Turning Ericsson around will need a year or two longer

Ian Scales
By Ian Scales

Apr 25, 2017

Ericsson CEO, Börje Ekholm.                           Source: Ericsson

Ericsson CEO, Börje Ekholm. Source: Ericsson

  • Ericsson's first quarter shows more losses
  • The media business could be redirected
  • Just a few years more and new products will right the ship

Big ships take a while to turn around. Ericsson’s first quarter results, announced today, seemed just about what the analysts were expecting albeit with a slightly bigger operating loss. Essentially Ericsson is on what’s become its standard trajectory of “unsatisfactory performance” according to newish president and CEO, Börje Ekholm.

Ekholm, only took the reins in mid January, so like ‘you-know-who’ he is coming up to his first 100 days. New strategic directions are being readied against a very difficult backdrop.

“It’s difficult because we need to invest at the same time as we work on our cost structure,” he explained to analysts in a call today. He cited accelerating losses with the cloud business, and the fact that while “services are developing fairly well,  legacy products are falling off faster than we expected,” he said. Additional difficulty was experienced  with  lower IPR licensing revenues and the non-renewal of managed services contracts , leading to reduced scope in North America.

Ups and downs in Ericsson's quarter

SEK b. Q12017 Q12016 YoYchange Q42016 QoQchange
Net sales 46.4 52.2 -11% 65.2 -29%
Sales growth adj. for comparable units and currency - - -16% - -29%
Gross margin 13.9% 33.3% - 26.1% -
Gross margin excluding restructuring charges and adjusted for items affecting  comparability in Q1 2017 30.5% 33.9% - 29.4% -
Operating income -12.3 3.5 - -0.3 -
Operating income excluding restructuring charges and adjusted for items  affecting comparability in Q1 2017 1.1 4.1 -73% 4.4 -75%
Operating margin -26.6% 6.7% - -0.4% -
Operating margin excluding restructuring charges and adjusted for items  affecting comparability in Q1 2017 2.3% 7.9% - 6.7% -
Net income -10.9 2.1 - -1.6 -
EPS diluted, SEK -3.29 0.60 - -0.48 -
EPS (Non-IFRS), SEK2) -2.42 0.87 - 0.62 -
Cash flow from operating activities -1.5 -2.4 -35% 19.4 -108%
Net cash, end of period 28.3 36.5 -22% 31.2 -9%

Maybe next year

Reading between the lines Ericsson is on a waiting game - that’s just about its only alternative as previously announced writedowns and major restructurings push it into a semi-permanent red. It has, as Ekholm points out, to weather the continuing downturn in its legacy products and services until the new round of carrier spending on 5G and general network transformation really starts to kick in.

Until then there are limited options. One is to do some strategic shuffling.  Media is a classic case of two halves. The ‘legacy’ products are dragging performance down but things  should be better in 2018 when Ericsson expects its new media platforms to start picking up. Plus, it is exploring strategic opportunities. These could involve new partnerships and some divestitures. The new partnerships, it was hinted, might be sought as a means to sell product beyond Ericsson’s current customer base.

Overall it’s hoped that a more focused business strategy will result in significantly improved profitability by as early as 2018.  Beyond that Ericsson is aiming to “at least double the underlying 2016 operating margin.”

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