Ericsson’s provisions escalate concern over health of business

STOCKHOLM — An attempt by Ericsson’s new chief executive to lay out his strategy for the Swedish telecoms equipment maker backfired on Tuesday when it exposed problems related to some of its main contracts.

Chief Executive Borje Ekholm, who took charge only in January, announced up to $1.7 billion in provisions, writedowns and restructuring costs to be taken in the first three months of the year.

Ekholm has to contend with shrinking markets and mounting competition from China’s Huawei and Finland’s Nokia.

His strategy statement on Tuesday raised concerns by including 7-9 billion crowns ($797 million-$1 billion) in first quarter provisions “triggered by recent negative developments related to certain large customer projects.”

Ekholm, a veteran Ericsson board member, said these contracts were few and isolated but gave no more details.

“It is beyond bad form. You don’t burn nearly a billion euros and don’t tell investors what it is for,” said a financial analyst who asked not to be identified.

Ericsson made an operating loss in the final three months of 2016 and cut its annual dividend by 73% and the lack of clarity pushed its shares 1.6% lower on Tuesday. The stock has lost more than a quarter of its value over the past year.

“What has happened in the first quarter that makes them take provisions of 7 to 9 billion crown? It’s a lot of money. It seems very strange to me,” said Inge Heydorn, fund manager at Sentat Asset Management, who has a short position in Ericsson.

Several telecom analysts said the provisions could stem from emerging markets such as Latin America, Russia and China, or US mobile operator Sprint, which renegotiated a managed services contract with Ericsson in July. The company 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.

The other measures outlined on Tuesday included exploring options for its loss-making media arm as well as restructuring its unprofitable business designing, building and managing networks for operators.

Ericsson, backed by prominent Wallenberg family-backed Investor AB and Industrivarden, is under growing pressure to take more advantage of the global surge in data traffic, enterprise networking and cloud computing.

In the past year, the firm has ousted its CEO Hans Vestberg and shocked the market with a heavy profit warning. —