Loss-Making Ericsson Still Short on Vision

Running to stand still
Even on the efficiency front, Ericsson is struggling. Under its current strategy, it is trying to reduce the annual "run rate" of operating expenses from SEK63 billion ($7.1 billion) in 2014 to SEK53 billion ($6 billion) by the second half of this year. That initiative appears to be on track, with full-year operating expenses falling to SEK56.4 billion ($6.4 billion) last year. And yet, even excluding restructuring charges, Ericsson's gross margin shrank to 29.4% in the fourth quarter, from 36.6% a year earlier, due to the sales slump.

Ericsson attributed that slump partly to a sharp fall in licensing revenues -- down 31% for the full year, to SEK10 billion ($1.1 billion) -- following the increase it witnessed in 2015 after reaching a major patents agreement with Apple Inc. (Nasdaq: AAPL).

"The revenue stream from IPR [intellectual property rights] is falling due to unlicensed actors gaining market share," said Ekholm. "That puts our income under pressure but we do have a strong IPR portfolio that could be the basis for future growth and new business models."

The company has now set a "baseline" for IPR business of SEK7 billion ($790 million) annually, with Ekholm saying it plans to pursue "non-compliant" actors as well as new licensing models.

The desire to boost revenues from licensing seems to mirror the ambition of Finnish rival Nokia Corp. (NYSE: NOK), which is similarly focused on further monetizing its intellectual property. But SEK7 billion ($790 million) would represent just 3.1% of Ericsson's total sales last year. Jan Frykhammar, Ericsson's executive vice president (formerly CFO and acting CEO following Vestberg's departure), also conceded that industry developments continue to put pressure on royalty rates.

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Ignoring licensing and stripping out foreign exchange effects, revenues fell by 6% at Ericsson's networks business, which accounts for about one half of overall sales, and by 7% at the global services division, responsible for about 45% of the total. Ericsson flagged double-digit declines in the regions of North America, Latin America and Europe but witnessed growth in the Middle East, North East Asia and South East Asia.

Of particular concern was a decline in revenues from Ericsson's "targeted" areas, which represent about a fifth of total sales and are supposed to cover the parts of the business that are growing, such as cloud networks, TV and media services and IT systems. Revenues dropped by 7%, compared with the year-earlier period, after rising by 3% on a year-on-year basis in the third quarter. And across the full year, they were "flat." In its results statement, Ericsson blamed "lower sales in OSS [operational support systems] and BSS [business support systems] following the transition from legacy to new products," for the fourth-quarter decline.

One potential bright spot from both a sales and revenue perspective is a new radio platform simply branded Ericsson Radio System (ERS), which the Swedish vendor appears to regard as a critical step on the journey to 5G.

Designed partly to facilitate easier, software-based network upgrades in future, ERS accounted for about 15% of the total deliveries of radio units in 2016, but Ericsson sees the figure rising to 50% this year. That should help the company to improve its profitability, according to Carl Mellander, Ericsson's acting CFO.

"ERS is a key enabler to bring down the cost of sales and push gross margins up," he said. "It will have a positive impact on the service side because of the serviceability of the suite."

— Iain Morris, , News Editor, Light Reading