Ericsson's Q1 Even Worse Than Feared

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.

Table 1: Ericsson's Headline Q1 Results (SEK Billion)

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

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James_B_Crawshaw 4/25/2017 | 2:02:08 PM
Re: That is a huge lost! Simmer down!

The consensus is still for an adjusted net income (before all the restructuring and write offs) of SEk8bn this year (US$900m) which is the same as 2016 and significantly better than the SEK25bn loss in 2002 and the SEK11bn loss in 2003 (also before "one time" items). 

There's still life in Lars Magnus yet. 

They need to get rid of that cloud hardware business though. 
Joe Stanganelli 4/25/2017 | 1:54:51 PM
Ericsson Ericsson's issues long predate Ekholm.  In any case, for the long term, I'm relatively unconcerned.  I'd be on the lookout for a pivot within the next six quarters.
sarcher60555 4/25/2017 | 10:45:07 AM
That is a huge lost! End of an era.
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