Ericsson Sees Up to $1.7 Billion in Costs as Revamp Begins
Ericsson will book as much as 15 billion kronor ($1.7 billion) in extra costs in the first quarter as new CEO Borje Ekholm cuts back the wireless network maker after four straight quarters of declining revenue, according to Bloomberg.
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 a prolonged industry slowdown. 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. “To enable us to immediately take action and move with speed in execution we are today outlining our path to restoring profitability.”
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.
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 dethroned Ericsson to become the world’s biggest supplier of mobile infrastructure in the third quarter, according to IHS Markit.
This month, wireless carrier VimpelCom 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 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.