Speaking at Ericsson (NASDAQ: ERIC) Shareholder Dialogue 2021, President and CEO, Börje Ekholm, summarized the company’s focused business strategy, its financial performance and the measures taken to handle the global pandemic during 2020. The event offered shareholders an opportunity to hear from Ericsson representatives and ask questions before the voting deadline for the Annual General Meeting 2021, which is performed through postal-voting only and without a physical meeting due to the ongoing COVID-19 pandemic.
Turning the business around
In 2020, Ericsson reached its 2020 financial targets making it possible to declare the turnaround completed. In his introduction, Ekholm discussed the successful execution of Ericsson’s focused strategy and reflected that many considered the strategy as unrealistic when it was launched in 2017 and argued that Ericsson needed to cut costs, especially in R&D.
“By having the customer in focus it becomes clear that competitive solutions based on leading technology is our raison d’être,” says Ekholm. “So instead of slimming down on R&D we increased our investments to strengthen our technology position. Today, Ericsson’s position is strong, and we are a leader in 5G.”
Employees at the core of Ericsson’s strategy
While customers remain in focus, equally important has been Ericsson’s prioritization of its employees. Ekholm explained the critical role that employees played in turning its business around. He also highlighted the challenging situation most employees have found themselves in during the pandemic year of 2020.
“More than 85,000 of our employees have worked from home and most of the approximately 10,000 new employees we recruited last year have yet to physically meet their boss or team,” says Ekholm. “Despite these challenges, we managed to execute on our strategy and deliver to our customers!”
Financial performance and growth ambitions
For the full year 2020, Ericsson’ showed organic topline growth of 5.1%, a strong gross margin of 40.3%, operating margin of 12.0% and solid free cash flow before M&A amounting to SEK 22.3 billion. This was the strongest free cash flow in the company’s history.
As Ericsson looks ahead, Ekholm stated that focus will increasingly be on growth. Investments in increased market share will be critical to ensure scale, but opportunities in the emerging enterprise segment will also be a priority.
Ekholm says: “Our strategy remains in place, but we see great growth opportunities in the enterprise segment, which is why we have expanded our strategy with investments in enterprise applications. In the same way that 4G made it possible to digitalize the consumer market, 5G will digitalize the enterprise sector.”
In 2020, Ericsson made critical inroads in the enterprise market by acquiring Cradlepoint. Through Cradlepoint’s solutions, companies can connect sites, vehicles, mobile workforces, and IoT devices in a simple and secure way using cellular technology.
“Cradlepoint is a win-win for our customers since its solutions create new revenue streams for the mobile operators,” says Ekholm.
Investments in technology leadership
Research and development remain at the core of Ericsson’s business and over the past several years, the company has increased its investments in R&D by almost SEK 10 billion. Today, more than a quarter of Ericsson’s employees work within R&D.
“2021 will be an investment year in order to strengthen Ericsson even further,” says Ekholm. “Our margins will be negatively impacted by lower patent licensing revenues due to important contract renewals, the acquisition of Cradlepoint and investments in our business. However, these are not costs, but rather investments to strengthen our position. We’re taking half a step back in order to be able to accelerate.”
The race to 5G
In 2020, the world saw rapid roll-out of 5G, moving the technology from future possibility to present reality. Based on assessments made by Ericsson, there were around 220 million 5G subscribers at the end of 2020 compared to 12 million the year before.
Ekholm highlighted the leading role that Ericsson has had in this development. In 2020, Ericsson announced 44 5G contracts and closed the year with 122 commercial agreements and 79 live 5G networks globally. Furthermore, Ekholm pointed to Ericsson’s world leading patent portfolio in cellular technology with more than 57,000 granted patents.
Ekholm stated that the company will continue to see strong 5G roll-out during 2021. However, he raised concern about the situation that most parts of Europe find itself in – far behind both the US and China when it comes to 5G roll-out.
“Of course, Europe will benefit from applications developed on top of 5G networks, but these applications will be created where the networks are first deployed,” Ekholm explained. “Thus, this is a question of future job growth. One example is that Europe was 2-3 years behind North America and China in deploying 4G and today we see very few digital champions in Europe.”
Ekholm emphasized the need for European countries to speed up 5G deployment, saying that it is one of today’s most important political issues.
Sustainability and responsible business
Sustainability continues to be an integral part of Ericsson’s strategy and part of Ericsson’s sustainability agenda is to become carbon neutral in 2030. Equally important is the work being done to improve energy efficiency across Ericsson’s products. These savings will generate sustainable results for both the environment and Ericsson’s customers’ P&L.
Ekholm says: “That sustainability is integrated into our operations is clearly seen in our factory in the U.S. By using smart 5G solutions, we have been able to reduce energy consumption by 24 percent and indoor water usage by 75 percent. In addition the factory runs on 100 percent renewable electricity.”
Ekholm also highlighted the important work being done within Ethics and Compliance. In 2020, Ericsson continued to strengthen its compliance program by increasing headcount in this area, making its related processes more robust and by focusing on its culture.
Closing remarks
Ekholm concluded his speech to shareholders saying that 2020 was a year unlike any other. While Ericsson had one of its strongest years ever, it was clearly dominated by the effect the global pandemic has had on the world. Still, Ekholm pointed to the great opportunities that the future holds.
“For Ericsson’s part, I’m full of confidence in the future,” says Ekholm. “The increasing pace of digitalization means our technology will play an increasingly central role going forward. And we already see the enterprise sector developing rapidly, for instance through private network solutions which make tailored industry solutions possible.”