Photographer: Peter Kollanyi/Bloomberg

Ericsson Turnaround Man Ekholm Hits Another Snag With Sales Miss

Updated on
  • Continued losses in IT and cloud computing weigh on profit
  • CEO Ekholm says result was far below long-term ambitions

Ericsson AB Chief Executive Officer Borje Ekholm can’t seem to catch a break, with his transformation plan showing signs of sputtering, a year in.

After Ekholm ended unprofitable contracts, took writedowns and sought a potential sale of Ericsson’s media business, investors had expected the Swedish maker of wireless networks would start showing more tangible signs of improvement.

Borje Ekholm

Photographer: Luke MacGregor/Bloomberg

Instead, fourth-quarter results showed more evidence that Ericsson’s primary business is weak and it’s struggling to turn around a loss-making IT and cloud computing business. Sales missed analysts’ estimates and Ericsson said it will hold onto 49 percent of its media business after finding a buyer for the rest. The shares fell as much as 8.6 percent, the most since Ericsson’s profit warning in July.

“Key as ever is networks and here Ericsson’s performance is poor yet again,” Neil Campling, an analyst at Mirabaud Securities Ltd. in London, said in an emailed note. Ericsson “may talk a good game of transition, transformation, improvement and a better future, but the numbers paint a clear picture that the core business remains weak and there is no evidence yet that the company can turn things around.”

Fourth-quarter sales declined 12 percent to 57.2 billion kronor ($7.28 billion), Stockholm-based Ericsson said in a statement Wednesday. Analysts had predicted 58.2 billion kronor on average. Adjusted for comparable units and currency rates, sales fell 7 percent. Adjusted operating profit of 400 million kronor missed estimates of 1.76 billion kronor.

Ekholm spent his first year as CEO trying to revive the embattled company, which has been hit by lower carrier spending and competition from Huawei Technologies Co. Ltd. and Nokia Oyj. Under Ekholm, Ericsson has ended or renegotiated unprofitable service contracts and taken 35 billion kronor in writedowns and other charges. Meanwhile, Christer Gardell’s Cevian Capital AB has amassed a 9 percent stake in the company, adding clout to the activist investor’s calls for Ericsson to cut costs deeper and faster.

Ekholm on Wednesday signaled more patience with the pace of the turnaround than investors had, saying the quarter was “in line with” overall expectations, with gradual improving performance in networks and continued significant losses in the company’s IT and cloud computing business.

Ekholm said the company will exit or complete 45 critical or non-strategic customer contracts in the digital services business, which provides IT products and software solutions, and that its actions to improve profitability in the unit are expected to generate positive effects on gross margin in the second half of this year.

“They are expected, but unacceptable,” Ekholm said of the losses in that unit. “So we clearly need to focus on turning digital services around and we will increase the speed of execution on the cost side.”

Digital Headache

Ericsson's Digital Services unit amassed more than 13 billion kronor in losses 2016-2017

Source: Ericsson

Note: adjusted operating losses

Ericsson fell as much as 8.8 percent, the steepest decline since July 18, and was down 8.7 percent to 50.88 kronor at 10:15 a.m. in Stockholm. Since Ekholm took over as CEO from Jan Frykhammar Jan. 16, 2017, Ericsson’s shares have declined 4.8 percent.

Sales in the market area covering China and Japan fell by 30 percent as carriers hold off on investments in fourth-generation mobile broadband products as they wait for governments to allocate frequencies for speedier, fifth-generation networks. Sales in North America rose 2 percent.

Ericsson’s closely watched adjusted gross margin -- the share of sales remaining after production costs -- rose to 29.9 percent last quarter, from 29.4 percent a year earlier. That was in line with analysts’ predictions. The net result in the quarter was a 18.8 billion kronor loss, burdened by earlier announced impairments and a revaluation of U.S. tax assets amounting to 15.2 billion kronor.

Ericsson reiterated that it sees the market addressed by its networks segment declining by 2 percent in 2018.

The company also announced that an almost year-long review of its media business had ended with an agreement to sell 51 percent of its Media Solutions business to One Equity Partners. Ericsson will retain a 49 percent stake, and also keep Red Bee Media, a smaller unit which provides broadcast services that Ericsson had tried to sell.

Ekholm said none of the suitors were willing to pay what Ericsson asked for Red Bee, which made an operating loss of 300 million kronor in 2017.

"Of course, I would have preferred to get a higher bid, but we didn’t,” Ekholm said. “We’re not going to give it away.”

— With assistance by William Canny

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