Ericsson warns of $76 million hit to cloud business

Swedish kit maker Ericsson has revealed the expected financial toll of impending cutbacks at its Cloud Software and Services division.

The unit was formed last May by the combination of Ericsson’s Managed Services and Digital Services divisions, which encompassed its OSS/BSS, core network platforms, and orchestration and automation activities. Both of these had hitherto struggled to turn a profit, and so the restructure was pitched as a means to lower costs by leveraging synergies between the two. Ericsson said it would also position it to capitalise on the convergence of cloud, software and services; increase its cloud native expertise; and enable it to build combined offerings for automation and AI for service delivery.

Unfortunately, the reorg has yet to translate into positive earnings. In the third quarter, Cloud Software and Services generated revenue of $1.4 billion, but it turned in a pre-tax loss of $75.3 million. At its capital markets day last month, Ericsson announced a “revised and robust strategy for achieving profitability” at the division, which can be summed up as: stop doing things that don’t make enough money. This includes limiting subscale software development, accelerating automation, and shifting focus from gaining market share to turning a profit. It will also accelerate automation to lower deployment and maintenance costs.

On Wednesday, Ericsson said it has reviewed its portfolio and customer contracts, and decided to exit an unspecified number of what it calls subscale agreements and product offerings. This will result in a $76 million hit to its earnings in Q4 2022. Furthermore, $66.5 million of that sum is expected to impact cash flow, mainly in 2023.

If all goes well, Cloud Software and Services should break even this year, Ericsson said.

At the aforementioned capital markets day, Ericsson predicted flat RAN market growth for the coming three years, which came off the back of a disappointing set of Q3 earnings. As a result, CEO Börje Ekholm is under pressure to find further savings while at the same time generate a greater volume of revenue from the enterprise side of the business.

When it comes to the savings side of things, Ericsson aims to cut costs by an extra $1 billion over the next 12 months. In December, it agreed to sell its loss-making IoT and Connected Vehicle Cloud (CVC) operations to US-based Aeris.

Meanwhile, Ericsson is betting heavily that its $6.2 billion acquisition of Vonage will be the silver bullet for its enterprise activities. The deal has equipped it with a suite of unified communications as a service (UCaaS), contact centre, API and CRM products, as well as Vonage’s broad base of corporate clients.

With a plan in place, and against a backdrop of lacklustre financial performance and little-to-no foreseeable growth in the RAN market, Ekholm needs to deliver.

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