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Ericsson suffers first net loss for four years

Slowdown in networks and radio is not offset by new revenue streams; reduction of Sprint deal could add pain to the current quarter

Following its shock profit warning, Ericsson’s bad third quarter results came as no surprise, though the Swedish vendor reported a net loss for the first time in four years.

As when it issued its warning earlier in the month, Ericsson blamed weak global demand and the inadequacy of its ongoing cost-cutting program to boost profits. It has now stepped up that program as it searches for a new CEO, having ousted Hans Vestberg in July.

Acting CEO Jan Frykhammar told analysts that the difficult conditions would prevail for the next two or three quarters and added another dose of pain, warning that a  “renegotiation” of a large managed services contract in the US would impact the current fourth quarter. It is assumed that the contract in question is Ericsson’s $5bn, seven-year deal which was signed with Sprint in 2009.

Third quarter revenues were down 14% year-on-year to SEK51.1bn ($5.7bn) while operating income crashed by 93% to SEK300m ($33.7m). The net loss was SEK200m ($22.5m), a reversal of a year-ago profit of SEK3.1bn.

The main problems are in “networks and radio”, said Frykhammar, saying “there we have a decline of close to 20%”. The services business was the biggest revenue generator but that has driven down gross margin, from 33.9% to 28.3%.

The vendor has been criticized by shareholders for the slow results of its turnaround program. Vestberg put a visionary plan in place, combining cost cutting with a focus on several targeted growth businesses, and a landmark alliance with Cisco to improve Ericsson’s position in enterprise markets. However, the profits wipe-out indicates that the cost-cutting has not been radical enough; the Cisco deal has yet to deliver major visible results; and the Q3 results show that growth in the new businesses is too slow to offset decline elsewhere. The cloud, IP and BSS/OSS activities accounted for just 20% of the total and only grew by 3% year-on-year.

Ericsson is in danger of frustrating investors with an ‘always jam tomorrow, never jam today’ approach. Having promised results from its cloud and IP activities, which are only slowing materializing, Frykhammar is now pinning his hopes on 5G. The company is developing a new platform which will support 4G enhancement, 5G migration and new services for carriers and other customers. “We are making important changes to the product portfolio at the moment,” said Frykhammar. “That is about 10% of volumes but next year more than 50% of all deliverables will be from the new product platform.”

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