Photographer: Peter Kollanyi/Bloomberg

Ericsson Sees Up to $1.7 Billion in Costs as Revamp Begins

  • Company cites ‘recent negative developments’ for some expenses
  • New CEO Ekholm begins strategic overhaul to revive company

Ericsson AB will book as much as 15 billion kronor ($1.7 billion) in extra costs in the first quarter as new Chief Executive Officer Borje Ekholm pares operations at the wireless network supplier after four straight quarters of falling revenue.

Ekholm, in his first major operational moves since taking over in January, is whittling down Ericsson’s structure to cope with a prolonged industry slowdown. He’s considering a sale of the media business that was a favorite of his predecessor, along with a unit that sells hardware for cloud computing, while eliminating a management layer and halving the number of regional divisions to five.

Borje Ekholm

Photographer: Chris Ratcliffe/Bloomberg

“We have been spreading ourselves too thinly, which has led to our market and technology position being challenged,” Ekholm said on a conference call Tuesday. “Today is the first step in a strategic repositioning of the company.”

Brought in 10 weeks ago by the Wallenberg family whose Investor AB is Ericsson’s largest shareholder, Ekholm is embarking on a mission to right the ailing network-equipment maker amid fierce competition and a spending slowdown by wireless carriers. Tuesday’s moves effectively void a setup conceived by former CEO Hans Vestberg and fully implemented as reporting structure this quarter. Ekholm has already slashed Ericsson’s dividend for the first time in eight years.

‘Negative Developments’

The Stockholm-based company said in a statement Tuesday its earnings this quarter will be cut by 7 billion kronor to 9 billion kronor because of cost overruns in a few large projects. Ekholm described the problems as isolated and said they don’t affect the company’s outlook.

“These projects are an important part of our strategy, but we have taken provisions for the extra costs,” the CEO said. “Things like that happen when you deliver new technology.”

Read more: Gadfly’s take on the task facing Ekholm

Ericsson has undertaken a series of restructuring programs over the last decade, reporting total costs of at least 56 billion kronor. That figure excludes measures taken at joint ventures such as ST-Ericsson and Sony Ericsson, the mobile phone maker that Sony Corp. took full ownership of in 2012.

Restructuring charges will be about 2 billion kronor in the quarter as Ekholm strives to reduce inefficiency and avoid duplication across the company. He said he plans no big job-elimination announcements, and wasn’t specific about the cost-cutting moves. Asset writedowns of the media, IT and cloud businesses will hurt operating income by 3 billion kronor to 4 billion kronor.

Beyond 2018, Ekholm aims to double Ericsson’s adjusted operating margin, helped by increasing sales of its recently introduced Ericsson Radio System as well as restructuring.

Shares of Ericsson fell as much as 4.6 percent before reversing course. They were up 0.3 percent to 59.35 kronor at 11:50 a.m. in Stockholm. They had added 11 percent this year through Monday after dropping 35 percent in 2016.

Asset Sales

Ericsson’s media business, which counts the BBC among clients and provides equipment for video streaming and processing, was touted by Vestberg as an important new revenue generator, reaching beyond the traditional customer base of telecom operators. Ericsson sold a minority stake in its Iconectiv business in the U.S. earlier this year.

Restructuring charges for this year will be 6 billion kronor to 8 billion kronor, up from a previous estimate of 3 billion kronor, Ericsson said.

Huawei Technologies Co. dethroned Ericsson to become the world’s biggest supplier of mobile infrastructure in the third quarter, according to IHS Markit. This month, wireless carrier VimpelCom Ltd. said it terminated a contract with Ericsson early, picking Huawei as a partner to manage its phone networks in Russia. Ericsson also recently lost a contract to manage the Italian network of VimpelCom’s joint venture with CK Hutchison Holdings Ltd.

Ekholm said he sees “significant improvements” in the company’s business next year, assuming stable market conditions. Long-term, Ericsson can at least double its 2016 adjusted operating profit margin of 6 percent “on a sustainable basis,” he said. Such an increase is already baked into analysts’ average margin estimates for 2019, Natixis analyst Stuart Jeffrey said in a note.

A former McKinsey consultant, Ekholm was appointed to right Ericsson after a troubled 2016, in which the company ousted Vestberg and blindsided investors with a massive profit warning. His main message since taking over from interim CEO Jan Frykhammar has been that the company needs to focus on profitability and cash flow to be able to invest in technologies that will be crucial for growth in the future.

Progress could be made faster, according to Janardan Menon, an analyst with Liberum Capital. The new strategy doesn’t go far enough, and any sale of Ericsson’s media business could be drawn out, Menon said in a research note.

“The strategy appears to be mainly incremental rather than radical, and the currently low levels of profitability needed bigger actions from management,” Menon said. “There is no real change in the main Networks and Services business.”

— With assistance by Kasper Viita, and Niklas Magnusson

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