The Swedish telecom equipment corporation has recently experienced a significant hit as its share prices plunged due to the enduring market uncertainty. Silence seems to be the underlying sentiment as there’s no evident resolution to these volatile market conditions. The company’s total sales were observed to have dipped by approximately 10% on a year-on-year basis with its gross margin maintaining its historical average.
However, the gloomy financial picture worsened upon considering the major goodwill write-down linked to the acquisition of Vonage. Consequently, a loss of over 30 billion SEK was reported for the quarter. An added blow came in the shape of their EBITA margin, a target that Ericsson had previously vowed to achieve a minimum of 15% by 2024. This figure too showed a substantial drop on a year-on-year scale. Consequently, the company was forced to virtually admit defeat regarding achieving this targeted figure, causing further decline in its share prices.
In this uncertain and taxing milieu, Ericsson has navigated to deliver quarterly results that are consistent with our projections, stated the CEO of Ericsson, Börje Ekholm. Like our industry counterparts, we envision the macroeconomic instability extending into 2024, which will undoubtedly affect our clients’ ability to invest.
He further elaborated on the Vonage acquisition situation adding, “We announced a SEK -32 b. impairment of goodwill attributed to the acquisition of Vonage last week. The changing market capitalization of Vonage’s publicly traded peers has seen significant impacts, primarily due to macroeconomic headwinds such as rising interest rates and evolving demand trends since the acquisition announcement in 2021.”
“Despite current uncertainties, our long-term EBITA margin target of 15-18% remains, and our goal is to achieve it at the earliest, provided market mix recovery. But as our customers manage the timing of the market mix recovery, we are opting a cautious approach and preparing for present market conditions to persist into 2024.”, Ekholm remarked.
Fredrik Jejdling, Ericsson’s head of networks, emphasized that no novel factors influenced their dismal forecast when we approached him for his insights. This implied the company had been hoping for better outcomes at this juncture. However, he refrained from commenting on whether they had overpaid for the Vonage acquisition. It is difficult, in spite of accounting for the unfavorable macroeconomic trends, to not arrive at that conclusion.
A significant part of the investor briefing was dedicated to justifying their acquisition of Vonage, specifically mentioning its latest collaboration with DT over network APIs as evidence. Another significant paradigm that Ekholm illustrated was Ericsson’s growing inclination towards Open RAN and Cloud RAN. To stress the importance of these facets to Ericsson’s shrewd strategy for a global network platform, Jejdling made a surprise appearance at the Fyuz event recently.
Ericsson’s stocks currently face an 8% devaluation, however, it’s notable how the Vonage write-down announcement last week seemed to have no significant effect. This leads to speculation around whether investors had already incorporated this decreased valuation. However, the larger worry appears to be the bleak macroeconomic prospect that has also caused a 4% dip in Nokia’s shares. Owing to the prevailing grim market conditions, Ericsson seems disinclined from providing guidance beyond the subsequent quarter which implies that there is no anticipation of market conditions improving in the near future.