Ericsson benefited from strong network equipment sales in North America in the 3Q, reporting overall revenues of $6 billion, up from $5 billion a year ago, and beating analysts’ estimates $5.9 billion.
However, the company’s adjusted operating profit was just $643 million, which was lower than analysts’ estimates of $760 million, according to Bloomberg.
In addition, Ericsson reported gross margin of 44.4%, a decline from 47.8% margin in the previous quarter. The company attributed the decline in gross margin to lower intellectual property revenues (Ericsson’s IPR licensing revenues decreased to $140 million) as well as increased supply chain costs and as well as increased costs associated with its expansion into new markets with its network business.
Ericsson President and CEO Börje Ekholm said that the lower IPR revenues were due to certain contracts that are currently being negotiated or under renewal. He also said that the company expects to see gradual improvement in supply chain issues and has been keeping its component supply chain inventory high to safeguard the delivery of products to customers but he expects that to decrease.
The company’s Network’s division remains its stronghold. The Network’s business reported net sales of $4.3 billion, an increase of 5% over Q2, and much of that growth was in the North American market where operators are rapidly deploying 5G. However, Ekholm said he expects the radio access network (RAN) capex to be lower in 2023 but still fairly strong.
Ekholm also touted the company’s acquisition of Vonage, which became part of its Enterprise division. “Vonage is the key to enterprise expansion,” he said, noting that the company believes that Vonage will be instrumental to helping operators and application developers create new use cases for 5G that take advantage of 5G’s low latency and faster speeds with the creation of network APIs.
The company’s Cloud Software and Services division, reported net sales of $1.27 billion, which was just 1% up from Q2. When asked why this division is lagging in terms of showing growth, Ekholm said the cloud business still has higher costs because of new product introduction. He also attributed its slow growth to the fact that 5G is still in the early stages of rollout and he expects it will increase as 5G matures. Nevertheless, he assured investors that Ericsson sees high growth potential from this area and he believes it will contribute to long-term growth targets.
Ericsson’s executive team did allude to potential cost-cutting measures in the future and said that they are going to look at ways to simplify operations and reduce costs. “We need to get more synergies out of our investments,” Elkholm said.