Ericsson to take large provisions as new CEO sets out strategy

Helsinki

ERICSSON AB will book as much as 15 billion Swedish kronor (S$2.4 billion) in extra costs in the first quarter as new chief executive officer Borje Ekholm resizes the wireless network maker for leaner times.

Mr 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 four straight quarters of revenue declines. Ericsson will explore options for its media business, and Mr 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," Mr Ekholm said on Tuesday. "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 seven billion kronor to nine billion kronor because of "recent negative developments related to certain large customer projects", the company said. Restructuring charges will be about two billion kronor in the quarter as Mr Ekholm accelerates cost reductions, while asset write-downs will hurt operating income by three billion kronor to four billion kronor.

Shares of Ericsson fell 2.8 per cent to 57.5 kronor at 9.20am in Stockholm. They had added 11 per cent this year through Monday after dropping 35 per cent in 2016.

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 Technologies Co dethroned Ericsson to become the world's biggest supplier of mobile infrastructure in the third quarter, according to IHS Markit.

Ericsson is also sold a minority stake in its Iconectiv business in the US. Restructuring charges for this year will be six billion kronor to eight billion kronor, up from a previous estimate of three billion kronor, Ericsson said.

This month, wireless carrier VimpelCom Ltd said that 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 Holdings Ltd in Italy.

Mr Ekholm said that 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, Natixis analyst Stuart Jeffrey said in a note. BLOOMBERG