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Ericsson Stuck in Loss-Making Rut, Offloads Majority Stake in Media Unit

Ericsson revealed early Wednesday that it had failed to sell the entirety of its media business, instead offloading a 51% stake, and that it had slashed more than 10,000 jobs since October as it suffered another sharp fall in sales and saw losses widen in the final quarter of 2017. Ericsson has now reported five consecutive quarters of operating losses and is not predicting when it might reverse that trend. (See Ericsson Reports Q4, Full Year and Ericsson Offloads Media Solutions to Private Equity Firm.)

Citing weak 4G sales in China, the struggling Swedish equipment maker reported a 12% drop in revenues, to 57.2 billion Swedish kronor ($7.3 billion), compared with the year-earlier period, with turnover down 7% in constant-currency terms.

The company's operating loss grew from SEK300 million ($38 million) to SEK19.8 billion ($2.5 billion) over the same period. With analysts polled by Reuters expecting a loss of about SEK17.3 billion ($2.2 billion), Ericsson's share price was trading down 9% in Stockholm at the time of publication, at about SEK50.82 ($6.48).

Table 1: Ericsson's Headline Results (SEK billions)

Q4 2017 Q4 2016 YoY change 2017 2016 YoY change
Net sales 57.2 65.2 -12.3% 201.3 222.6 -9.6%
Gross margin 21.0% 26.10% -5.1 percentage points 22.1% 29.8% -7.6 percentage points
Operating income -19.8 -0.3 N/A -38.1 6.3 N/A
Operating margin -34.5% -0.4% -34.1 percentage points -18.9% 2.8% -21.7 percentage points
Net income -18.9 -1.6 N/A -35.1 1.9 N/A
Cash flow from operating activities 11.2 19.4 -42.3% 9.6 14 -31.4%
Net cash, end of period 34.7 31.2 11.2% 34.7 31.2 11.2%
Source: Ericsson

Despite the headline results, executives insisted that restructuring efforts were starting to pay off, with Ericsson's adjusted gross margin -- a closely watched metric -- edging up to 29.9% in the fourth quarter, from 29.4% a year earlier.

Hit by a downturn in its network equipment markets, Ericsson AB (Nasdaq: ERIC) has also struggled to fend off competition from Chinese rivals Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763). CEO Börje Ekholm, who took charge of the company this time last year, is determined to restore profitability and focus on a smaller number of core activities, including the development of 5G network offerings. (See Has the 5G Upturn Begun?, Ericsson Goes Dotty for 5G Small Cells and Ekholm's Vision of Slimmer Ericsson Lacks Detail & Dazzle.)

Still Smiling
Ericsson CEO Borje Ekholm faces concern that he is backtracking on strategic objectives.
Ericsson CEO Börje Ekholm faces concern that he is backtracking on strategic objectives.

His current target is to boost Ericsson's adjusted operating margin to more than 10% in 2020 from just 1% in 2017.

Having put Ericsson's media and cloud hardware businesses up for "review" last year, Ekholm today said that a 51% stake in the media solutions unit would be sold to a private equity company called One Equity Partners. (See Ericsson Moves Closer to Media Business Sale – Report.)

Ericsson did not disclose the financial terms of that agreement but said that employees and contractors would transfer to the new company upon closing of the agreement in the third quarter of 2018.

It will retain Red Bee Media, formerly its broadcast and media services outfit, after failing to attract worthy bids for the unit, and heralded improvements in profitability at that business in the fourth quarter.

On the organizational and leadership fronts, Ericsson revealed that it was setting up a new "emerging markets" business focused on innovation. Asa Tamsons, currently a partner at consulting group McKinsey, will lead that division from April this year. (See Ericsson Revamps Structure, Shuffles Top Team.)

Ericsson also said it would reduce its number of group functions from six to four, with the new emerging markets business to absorb technology and research functions.

There is also upheaval at the long-suffering digital services business area, which is to lose Ulf Ewaldsson as leader. Jan Karlsson, who heads up Ericsson's business support services, will become acting boss of digital services until Ericsson finds a permanent replacement. Ewaldsson will become an advisor to Ekholm but lose his seat on Ericsson's executive team. (See Ericsson's Ewaldsson Takes Aim at Telco 'Conservatism'.)

During an earnings call about the latest results, Ekholm insisted there had not been any kind of strategic backtracking after one analyst expressed disquiet about Ewaldsson's departure and Ericsson's failure to offload media assets.

"If we take the media solutions, we wanted to maximize the ownership stake without providing more capital because it is strategically important for customers," he said. "On Red Bee, I would have preferred to get a higher bid and we didn't and will not just give it away.

"Ulf [Ewaldsson] has done a really good job on products and the R&D function and we've got stability in customer projects," Ekholm added. "Now Ulf elects to leave and we've put in Jan to focus on the execution and cost side. This is the next step in the turnaround."

Next page: Profitability pain

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