January 16, 2018
Limping from one financial setback to the next, Ericsson today said it would book 14.2 billion Swedish kronor ($1.8 billion) in charges after carrying out impairment testing and the revaluation of US tax assets.
The charges will mainly hit the Swedish vendor's digital services and media businesses, chewing into operating income for the final three months of 2017.
Besides booking a impairment write-down of SEK13.2 billion ($1.6 billion), Ericsson AB (Nasdaq: ERIC) took a SEK1 billion ($120 million) non-cash tax charge because of changes to US corporate income tax rates.
Ericsson is due to report full-year results on January 31.
In financial parlance, impairment essentially means an asset is not really worth as much as the books have shown, and that its accounting value needs to be adjusted accordingly.
Ericsson has basically acknowledged that some of the assets it acquired more than a decade ago have "limited relevance" and therefore no longer hold much value.
The charges include SEK12 billion ($1.5 billion) in "goodwill" -- an intangible asset that shows up on a company's balance sheet -- across the digital services and media divisions.
The tweaks to the balance-sheet numbers will not have any impact on Ericsson's cash position, as it was quick to point out, but they will dent profitability, which factors in all sorts of non-cash items like depreciation and amortization.
That will make it even harder for Ericsson to realize a target of boosting its operating margin from about 6% in 2016 to more than 12%.
Once the world's biggest equipment suppliers to communications service providers, Ericsson lost its crown to China's Huawei Technologies Co. Ltd. in 2015 and has subsequently been struggling to halt a sales decline and streamline its operations. (See Huawei: New King of the CSP Market.)
But there have been some positive signs in recent weeks, as CEO Börje Ekholm, who took charge of Ericsson a year ago, tries to reinvigorate the core networks business.
Last month, Ericsson was revealed by Light Reading to have landed a major radio access networks (RAN) deal with Deutsche Telekom in Germany, where it has replaced either Huawei or Finland's Nokia Corp. (NYSE: NOK) as one of the two RAN suppliers the operator uses. (See Ericsson Replaces Major Rival as DT Supplier in 5G Deal.)
Too often, though, Ericsson seems to be running to stand still, as U2's Bono might have warbled. Revenues shrank by 6% in the three months ending in September, to SEK47.8 billion ($5.9 billion), compared with the year-earlier quarter. Ericsson also swung from a small operating profit of SEK300 million ($37.3 million) to an operating loss of SEK4.3 billion ($530 million) over the same period.
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The latest financial setback suggests that, for all its efforts to diversify and modernize, it is still being slowly crushed by the deadweight of its legacy businesses.
Unsurprisingly, about SEK6.7 billion ($830 million) in charges have come at the underperforming media business, which Ericsson seems keen to offload. Indeed, that unit's long-term irrelevance was confirmed when Ericsson last year renamed it the "other" segment.
Perhaps more troubling is an impairment charge of SEK7.1 billion ($880 million) at the digital services unit, which Ericsson has had to defend as an essential part of its business in the face of analyst doubts.
Operators are investing in new digital technologies as they try to improve customer service and back-office systems, but many of the operational and business support systems they have taken from suppliers including Ericsson are now past their prime.
This is the second round of impairment charges that Ericsson has reported in less than a year, following a SEK15 billion ($1.9 billion) write-down in March 2017.
The investors' best hope is that Ericsson has now trimmed all the fat and that its balance sheet is now a fair reflection of market value.
They certainly appear to have taken the update in their stride, with Ericsson's share price down as little as 0.8% in mid-morning trading in Stockholm, at about SEK56 ($6.96).
Shares were priced at SEK52.75 ($6.56) this time last year, shortly after Ekholm had taken charge.
With its books and strategy in order, Ericsson can at least try to become a Viking conqueror of the nascent 5G market, and not another depressing episode of Scandi noir.
— Iain Morris, News Editor, Light Reading
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