Why Ericsson IT and Cloud Services’ Revenue Keeps Falling
Ericsson is struggling in the cloud segment
Ericsson has three reporting segments: Networks, IT and Cloud Services, and Media. While the evolution and transition to cloud have been beneficial to tech giants such as IBM (IBM), Amazon (AMZN), Microsoft (MSFT), and Google (GOOG), Europe’s Ericsson (ERIC) continues to struggle in this space. Ericsson aims to be the market leader and drive the cloud telecom transition that will connect several devices to the cloud.
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Revenue fell 5.2% in 2Q17
Ericsson IT and Cloud Services’ revenue fell more than 5.0% YoY (year-over-year) to 10.9 billion SEK (Swedish kronor) from 11.5 billion SEK in 2Q16. Its gross margin fell significantly from 36.0% to 28.0%, while its operating margin fell from -9.0% to -22.0% in the same period. Ericsson attributed the sequential increase in losses to lower capitalization of R&D (research and development) expenses.
Ericsson stated that the gross margin for its IT and Cloud Services segment continued to fall, driven by large digital transformation projects. The segment remains important to Ericsson and accounts for more than 20.0% of its total revenue. Ericsson believes this segment is strategically important since it will drive the transition to 5G (fifth generation), digitalize operations, and “invest in a future network architecture based on software-defined logic.”
Ericsson also invested in developing a new product portfolio, and sales for this vertical rose 7.0% YoY. CEO (chief executive officer) Börje Ekholm stated, “We are taking firm actions to improve performance in IT & Cloud, including stabilizing product roadmaps, addressing underperforming customer projects, improving new project delivery scoping and reducing costs, primarily in service delivery.”
Ericsson now aims to stabilize its IT (information technology) and cloud product portfolio as well as achieve profitability by focusing on transformation projects.