Swedish vendor racks up massive loss and says new profitability criteria in the managed services area will wipe 4% off revenues in 2019.
Ailing Ericsson has racked up huge first-quarter losses on a further double-digit decline in sales and mounting cost problems, as self-described "rookie" CEO Börje Ekholm embarks on a mission to restore profitability at the Swedish equipment supplier and narrow its focus.
Additional expenses of 13.4 billion Swedish kronor ($1.5 billion) -- triggered by asset write-downs, restructuring charges and contract setbacks -- resulted in a net loss of SEK10.9 billion ($1.2 billion), compared with a net profit of SEK2.1 billion ($240 million) in the year-earlier period.
Revenues fell by 11%, to SEK46.4 billion ($5.3 billion), with sales declining across all of Ericsson's divisions.
Even when restructuring costs and write-downs were excluded, Ericsson's operating income tumbled 73%, to just SEK1.1 billion ($120 million), with its operating margin shrinking to just 2.3% from 7.9% a year earlier.
Q1 2017 | Q1 2016 | YoY change | |
Revenues | 46.4 | 52.2 | -11% |
−networks | 34.9 | 39.9 | -13% |
−IT and cloud | 9.5 | 9.8 | -3% |
−media | 2.0 | 2.4 | -20% |
Gross income | 6.4 | 17.4 | -63% |
Gross margin | 13.9% | 33.3% | -19.4 percentage points |
Operating income | -12.3 | 3.5 | − |
Operating margin | -26.6% | -6.7% | − |
−networks | -2.0% | 14.0% | − |
−IT and cloud | -94.0% | -20.0% | − |
−media | -143.0% | -13.0% | − |
Net income | -10.9 | 2.1 | − |
Source: Ericsson. |
Investors had been alerted to the cost hit during Ericsson's recent strategy update but the first-quarter figures were even worse than markets had feared: Ericsson's share price opened 3% lower in Stockholm and was trading down more than 4% at the time of publication. (See Ericsson Tightens Focus, Warns of $1.7B Q1 Hit.)
With its main networks market in decline, Ericsson AB (Nasdaq: ERIC) has been losing out to China's Huawei Technologies Co. Ltd. , which last year overtook it to become the world's biggest telco supplier, and has failed to make a success of new ventures, including a push into the media and cloud markets. (See Huawei: New King of the CSP Market.)
Ekholm, who took charge at the beginning of the year, has set a target of doubling Ericsson's 2016 operating margin to about 12% in 2019 or later and announced plans for more dramatic cost cutting than was previously envisaged. (See Ekholm's Vision of Slimmer Ericsson Lacks Detail & Dazzle.)
He is also exploring "options" for the company's media and cloud hardware businesses, implying those units will eventually get sold.
"Our performance is unsatisfactory and that highlights the need for the new strategy we presented a few weeks ago," Ekholm told analysts during an earnings call this morning. "We need to focus on adjusting our cost structures and at the same time invest to secure our long-term competitiveness."
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Ericsson had previously been aiming to reduce annual operating costs from about SEK63 billion ($7.2 billion) in 2014 to a run rate of SEK53 billion ($6 billion) by the second half of this year.
It has now abandoned that target, saying it was not "yielding sufficient results," but declined to provide details of its latest ambitions or say what its margin goal means for staff numbers, which fell from 111,464 in December to 110,898 in March.
Annual operating expenses were down to about SEK56.3 billion ($6.4 billion) at the end of March, but Ericsson now thinks restructuring will cost it between SEK6 billion ($680 million) and SEK8 billion ($910 million) this year, up from a previous estimate of just SEK3 billion ($340 million).
Next page: Slimline Ericsson
Slimline Ericsson
What looks certain is that Ericsson will be a somewhat smaller business in the next couple of years: Besides eyeing sales of its underperforming businesses, Ekholm today indicated that Ericsson would jettison managed services contracts that do not meet new profitability criteria.
That is expected to wipe about SEK10 billion ($1.1 billion) off revenues in 2019 -- a figure that represents more than 4% of sales last year.
"We have contracts that are not profitable and we will approach them and try to make them profitable or not extend them," said Ekholm. "It is about being stricter in the way we price contracts to make sure they are profitable at the end of the day."
Besides complaining about a fall in revenues from intellectual property rights, and the usual weakness in the mobile broadband market, Ericsson blamed the pruning of a managed services contract in North America -- which seems likely to be with mobile operator Sprint Corp. (NYSE: S) -- for some of the sales decline at its networks business in the first quarter.
Even so, Ekholm insisted the networks division had turned in a "solid performance" during the first three months of the year, stabilizing its market share after several quarters of decline and registering a gross margin of about 31%, up from 27% in the fourth quarter of 2016.
The same could not be said of the media business, or the IT and cloud unit, with results at these operations worse than expected.
"The legacy products are falling off faster than anticipated and we need to be more aggressive in accelerating [sales of] new products," said Ekholm. "At some point we should be able to ramp up new products because they are competitive and we see that in the market, but there is a period where sales will suffer a bit."
Ekholm also downplayed analyst suggestions that Ericsson could look to sell the underperforming OSS/BSS division, which forms a key part of the IT and cloud unit.
"We have a strong historic presence in that area and our view has not changed due to the first quarter," he said. "What I do think is that we need to be more aggressive and focused on actions we must take to improve profitability." (See Ericsson Must Hit M&A Trail to Boss B/OSS – Analyst.)
Ericsson is sticking to guidance that its main radio access networks market will shrink by 2-6% this year but is confident it can improve profitability in 2018 and ultimately double the operating margin to about 12%.
— Iain Morris, , News Editor, Light Reading
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