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Ericsson sees up to $1.7 billion in costs as revamp begins

LiveMint logoLiveMint 28-03-2017 Ville Heiskanen

Helsinki: 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 resizes the wireless network maker for leaner times.

Ekholm, who took over in January, is cutting costs and narrowing the company’s focus as he contends with contract losses in Italy and Russia and four straight quarters of revenue declines. Ericsson will explore options for its media business, and Ekholm will also remove a layer from top management, reducing 10 geographical business areas into five.

“For some time Ericsson has been challenged on both technology and market leadership and the group strategy has not yielded expected returns,” Ekholm said in a statement Tuesday. “To enable us to immediately take action and move with speed in execution we are today outlining our path to restoring profitability.”

‘Negative developments’

Earnings this quarter will be cut by 7 billion kronor to 9 billion kronor because of “recent negative developments related to certain large customer projects,” the company said. Restructuring charges will be about 2 billion kronor in the quarter as Ekholm accelerates cost reductions, while asset writedowns will hurt operating income by 3 billion kronor to 4 billion kronor.

Shares of Ericsson fell 2.8% to 57.5 kronor at 9:20am in Stockholm. They had added 11% this year through Monday after dropping 35% in 2016.

The new CEO has already slashed Ericsson’s dividend for the first time in eight years as he tries to reverse a sales plunge caused by fierce competition amid a slowdown in spending by wireless carriers. Huawei Technologies Co. dethroned Ericsson to become the world’s biggest supplier of mobile infrastructure in the third quarter, according to IHS Markit.

Asset sales

Ericsson is also sold a minority stake in its Iconectiv business in the US. 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.

This month, wireless carrier VimpelCom Ltd said it terminated a network 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 in Italy.

Ekholm said he sees “significant improvements” in the company’s business next year, assuming stable market conditions. Beyond that, Ericsson can at least double its 2016 operating profit margin, excluding restructuring charges, “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 CEO Hans Vestberg and blindsided investors with a massive profit warning. His main message since he took the job 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.

He has also told investors he’s focused on a long-term timeframe, rather than making decisions that will yield only short-term benefits.

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.” Bloomberg

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