Ericsson, the market leader in telecommunications network equipment, announced second quarter financial results last week.
The juggernaut rolls on, with strong sales and healthy profits for the Networks business unit, unlike most of the competing equipment providers who are struggling to break even. However, there are some areas for concern. The Multimedia business unit continues to bleed kronor, primarily due to the Ericsson TV business (formerly Tandberg Television); the Multimedia results will look much better in the future due to the Telcordia acquisition, since OSS/BSS products are included in Multimedia, but Ericsson needs to get more traction in the content and applications businesses which are also part of the Multimedia business unit. The real concern, in my opinion, is the Services business unit.
Ericsson claims to be “the industry leader in managed services”, managing networks that serve more than 800 million subscribers. However, according to Ericsson’s 2Q2011 financial report, Global Services sales were down 5% from a year earlier, Professional Services were down 9% from a year earlier, and Managed Services were down 16% from a year earlier. The quarterly report blames the decreases on the strong Swedish Krona, but the real story is that services growth was not strong enough to outpace the currency appreciation. This is a serious problem for a business where profit margins on equipment are inexorably falling due to commoditization of products, and building a strong services business with lucrative margins is vital to the future of the company. All of the telecommunications equipment providers have been working on building their services businesses, with varying degrees of success. Managed Services, in particular, is hot at the moment, as more and more service providers look to outsource their network operations. Ericsson’s competitors are growing their Managed Services businesses with new contracts every quarter, and all that “the industry leader in managed services” can say is that sales this quarter would not have decreased if the Swedish Krona had not appreciated so much. If the best strategic plan that they can come up with in Stockholm is to just wait for the Krona to depreciate, their services business is in trouble, which means the company as a whole is in big trouble.