Ericsson’s struggles continue as new CEO promises gradual change

Ericsson sign (ericsson)
Ericsson's full-year sales decreased by 10% mainly due to weaker demand for mobile broadband. Image: Ericsson

The bad news just keeps coming for Ericsson, which today reported a fourth-quarter net loss of $181 million as sales were down 10% for the full year 2016. This follows several tough quarters and further cost-cutting plans.

“The negative industry trends remained in the fourth quarter,” said a statement from Ericsson President and CEO Börje Ekholm, who assumed the position on Jan. 16. “Profitability declined YoY following lower IPR licensing revenues mainly due to last year's agreement with Apple as well as increased restructuring charges.”

Despite the struggles, Ericsson stock jumped as much as 7% as its fourth-quarter revenue actually came in higher than analysts had predicted, Bloomberg reported, noting that in his first major decision, Ekholm slashed the dividend for the first time in eight years, giving him a cash cushion as he tries to reverse the negative sales. 

RELATED: Ericsson to slash 3,000 jobs in Sweden

Ekholm, who replaced ousted CEO Hans Vestberg last year, said there are things the company can do to make it more competitive and he asked for patience. “It may be disappointing that we don’t stand here pointing out exactly what we’re going to do, but I think it’s more important to execute on what we do and that requires alignment internally,” the new CEO said, according to Bloomberg. “Bear with us, we will get there.”

Ericsson said a number of markets in 2016, in regions such as Latin America, the Middle East and Africa, were impacted by a weak macroeconomic environment with a negative effect on mobile broadband investments.  

Still, segment networks sales increased by 39% quarter-over-quarter, and its new radio platform, Ericsson Radio System (ERS), represented almost 15% of total deliveries of radio units for 2016. The company said the rollout of the new platform is gradually ramping up.

At its Investor Update event in November, Ericsson estimated the Radio Access Network (RAN) equipment market would decline by 10% to 15% in 2016 and further decline by 2% to 6% in 2017. At the same time, IHS Markit declared Ericsson had been “dethroned” in the third quarter as king of the macro 2G/3G/LTE radio market by Huawei, leaving Ericsson at No. 2 and Nokia close behind.

RELATED: Ericsson loses macro 2G/3G/LTE crown to Huawei in Q3: IHS

While Ericsson focuses on profitability, it looks as though challenges will continue. Losses are expected to continue through 2017 as lower capex outlays pressure results, according to Technology Business Research (TBR) analyst Patrick Filkins. “With market conditions set to persist through 2017, TBR expects Ericsson to adjust its Cost & Efficiency program goals, with additional headcount reductions forthcoming,” he wrote in a research note.

While cost-cutting is likely to be top-of-mind in the coming months, Ericsson’s targeted growth areas (IP, cloud, OSS/BSS and Media) have yet to generate the revenue required to offset lower LTE RAN sales, he noted. Most notably, Support Solutions, which contains Ericsson’s OSS/BSS and Media sales, declined 39.5% year-over-year, which TBR attributes to lower legacy sales and large mergers by customers, which reduced Ericsson’s addressable market and revenue opportunities.

With a lull in operator capex expected between now and commercial, standards-based 5G implementations in 2020, RAN suppliers are likely to see revenue and margins contract in 2017, Filkins said. While revenues will remain challenged until the 5G air interface standards are finalized, suppliers are constructing 5G roadmaps, with the goal being to pull revenue ahead by tethering NFV, SDN, cloud and LTE enhancements to forthcoming 5G implementations.