LONDON/STOCKHOLM Mobile telecom equipment maker Ericsson faces a long and painful overhaul after shrinking markets, tough competition and restructuring costs pushed it to a quarterly operating loss on Tuesday.
The Swedish company, which is seeking to reposition the business for growth under new chief executive Borje Ekholm, reported an operating loss of 12.3 billion Swedish crowns ($1.4 billion) as previously announced provisions, writedowns and restructuring costs pushed it deep into the red.
That compared with a 3.5 billion crown profit in the same period last year and a mean forecast for a 12.0 billion crown loss in a Reuters poll of analysts.
Ekholm wants to focus the business on lucrative core networks while restoring profitability in its IT & Cloud unit. It is also exploring partnerships or a sale of all or part of its media unit.
Sales came in at 46.4 billion crowns, below the consensus forecast of 47.3 billion, while the gross margin was 13.9 percent versus the 17.9 percent seen by analysts.
The company reiterated its guidance to at least double 2016 margins beyond 2018 through more aggressive cost-cutting.
"What we see now is a need ... to intensify our efforts further on the cost side," Ekholm said on a call with analysts, adding that this would include streamlining its portfolio.
Ericsson cut its total workforce by almost 5,000 last year to around 111,000 as part of a drive to improve profitability. Ekholm said he expected the steps he is taking to lead to significant profitability improvements as early as 2018.
Critics question whether Ekholm, a veteran Ericsson board member, is best placed to turn the business around. They say a more varied, international management team at rival Nokia was key to its revival.
Ericsson backers say the company has changed the guard, albeit internally, and is doing a good job of promoting a new generation of managers.
Shares were down 3.2 percent at 1204 GMT, reflecting investor scepticism. UBS analysts expect 2017 EBIT to fall by more than 3 percent and the stock to decline by the same amount.
"The only positive factor is networks' underlying margin of 12 percent," said Inge Heydorn, a fund manager at Sentat Asset Management, referring to the company's main business.
"The rest is basically just more of the same, mainly a weak market," Heydorn said. Sentat does not have a position in Ericsson shares.
Ericsson, backed by prominent Wallenberg family-backed Investor AB and Industrivarden, is under pressure to take greater advantage of the global surge in data traffic, enterprise networking and cloud computing.
It has been hit by a drop in spending by telecoms firms, with demand for next-generation 5G technology still years away, and weak emerging markets. It also faces mounting competition from China's Huawei and Finland's Nokia.
The company stunned investors in March by announcing $1.7 billion in provisions, writedowns and restructuring costs.
The bulk of the provisions were related to "transformation projects" - operators needing to upgrade old systems - in Ericsson's IT & Cloud business, the company said.
A second tech investor, with no stake in Ericsson, said weak performance at the other units, IT & Cloud and Media, showed the need to exit unprofitable businesses.
Sector bankers scouting the market for possible partners or buyers for the media assets said they are having a hard time as the unit is small and not growing. A banker who worked for Ericsson in the past said the company overpaid for media acquisitions in 2012-13 and will hardly recoup its investment.
Bankers said Media solutions - which provide consulting, systems integration and managed TV services - could appeal to large IT players such as France's Atos, while broadcast services could be sold to "bottom-fishing" private equity funds which have lower expectations of returns and tend to keep assets longer than traditional funds.
Bankers ruled out any imminent takeover of Ericsson but said some rivals could take a look once the business stabilises.
Speculation of a possible Ericsson-Cisco tie-up has been doing the rounds since the companies struck a strategic partnership two years ago.
Ericsson said industry trends from 2016 were expected to continue in 2017. It has forecast the mobile infrastructure market to decline by 2-6 percent this year and stabilise after that.
($1 = 8.8115 Swedish crowns)
(Additional reporting by Olof Swahnberg; Editing by Mark Potter and Adrian Croft)