Ericsson talked up a focused push on enterprise ambitions as it released earning results Tuesday, during which the Swedish vendor disclosed organic sales growth both in the fourth quarter and full year 2021, despite significant market share loss in China.
For the fiscal year Ericsson notched 8% organic sales growth, excluding declines in mainland China, even as it faced supply chain challenges and inflation pressures.
With momentum in the core mobile infrastructure business, Ericsson CEO Börje Ekholm said the vendor was able to offset the impact of reduced market share in China by growing elsewhere thanks in part to continued 5G demand.
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5G is the fastest scaling mobile technology to date and deployments accelerated in 2021, Ekholm said during the earnings call. Ericsson ended 2021 with 109 live 5G networks and 170 5G agreements with customers.
He also touted investments in R&D and technology as paying off in terms of market share gains and 5G network performance for customers. 2021 saw Ericsson introduce lightweight Massive MIMO radios and its 5G cloud RAN for mid-band link. In Q4 R&D expenses were SEK 11.7 billion, and R&D increased 7% year over year for 2021 with investments in 5G portfolios across segments.
In the fourth quarter group organic sales growth was 2% year over year, and 5% excluding China. Sales in mainland China were down by SEK 1.8 billion. Ericsson saw 3% organic sales growth for the network business in Q4.
Reported networks sales for the quarter were SEK 51.1 billion, up 4% year over year.
The full year 2021 followed a similar trend where group organic sales were up 4% with a 7% increase in network segment. Ericsson reported full-year sales of SEK 232.3 billion, as the loss of market share in China drove a SEK 7.7 billion hit and negatively impacted the growth rate by 3%.
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Ericsson saw market share gains help drive sales growth in Europe and Latin America in Q4, reporting SEK 19.2 billion with 12% growth. North America also continued to have strong 5G momentum where sales grew 15% to SEK 22.3 billion in Q4. Ericsson has 5G contracts with all Tier 1 U.S. operators, which are all pushing ahead with expanding 5G rollouts including C-band. In 2021 the vendor inked a more than $8 billion deal with Verizon, its biggest ever. North America and Europe and Latin America are Ericsson’s largest markets and account for nearly 60% of Ericsson’s group sales.
Ericsson CFO Carl Mellander said the proportion of software as sales had increased in digital services, fully in line with the vendor’s overall strategy. Digital services, which include 5G core, were roughly flat at SEK 12.7 billion. 5G core sales in that segment have started to progress well, he added, and expects that to continue. The vendor has landed 50 5G core contracts to date.
Notably, Ericsson reached its 2022 financial target of 12-14% of EBIT margin a year early, delivering an EBITA margin of 14.6% in 2021.
Enterprise provides more growth and profitability potential
Pursuing growth plans via a focused pivot to the enterprise space was a key theme Ekholm highlighted throughout the earnings presentation. It’s a focus Ekholm also called out during Q3 earnings, at the time citing a $15-25 billion market opportunity by 2025.
With its 2022 EBITA margin target already reached, the chief executive said now the focus is squarely on longer-term targets of 15-18% EBITA margin, which he feels can be achieved at an accelerated pace within 2-3 years.
“With a strong core mobile infrastructure business we can now take advantage of growth opportunities in the enterprise segment,” Ekholm said during Tuesday’s earnings call. In a few years, Ericsson expects to have “fundamentally shifted” its business mix to a much higher proportion of revenues coming from enterprise.
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Over time, the vendor expects “the enterprise segment to provide higher growth potential as well as profitability than our core infrastructure business,” Ekholm said.
Part of Ericsson’s push in the enterprise comes through M&A, having already completed a $1 billion deal for Cradlepoint in 2020. Teed up is a more than $6 billion planned acquisition of Vonage, which it hopes to close in the first or second quarter of 2022.
Ekholm said Vonage will allow Ericsson to build an enterprise business where it, along with service provider customers, can monetize capabilities of the 5G network. Ericsson’s interest appears to be on APIs, which he noted it can provide to the Vonage developer community and create new applications within the 5G network for both enterprises and consumers. Some analysts expressed skepticism at the deal when it was announced last November.
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According to Ekholm, Vonage will remain a standalone entity within Ericsson and operate with limited integration – similar to how Cradlepoint functions since it was absorbed by the vendor.
“The light integration will allow Vonage to continue to execute growing the business,” Ekholm said, while Ericsson simultaneously invests in its global network platform. As of now Ericsson’s enterprise business also involves dedicated or private networks, IoT, and Cradlepoint.
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Ekholm cited 5G interest across verticals with demand picking up in enterprise industries like mining, manufacturing and logistics. Rival Nokia has also made a focused effort on enterprise verticals, particularly around private networks and industrial users.
Earnings call tidbits:
- Ericsson CFO Carl Mellander called out record high cash flow for 2021, saying it’s best the vendor has seen in the history of Ericsson and a strong testimony to performance of the business. In Q4 free cash flow before M&A was SEK 13.5 billion, up from SEK 12.8 billion. Full-year free cashflow before M&A was SEK 32.1 billion.
- In Q4 gross margin improved to 43.5%, versus 40.6% the year prior, due to improvements across segments. Net income of SEK 10.1 billion was up 41% year over year, both from better earnings and reduced taxes. EBIT margin hit 17.3%.
- Sales in North East Asia were down to SEK 9.8 billion in Q4 because of losses in China, representing a 22% decline in the region. Ericsson expects to maintain around a 3% market share in China.
- IPR: Next quarter intellectual property rights (IPR) revenues will be impacted by several expiring contracts and 5G license negotiations. Assuming those renewals aren’t signed, Ericsson estimates SEK 1.0-1.5 billion in IPR revenue for Q1 2022. It’s in the middle of litigation with Apple over licensing standard essential patents including for 5G. Ericsson previously faced patent license renewal challenges with Samsung that were ultimately resolved last year. IPR revenues in Q4 totaled SEK 2.4 billion.
- DoJ agreement breach: Ekholm said Ericsson didn’t have any additional information to share about a breach, tied to corruption-related settlement terms, in its deferred prosecution agreement with the U.S. Department of Justice, which it was notified about by the DoJ in October. Ericsson will share updates once it has more information, and in the meantime Ekholm said it continues to invest heavily in its compliance program.
- Hardware made up 46% of Ericsson’s sales mix in 2021, up from 41% in 2020.
“Which is actually very good because it means we’re shipping a lot of 5G equipment to customers as they build out the networks…this is fully in line with what we want to do and our strategy. At the same time, over time software will increase its share as well, as networks capacity is increased” which is true across networks, digital services, managed services and emerging businesses as well, CFO Mellander said, noting the vendor’s high margins even with a higher percentage of hardware. Still, Ericsson overriding strategy is to increase the proportion of software sales.
- Ekholm sees fixed wireless access as becoming a large subsegment of 5G, happening before the enterprise opportunity which he said will take longer to materialize. He’s personally more optimistic on 5G growth forecasts and longevity of the investment cycle, in part because 5G characteristics are so different from other generations of mobile technologies, saying he thinks the growth potential in 5G rollouts is underestimated.