Ericsson Q4 results hit by uncertainty of T-Mobile/Sprint deal

Ericsson CEO Börje Ekholm
Ericsson CEO Börje Ekholm said the company is tracking well toward its targets for 2020 and 2022. (Ericsson)

Uncertainty related to the proposed merger of T-Mobile and Sprint reduced sales in North America for Ericsson during the fourth quarter of 2019, but that was offset by demand in Japan and Saudi Arabia.

For the full year 2019, sales increased by 4% across its markets, with the networks segment growing by 6%. It now has 79 contracts for 5G and is live in 24 5G networks.

T-Mobile and Sprint are awaiting a decision by U.S. District Court Judge Victor Marrero about whether they will be allowed to merge after more than a dozen states filed suit to block the deal. A decision is expected next month. 

Asked about the deal impact during a conference call today, Ericsson CEO Börje Ekholm said uncertainly around the proposed T-Mobile/Sprint merger clearly affected the fourth-quarter sales, but whichever way it goes, once there is a decision, that will take away uncertainty and lead to spending. There’s the shift from 4G to 5G that's happening and continued data growth, so the need to address capacity hasn’t really changed.

Of course, the investments will vary depending on the outcome, he said, and that’s why it’s hard to speculate about where investments will be made.  

“We have tried to make Ericsson less exposed to our geographic mix and mix between markets, and mix between technologies in that sense, and business segments,” he said. “I think, when you look at the fourth quarter, you see an unusually low North American share. And we still have sequentially a strong gross margin, so I think it indicates that we have a much less geographic mix or business mix exposure than we've ever had in the past. That's what we are going to continue to work on.”

5G antenna portfolio

The Swedish vendor closed on the acquisition of Kathrein’s antenna and filter technology division last fall, and that business also was affected by U.S. deal uncertainty. But it had some other things going on as well. For example, Ekholm said when they took over the business, Ericsson didn’t have the permits to operate in the factory so it actually stopped supply in the beginning of the quarter.

“We will always ensure the safety of our—of the people working for us. So for us, we did not want to operate the facility without fire permits. So that's one effect we had in Q4,” he said.

RELATED: Ericsson closes acquisition of Kathrein

Ericsson is now working on integrating Kathrein into Ericsson, and then establishing and building a portfolio of antenna solutions, but the contribution during the fourth quarter was negative on its operating margin. Moving into 2020, Ericsson expects to have a loss for the full year from that business as it’s investing in building a strong road map and a bigger 5G antenna product offering.

“We’re establishing a very strong competitive position and competitive offering in antenna solutions,” he said, adding that it’s probably going to take 12 to 18 months before that’s achieved, but it will be even more important in the 5G world when Ericsson can offer fully integrated site solutions.

He also noted Ericsson was able to reach an agreement with the U.S. Department of Justice (DoJ) and U.S. Securities and Exchange Commission (SEC). Ericsson last year announced it would apportion $1.23 billion in its third quarter 2019 earnings to cover an estimated fine of $1 billion, plus other related costs, related to a corruption investigation by the SEC and DOJ. The investigation involved Ericsson's compliance with the U.S. Foreign Corrupt Practices Act (FCPA).

RELATED: Ericsson plans to take $1.23B hit for corruption fine in Q3

In written comments (PDF), Ekholm said the resolution of the SEC and DoJ investigations highlights serious shortcomings in its otherwise proud history.

“The events described in the resolution are totally unacceptable,” he stated. “However, the resolution represents an important step for Ericsson. We are now fully focused on strengthening the company and making sure we are equipped to deal with compliance challenges. We have already put in place many important changes to our Ethics and Compliance program, including adding further compliance and assurance competence as well as strengthening our third-party management, leadership vetting and internal controls. This work will not stop; our zero-tolerance policy requires constant oversight and renewal, and we are confident that we are on the right path.”

Shares down 7%

Ericsson’s shares were trading down more than 7% at one point today, at around $8.32. Zacks Equity Research described the fourth-quarter results as unimpressive, whereby the top line and the bottom line missed the respective Zacks Consensus Estimate. However, both figures improved on a year-over-year basis.

Net income for the fourth quarter was $460.8 million or 15 cents per share compared to a net loss in the prior-year quarter. The improvement was driven mainly by higher sales and lower cost of sales, the firm said. The bottom line, however, missed the Zacks Consensus Estimate by a penny.