Ericsson's Q1 Even Worse Than Feared

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, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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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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