After another rough quarter, Ericsson vows to cut costs but needs to remain competitive in 5G

Ericsson called its first-quarter results "unsatisfactory" and says it will intensify efforts to reduce costs. (Ericsson)

Having just reported a first-quarter loss of about $1.4 billion, Ericsson continues to find itself in the predicament of having to cut costs while at the same time make investments in 5G to remain competitive.

Newish chief executive Borje Ekholm told Bloomberg TV that it’s sort of like having to put one foot on the gas pedal and the other on the breaks as it seeks to cut costs in some areas but invest in others. The company foresees some higher costs on a temporary basis and is also reviewing its managed services contracts to make them more profitable.

First-quarter sales, adjusted for currency, decreased 16% year-over-year in part due to lower IPR licensing revenues. The company’s gross margin declined to 30.5% from 33.9% a year earlier, mainly due to lower the IPR licensing revenues.

Ericsson’s networks business, which makes up about three-fourths of its overall business, delivered solid results despite lower sales, but losses really piled up in IT, cloud and media. IT and cloud remains a strategic area for Ericsson as its customers invest in network architectures based on software.

The company is still anticipating a 2% to 6% decline in the RAN equipment market in 2017 and then it’s expected to flatten out in 2018.

Ericsson said networks sales declined year-over-year due to lower investment levels in certain markets, lower IPR licensing revenues and a renewed managed services contract with reduced scope in North America. (The company last year renewed parts of its managed services partnership with Sprint.)

The new Ericsson Radio System platform contributed to improving profitability and stabilizing the market share position after several years of decline, the company said.

Last month, Ericsson announced that it will pursue a more focused business strategy to revitalize technology and market leadership, improve group profitability and enable customer success. The overall strategy is to enable service providers to expand their business across industries and into new profit pools, leveraging the potential of 5G, IoT and cloud.

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Actions to turn the business around include accelerating the introduction of the new products, streamlining the services organization and tightening the contract scoping.

“We will continue to sell complete solutions in telecom core, OSS and BSS, including hardware, software and services,” the company said in its earnings release. “However, we are seeking alternatives for our IT cloud infrastructure hardware business to gain necessary scale to ensure that we can offer competitive solutions to our customers. Tangible improvements in profitability are expected during 2018.”

Ekholm took the reins in January, replacing Hans Vestberg, who has since joined Verizon as executive vice president for the Network and Technology team, reporting directly to CEO Lowell McAdam.

Ericsson posted a loss of $181 million in the fourth quarter of 2016 as the Swedish vendor continued to struggle with slowing 4G buildouts and increased competition worldwide from rivals including China’s Huawei and Finland’s Nokia.