Ericsson books charge as it rethinks Digital Services strategy

[January 10, 2019]   By Johannes Hellstrom and Olof Swahnberg

STOCKHOLM (Reuters) - Sweden's Ericsson said it will book a 6.1 billion crown ($687 million) charge for the fourth quarter after a failed revamp of its loss-making Business Support System unit (BSS), as it seeks to protect its profitability targets.

The mobile telecom equipment maker said it would now implement a fresh strategy for BSS, which is part of its Digital Services business and provides real-time charging and billing products.

A previous plan to scale up BSS with a new platform to help customers needing to upgrade big IT systems had not generated any revenue.

"The anticipated customer demand... has not materialized," Ericsson said in a statement. "In addition, certain complex transformation projects experienced delays and cost overruns."

Shares in Ericsson, which counts Finland's Nokia and China's Huawei as its main rivals, fell 4.1 percent by 1117 GMT as the company also said it foresaw further restructuring charges related to the planned measures, including related headcount reductions, of 1.5 billion crowns in 2019.

Activist investor Cevian Capital, one of Ericsson's largest shareholders, said the plans to revise strategy made sense.

"Today's decision is fully in line with our plan for a more focused, simplified and improved Ericsson", Cevian told Reuters in an email.

It said it would speed up restructuring of the BSS business and concentrate on its core products, materially reducing BSS losses in 2019.

Digital Services as a whole accounts for around 17 percent of group sales and generated sales of 25.1 billion crowns in the January-September period, but made an adjusted operating loss of 4.9 billion crowns.

The Ericsson logo is seen at the Ericsson's headquarters in Stockholm, Sweden June 14, 2018. REUTERS/Olof Swahnberg/File Photo

Ericsson would not comment on the size of BSS, but Credit Suisse said in a note that it accounted for a quarter of Digital Systems sales.

Lars Soderfjell, portfolio manager at Alandsbanken, which is underweight in Ericsson shares in its portfolios, said he was not surprised by the new charges.

"This shows that turning around Digital Services is no easy job," Soderfjell said. "If they are going to have a chance to reach their targets (for Digital Services) they have to do this, otherwise it will take too long."

Ericsson said it expected its fresh BSS strategy would set Digital Services on "a strong path" to reach its targets of a low single-digit margin in 2020 and 10–12 percent by 2022 at the latest.

Ericsson's share price rose sharply in 2018 as a cost savings and an efficiency program started to yield results across many of its businesses after years of crisis during which telecom network operators reined in spending.

Credit Suisse repeated its neutral recommendation on the shares after Ericsson's statement, saying that while the company should continue to benefit from improving capex trends, the bulk of that looked to be priced in already.

(Reporting by Johannes Hellstrom and Olof Swahnberg; Editing by Niklas Pollard/Georgina Prodhan/Susan Fenton)

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