Ericsson expects network gear market to grow more slowly than before, but pins hopes on emerging opportunities

Ericsson (NASDAQ: ERIC) cut its outlook for how much the network equipment will grow over the next few years, but still said it aimed to grow faster than the market. The company also thinks it will be aided by a new partnership it unveiled yesterday with Cisco to integrate existing gear, combine some sales and consulting efforts and potentially jointly develop new hardware and services.

Ericsson estimates that the total network equipment market during the years 2014-2018 will show a compound annual growth rate (CAGR) of 1 to 3 percent, slightly lower than the 2 to 4 percent rate it projected last year through 2017.

Additionally, the vendor said that the telecom services market is estimated to grow at a CAGR of 3 to 5 percent, also down slightly from its projection last year of 4 to 6 percent growth through 2017. The firm also said the market for support solutions, still only a small percentage of the company's sales, is forecasted to show a CAGR of 7 to 9 percent in the same period, unchanged from last year.

Ericsson said in a statement it put out tied to its annual capital markets day that its "ambition is to continue to grow faster than the projected total addressable market CAGR of 2 to 4 percent in 2014-2018, including growing faster than the market in targeted areas."

Over the past few years Ericsson has tried to diversify its business into software and services, which are higher-margin businesses than network gear, and it has pushed to make itself less dependent on selling wireless equipment to carriers. The company still aims to excel in its core businesses of radio access networks, core networks and telecom services.

"The strategy is clear, we want to be improving the core areas – profitability, and of course having growth there as well," Ericsson CEO Hans Vestberg told investors at the capital markets meeting, according to Reuters. "We are not yet where we are satisfied," he said.

However, Ericsson also has been pushing into what it calls "targeted areas" of cloud, IP networks, TV and media, OSS/BSS, as well as "Industry & Society," addressing new customers outside of traditional operators. Ericsson said estimated market growth for these targeted areas is a CAGR of 10 percent, with Ericsson outperforming market growth year-to-date.

"These targeted areas are selected based on factors including clear adjacency to the core business, high degree of software and professional services, high degree of recurrent revenues, and higher market growth than the core business areas," Ericsson said in a statement. "In addition, the targeted areas are less capital-intensive than today's core business."

For 2015, rolling over the last four quarters, the total sales in targeted areas amounted to $5.16 billion (SEK 45 billion), up from $4 billion for the same period last year and representing a growing share of Ericsson's total sales.

Vestberg told The Wall Street Journal that the deal with Cisco is "a much more agile and efficient choice" than doing a merger, even though the partnership has some elements of one. Cisco's executive chairman and former CEO John Chambers was on stage at Ericsson's capital markets day and said vendors need to seize the initiative to provide gear and services to carriers and enterprises. The companies think the deal will generate $1 billion or more in additional sales for each company by 2018.

"This industry is about growth, innovation and speed," Chambers, said, according to LightReading, adding that a merger would have taken too long. "If it takes six months to get through a regulatory board and then another year to combine … this industry will be won and lost in the next three years, so it is all about speed, about how you go about it. While we are a huge believer in big-to-small and big-to-medium acquisitions, partnerships, if you can do them, are the way to go large-to-large. Joint ventures add an extra level of complexity, you have an over-riding group, a board, and that slows you down," he added.

Ericsson also said it its previously announced cost-cutting program is on target to save $1 billion per year during 2017, but it now expects to book higher restructuring costs from the program than it had expected. The program is expected to generate approximately $402 million to $516.5 million in restructuring charges from 2015-2017, up from its previous projection of around $344 million to $459 million.

For more:
- see this release
- see this Bloomberg article
- see this Reuters article
- see this MarketWatch article
- see this LightReading article 

Related articles:
Ericsson, Cisco come together in network partnership to 'turbocharge' carriers' shift to SDN
Ericsson and Cisco partner on networks, target $1B in extra sales by 2018
Ericsson's Vestberg: The U.S. should lead on 5G -- but we'll be leading no matter what
Ericsson misses sales expectations in Q3, but points to continued stabilization of North American business

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