Daily Management Review

As It Plunges Into Loss, Sweden's Ericsson Faces Painful Overhaul


After shrinking markets, tough competition and restructuring costs pushed it to a quarterly operating loss on Tuesday, mobile telecom equipment maker Ericsson faces a long and painful overhaul.
An operating loss of 12.3 billion Swedish crowns ($1.4 billion) as previously announced provisions, writedowns and restructuring costs pushed it deep into the red, was reported by the Swedish company, which is seeking to reposition the business for growth under new chief executive Borje Ekholm.
Compared to this was a mean forecast for a 12.0 billion crown loss in a Reuters poll of analysts and a 3.5 billion crown profit in the same period last year.
While restoring profitability in its IT & Cloud unit, Ekholm wants to focus the business on lucrative core networks. Partnerships or a sale of all or part of its media unit is also being explored by it.
While the gross margin was 13.9 percent versus the 17.9 percent seen by analysts, sales came in at 46.4 billion crowns, below the consensus forecast of 47.3 billion.
Through more aggressive cost-cutting, the company reiterated its guidance to at least double 2016 margins beyond 2018.
"What we see now is a need ... to intensify our efforts further on the cost side," Ekholm said on a call with analysts, adding that this would include streamlining its portfolio.
As part of a drive to improve profitability, Ericsson cut its total workforce by almost 5,000 last year to around 111,000. He expected the steps he is taking to lead to significant profitability improvements as early as 2018, Ekholm said.
Ekholm is a veteran Ericsson board member and critics question whether he is best placed to turn the business around.
"The only positive factor is networks' underlying margin of 12 percent," said Inge Heydorn, a fund manager at Sentat Asset Management, referring to the company's main business.
"The rest is basically just more of the same, mainly a weak market," Heydorn said. Sentat does not have a position in Ericsson shares.

Ericsson, is under pressure to take greater advantage of the global surge in data traffic, enterprise networking and cloud computing and is backed by prominent Wallenberg family-backed Investor AB and Industrivarden.
With demand for next-generation 5G technology still years away, and weak emerging markets, it has been hit by a drop in spending by telecoms firms. Mounting competition from China's Huawei and Finland's Nokia has also bene faced by the company.
By announcing $1.7 billion in provisions, writedowns and restructuring costs, the company stunned investors in March.
The company said that in Ericsson's IT & Cloud business, the bulk of the provisions were related to "transformation projects" - operators needing to upgrade old systems.
Weak performance at the other units, IT & Cloud and Media, showed the need to exit unprofitable businesses, said a second tech investor, with no stake in Ericsson.
They are having a hard time as the unit is small and not growing, said sector bankers scouting the market for possible partners or buyers for the media assets. The company overpaid for media acquisitions in 2012-13 and will hardly recoup its investment, said a banker who worked for Ericsson in the past.

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