks.”
But for now, that’s not happening. Ericsson’s global services revenue in the fourth quarter was up just 3% versus the year-ago quarter, while its network revenue was up 9%. Frykhammar said in North America, revenue from the company’s services business is roughly equal to revenue from its networks business. And although Ericsson has been cutting jobs in an effort to control costs, its global services unit added jobs during the fourth quarter.
During the fourth quarter, global services represented 42% of Ericsson’s revenue, while network equipment represented 50%. The other 8% was support solutions, which includes Ericsson’s software and media business. That segment grew 40% versus the year-ago quarter.
Video delivery is a key part of Ericsson’s support solutions business. AT&T’s U-verse is using the Mediaroom platform that Ericsson bought from Microsoft, and Frykhammar said his company is now targeting its carrier customers for video delivery solutions.
“The Mediaroom platform has quite a big installed base in terms of customers across many telecom operators in the world,” said Frykhammar. “Our main focus there is to get similar types of projects going with most of those customers. … Then it is really about going from the platform as it stands today to a cloud-based platform where these services can be delivered from a data center somewhere.” Frykhammar suggested that Ericsson would have more customer announcements around Mediaroom at Mobile World Congress.
Ericsson is often at the center of conversation about “5G,” which will be the next evolution of wireless networks. Frykhammar said as networks become more capable, his company will have the opportunity to work more directly with the enterprises that are the end users of those networks, meaning Ericsson will be less reliant on the mobile operators.
“By 2020 there is a possibility that the top line will be 30% or so coming from customers outside telecom operators,” said Frykhammar.
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