Ericsson takes another hit on Vonage buy

The Swedish kit maker said it will record an SEK11.4 billion ($1.09 billion) non-cash impairment charge relating to Vonage in the second quarter. After the announcement, shares were changing hands early on Thursday morning for SEK64.58, down from Wednesday's closing price of SEK66.02.

Ericsson said the writedown reflects lower anticipated growth in some of the markets addressed by Vonage's portfolio.

Announced in November 2021, Ericsson's $6.2 billion acquisition of Vonage – its biggest ever deal – raised eyebrows not just because of the 28% premium it paid on Vonage's share price, but also because it wasn't clear that a cloud comms and API provider would necessarily be a good strategic fit for a RAN vendor.

Ericsson went to a lot of effort to sell the idea, insisting that the resulting growth in enterprise revenue would help to offset the slowdown that was setting in at the networks business.

CEO Börje Ekholm also talked up the potential upside of owning a company like Vonage, with its API portfolio and developer community, at a time of growing interest in exposing telco network capabilities to developers via APIs.

When the deal was announced, Ericsson said that it expected the transaction to contribute to earnings and free cash flow (FCF) from 2024 onwards.

However, it appears to be taking considerably longer than Ericsson hoped for its bet on Vonage to pay off.

Last October, it announced a Vonage-related non-cash impairment totalling SEK32 billion ($3 billion), which was attributed to the declining value of Vonage's publicly-traded peers, higher interest rates, and a general slowdown in Vonage's core markets.

With this new impairment, Ericsson has now written down almost two-thirds of Vonage's purchase price.

As well as raising questions about Ericsson's strategic nous, the impairment also raises questions about when the industry will actually start generating revenue from network APIs, and how much they truly stand to gain.

With 5G services not moving the needle significantly on operator revenues, and all the promised new use cases still 'just around the corner', the industry has turned to network APIs as its next great hope for monetising connectivity.

So when Ericsson chalks $4 billion off the $6.2 billion it paid for an API company, it doesn't exactly send a bullish signal.

Ericsson still believes in the fundamental rationale behind the acquisition.

"We continue to advance our strategy to build a global network platform for network APIs, which was the strategic impetus for the Vonage acquisition," said Niklas Heuveldop, who took the reins as head of business area global communications platform and CEO of Vonage in February.

"We recently announced additional partnerships with leading mobile network operators and we see continued positive momentum across the industry," he said. "Through this strategy, we are making advanced 5G network capabilities available to the world's developer community to accelerate the innovation of value-added applications for industry and society. This will open up new revenue streams for our operator customers and spur growth in the telecom industry."