Ericsson Tightens Focus, Warns of $1.7B Q1 Hit
Ericsson's new CEO, Börje Ekholm, has unveiled the Swedish giant's new business strategy, one that is built around the vendor's traditional strengths in mobile networks, backed up by professional services, supporting software (including virtualization) and the development of Internet of Things (IoT) platforms.
There are, however, some strategic sacrifices. Ericsson says it is exploring "options" for its media and cloud hardware assets, hinting at a potential sale of the struggling units. (See Ericsson Presents New Business Strategy.)
With the new business strategy comes a revamp of the management team, though the change is more in structure and designated responsibilities than in personnel. (See Ericsson Unveils New Management Team .)
The much-anticipated update comes after Ekholm took charge of the Swedish vendor at the start of the year and is aimed at returning Ericsson AB (Nasdaq: ERIC) to growth and healthy profitability following a torrid few months in which the company has lost market share to rivals, Ekholm acknowledged today. (See Loss-Making Ericsson Still Short on Vision and Ericsson's Ekholm Trumpets 5G Role But Still Lacks Plan.)
During a conference call with analysts, Ekholm said the ultimate profitability target was "at least double" the overall group margin that Ericsson reported last year, when the company's operating margin, minus restructuring charges, was 6.2%.
In the short term, the pain is likely to persist. Besides tightening its focus, Ericsson this morning revealed that it would book up to 15 billion Swedish kronor ($1.7 billion) in additional costs in the January-to-March quarter -- equating to about 7% of sales last year -- because of writedowns at its media and IT and cloud businesses, along with "negative developments related to certain large customer projects."
Ericsson appears to have suffered a couple of major setbacks since December last year. In Italy, it is reported to have lost a contract to China's ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763) to manage networks for Hong Kong's Hutchison and Russia's VimpelCom, which are merging their Italian operations, while in Russia VimpelCom Ltd. (NYSE: VIP) is said to have terminated a similar deal with Ericsson, opting to use Huawei Technologies Co. Ltd. instead. (See ZTE Suffers $340M Net Loss on US Fine and VimpelCom to Pioneer 'Multivendor' NFV; Downbeat on 5G.)
"We are not commenting on what contracts," said Ekholm, when pressed on the specifics of the negative customer developments. "On market share, we know that over the last few years we've lost market position and we've lost market share."
The figure of up to SEK15 billion ($1.7 billion) for additional first-quarter costs includes SEK3-4 billion ($340-460 million) in impairment charges, SEK7-9 billion ($800 million to $1.03 billion) relating to negative customer developments and another SEK2 billion ($230 million) in extra restructuring charges.
Ericsson said that restructuring charges over the whole of 2017 would rise to about SEK6-8 billion ($680-910 million), up from a previous estimate of just SEK3 billion ($340 million), and that the company would stop providing guidance on overall operating expenditure.
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