Following a substantial $1 billion write-down at Vonage, which was characterized as “value destruction” by a financial analyst, Ericsson’s recently released results could have been significantly more unfavorable. Excluding this impairment, the Swedish vendor would have achieved a modest net profit of 400 million Swedish kronor (approximately $38 million) for the second quarter, rather than incurring an SEK11.4 billion loss ($1.1 billion). This would have represented an improvement compared to the SEK600 million ($57 million) loss recorded in the corresponding period of the previous year.

Furthermore, sales experienced a moderate decline of 7% year-over-year, reaching SEK59.8 billion ($5.7 billion), following a 9% decrease in the same period of 2023. Notably, Ericsson’s gross margin improved by 5.7 percentage points, reaching 43.1%.

In reference to the aforementioned, credit must be partially attributed to North America, where telecommunications companies appear to have finally exhausted the surplus inventory accumulated in the aftermath of the pandemic. "We see the US market increasing 14% in the quarter," Fredrik Jejdling, the head of Ericsson’s primary network division shared with Light Reading that revenues reached SEK16.6 billion ($1.6 billion) as telecommunications companies reinvigorated their investments.

The recent $14 billion contract between Ericsson and AT&T, involving the replacement of Nokia equipment, has contributed positively to Ericsson’s performance. Nokia, Ericsson’s Finnish competitor, may face challenges in achieving a similar recovery, as T-Mobile remains its sole significant customer in the United States. Furthermore, Ericsson secured a new licensing agreement with OPPO, a Chinese smartphone manufacturer, which further bolstered its sales.

 

It continues to demonstrate prudent expense management under the leadership of CEO Börje Ekholm. Despite a 7% decline in revenues, the cost of sales witnessed a significant reduction of 16%, reaching approximately SEK34 billion ($3.2 billion) in the second quarter. The company’s workforce has been reduced by 1,155 employees, bringing the total headcount to 97,985 as of the end of March, and marking a decline of 7,544 since late 2022. Notably, research and development, which faced challenges prior to Mr. Ekholm’s tenure, is now prioritized and considered sacrosanct. Investments in this area have increased by 8%, amounting to SEK14.9 billion ($1.4 billion). The executives’ argument that more competitive products lead to improved gross margins appears well-founded.

The recent challenges faced by Vonage

The acquisition of Vonage by Ericsson in 2022 for $6.2 billion has resulted in significant financial losses for the company. The company’s deteriorating performance and outlook have led to write-downs totaling nearly $4 billion. This has raised concerns among analysts and investors, who are questioning the accountability and responsibility for this substantial value destruction.

 

Ekholm took full responsibility for the situation, acknowledging his accountability as the CEO. However, he urged caution in assessing the overall transaction until it could be determined whether a separate new market for network APIs could be created. He emphasized that this had been the primary focus and that the current performance of the existing business may not have met expectations.

The current business operates in the communications APIs sector, specializing in two-factor authentication via text messages. Vonage’s write-downs are a result of both the revaluation of competitor stocks, such as Twilio’s 85% decline over the past three years, and Vonage’s own underperforming sales. Ericsson’s primary objective is to realign Vonage to support industry-standard network APIs, thereby granting developers access to previously undisclosed 5G capabilities.

"You build it to provide one interface of APIs that access all the networks in the world," said Jejdling. "The attractiveness of the 5G network becomes higher when that same application can be developed across multiple customers." An initiative called Camara, managed by the open-source Linux Foundation, is trying to make sure the world's telcos adhere to one standard.

 

The value of these APIs to developers is a topic of debate, and it is unclear whether customers are willing to pay more for improved quality of service or other 5G features. Other companies, particularly hyperscalers, may be more appealing platforms in a market for standardized rather than telecommunications-specific APIs. Some analysts question Ericsson’s rationale for acquiring Vonage to pursue a network APIs strategy.

 

"Vonage can boast a CPaaS ecosystem but Vonage's traditional developers do not necessarily have much use for advanced network – as opposed to communications – APIs," said Caroline Chappell, an analyst at Analysys Mason, in a paper earlier this year. Nokia's approach, which is not built on a $6.2 billion takeover, "looks more promising," she added.

Irreversible debilitation

Why is Ericsson persisting in this endeavor? Primarily due to the developments affecting the substantial portion of its 5G network operations outside North America and its inventory adjustment. "All the other markets are actually reducing for us," said Jejdling. Research firm Dell'Oro expects the radio access networks market to shrink 4% to 8% this year, and Ericsson deems that optimistic. "We think that is probably a bit positive and see a little bit more contraction in the market, so it is a challenging market environment," said Jejdling.

The Swedish concern is that the current slowdown in 5G investments may not be a temporary pause but rather a long-term weakening of the industry. Despite increasing mobile data consumption, telecommunications companies have yet to see a substantial return on their 5G investments, as acknowledged by Ekholm last week. Furthermore, the growth rate of traffic is decelerating, according to numerous analysts. Ericsson’s recent mobility report revealed that previous traffic level estimates were overstated by tens of exabytes. These factors collectively indicate that a swift recovery in 5G spending is unlikely in the immediate future.

Vonage plays a crucial role in this context. Ekholm emphasized the significance of generating additional revenue from network features to justify future investments in advanced generations of technology. In essence, if the financial situation does not improve, telecommunications companies will lack the incentive to develop more sophisticated 5G networks in the future, let alone introduce a new 6G network.

The acquisition of Vonage places significant pressure on the company. Furthermore, Ekholm has divested numerous assets acquired by his predecessor, Hans Vestberg, making Ericsson heavily reliant on the 5G market outlook compared to other major equipment providers. Given Nokia’s recent $2.3 billion acquisition of Infinera in late June, Ekholm appears to have ruled out any potential bids for optical vendors.

"I think they're in a very different position than we are," said Ekholm, commenting on the bid. "They already have a business there. So, for them, it's kind of a rational acquisition. I think that's a market we serve through the access technology. But seeing us sell directly to data centers is rather unlikely."