Ericsson sees no 'meaningful' network API sales till 2025 as shares tank

The mournful slide-guitar music that online attendees must endure before the start of an Ericsson earnings call was pertinent this week. Days after writing down the value of its Vonage acquisition by nearly $3 billion, just 15 months since it completed the $6.6 billion takeover, the Swedish equipment maker served up a rancid smorgasbord of third-quarter results. After that Vonage clobbering, it included a net loss of 30.5 billion Swedish kronor (US$2.8 billion) and a 5% year-on-year drop in reported sales, to SEK64.5 billion ($5.9 billion). On a constant-currency basis, sales fell a tenth.

Few of the moving parts looks pretty and the outlook is bleak, with CEO Börje Ekholm now expecting the macroeconomic uncertainty to persist into 2024. Not even traffic growth on mobile networks will spur growth, is the latest tweaked message. "We don't believe the peak levels of 2022 will return but we do believe that investments will normalize from current levels," Ekholm told analysts this morning. Ericsson's share price immediately fell 7% when the Stockholm market opened.

Ericsson's answer to this zero-growth problem remains Vonage, and Ekholm was quick to defend the rationale for the takeover and present the impairment as a consequence of broader market conditions and Vonage's legacy activities. The idea is to make Vonage a "Global Network Platform" (GNP) that allows developers to access whizzy new 5G features via application programming interfaces (APIs), the magic glue between networks and coders. Money generated this way will partly be reinvested in networks, or so Ericsson hopes.

But none of this will happen fast, as Ekholm conceded today. This quarter, Vonage's sales were up by an impressive 44%, to SEK4.2 billion ($3.8 billion), but that is less than 7% of the Ericsson total and was not enough to offset declines elsewhere. While Ekholm expects it to generate its first network API revenues this year, they will amount to just "tens of millions of kronor," he said on today's call. Sales in this market will not be "meaningful" until 2025, he disclosed.

Starting somewhere

A recently announced deal with Deutsche Telekom is not the best example of what to expect. Through that, Vonage's technology is powering an API marketplace for Deutsche Telekom. But developers would face the same old problem of coding for one telco with millions of customers (57.7 million in Germany, in Deutsche Telekom's case) rather than a global telco audience of billions.

"We need to start somewhere," said Fredrik Jejdling, the head of Ericsson's mobile business, on a call with Light Reading. "At the end of it, there will be different platforms that work in parallel. With GNP, we can standardize exposure of network APIs so that, instead of developing with unique operators, developers can develop across 8 billion subscriptions."

A Vonage platform for the market makes better sense commercially than one-off deals with specific telcos. The difficulty for Ericsson is partly that competition is coming from an array of other companies, including Big Tech players now involved in CAMARA, the initiative set up to standardize APIs in the first place. Ekholm, however, remains confident that Vonage has a headstart it can maintain.

The other problem is that network APIs themselves are forecast to be worth only about $20 billion in annual revenues by 2028. In the context of a market generating north of $1 trillion in yearly sales, that is "small beer," said James Crawshaw, a principal analyst with Omdia (a Light Reading sister company). For Ericsson and its telco customers to seriously thrive, the use of APIs must trigger more use of network services by the enterprise customers of the telcos. "If they don't grow, they will not invest in more 5G networks," said Jejdling. "We need to create a virtuous cycle of generating revenue on top of the platform and building a better 5G network."

Long-suffering units

The networks unit Jejdling manages remains by far Ericsson's largest division, accounting for 64% of total revenues. But it has been hamstrung this year by inventory corrections and a spending slowdown in North America, where big telcos previously gorged on supplies. A major rollout of 5G services in India has provided some relief, but conditions elsewhere have also been tough. Revenues dropped 17%, to SEK41.5 billion ($3.8 billion), and Ericsson's operating margin shrank to 11.1%, from 19.9% a year earlier, because of what Ericsson calls the "mix shift." Essentially, that means work is less profitable during the sort of labor-intensive deployment phase now happening in India.

The long-suffering cloud software and services unit is at last on track to break even for a full year in 2023, with quarterly sales up 10%, to SEK15.6 billion ($1.4 billion). But its margins are threadbare, with operating income of just SEK100 million ($9.2 billion). And an even smaller segment of "other" activities remains unprofitable. Its sales were unchanged at SEK700 million ($64 million), while its operating loss widened by a half to SEK300 million ($27 million).

Ericsson is once again hacking into its costs to protect margins. Having previously sought run-rate savings of SEK11 billion ($1 billion) by year end, it has upped the target to around SEK12 billion ($1.1 billion). Some 3,139 employees have left the business in the last 12 months, giving Ericsson a workforce of 101,351 at the end of September. More staff look set to go under the latest cost-cutting plans. In the meantime, Ericsson's share price is now lower than it was when Ekholm took charge nearly seven years ago.