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Niklas Heuveldop, Ericsson’s North American CEO, has been appointed as CEO of Vonage, marking a significant leadership change. The head-scratching acquisition has been an ongoing challenge for Ericsson, who last year wrote off almost half the $6B acquisition price. Niklas is coming off a spectacular seven-year stint culminating in the $14B AT&T Open RAN deal. He now has a clear mandate at Vonage: to jump-start growth.
Vonage’s Not-So-New Problem
Unlike Ericsson, Vonage is a software company that has always touted its consumer roots and showcased its CPaaS ambitions. Its growth challenges, however, predate Ericsson.
Even in the heady, golden 2020-to-2022 years, Vonage severely lagged its peers. While its Nexmo business was growing, the company was weighed down by a declining D2C VoIP product. In the last quarter it reported earnings, while its core CPaaS business grew 28%, UCaaS grew only 7% YoY and its consumer business decreased 19% YoY.
Growth only tells part of the story. For the same quarter, the CPaaS business churned out an adjusted EBITDA of $2M from $284M of revenue while its consumer business churned out $42M from $62M of revenue. So you have your growth business, but you get to keep only 0.7 cents of every $1 you make. And you have a declining business where you get to keep 65 cents of every $1 you make. It’s a tough situation for anyone to be in: What’s handsomely growing is barely profitable, and what’s handsomely profitable is declining. Your hope is to have enough time to use profits from one business to make the other sustainable. In such a situation, Ericsson’s all-cash offer likely came as a welcome relief.
Three Choices, None Easy
Clearly Ericsson has lost patience and put its star leader in charge to shake things up. Going forward, Niklas has three options all of which require hard work but with varying risk profiles:
- Double down on deal synergies: A combined product roadmap, unifying messaging and voice APIs with 4G and 5G APIs, may still offer hope. This is a tall order; Telcos are having a tough time API-enabling core infrastructure. Often-touted terms such as Telecom APIs” and “Network-as-a-Service” sound promising but demand extensive cross-organizational synchronization. Layer on this the merger of two cultures, and the risk profile increases significantly.
- Let Vonage be the best it can be: The second option is to resist the sunk-cost fallacy, reset, and allow Vonage to operate independently. Its 2% YoY growth is actually comparable to that of its peers. Let it loose on the marketplace with the mandate to be a market leader.
- Fix and sell the business to a PE or another strategic acquirer: It is possible to run CPaaS as a FCF-generating machine. Fix the business—get it to the point where it is attractive to either a Vista Equity-/ThomaBravo-like PE or another strategic acquirer. This allows Ericsson to focus on what it does best: build networks that power the world.
Finally
I had the chance to meet Niklas during my time on the CTIA’s Board and saw him speak at last year’s 5G summit. Like all strong leaders, he is charismatic, articulate, and collaborative. I wish him much success in this new role.