Tuesday, January 16, 2018

Ericsson to take US$1.8B accounting charge

Ericsson will take an accounting charge of SEK 14.2 billion (approximately US$1.75 billion) following an impairment testing of its restated financial numbers and changes to the U.S. income tax code. The company said much of the write-down from its balance sheet is goodwill associated with investments made 10 years ago or more. The drop in the U.S. corporate income tax rate from 35% to 21% effective this year also results in a revaluation of the company's U.S. deferred tax assets.

The write-down is distributed as follows for Ericsson's business units:

  • Segment Digital Services: impairment of SEK 6.7 b. of goodwill and SEK 0.4 b. of intangible assets
  • Segment Other: impairment of SEK 6.0 b. of goodwill, SEK 0.3 b. of intangible assets, and SEK 0.4 b. of fixed assets
  • Segment Managed Services: impairment of SEK 0.3 b. of deferred costs related to termination of certain transformation activities
  • Segment Networks: impairment of SEK 0.2 b. of capitalized development expenses related to technologies that are no longer planned to be used

Ericsson borrows $370M to fund 5G R&D

In late December, Ericsson signed a credit agreement with the Nordic Investment Bank (NIB) for US$220 million, maturing in 2023, and with AB Svensk Exportkredit (SEK) for US$150 million, maturing in 2025. Of these new funds, $98 million will replace credit with NIB that was set to mature in 2019. Ericsson said the remaining amount will be used to strengthen its balance sheet and to support R&D activities to further develop 5G and other mobile innovations.

Ericsson invested SEK 31.6 billion in R&D in 2016 (US$3.9 billion).

Ericsson sets 2020 financial targets

Ericsson outlined key elements of a transformation plan to stabilize the company and improve its margins by the 2020 timeframe. The restructuring is taking longer than the company initially expected due to a weaker than expected Radio Access Network equipment market that will have significant compound effect over the coming years. The exchange rate of the Swedish krona against the USD is making the situation even more challenging.

During its Capital Markets Day event in Sweden, Ericsson executives reaffirmed that the corporate mission is "to enable the full value of connectivity for its service provider customers."

Some group financial targets

  • achieve net sales of SEK 190 – 200 b. by 2020
  • achieve more than 12 % operating margin on a sustainable basis beyond 2018, excluding restructuring costs.
  • achieve a gross margin of 37 – 39% and an operating margin of at least 10% for the Group in 2020, excluding restructuring charges. This target does not factor in any significant 5G sales during this time period.

Some other takeaways from the meeting

  • Ericsson expects that the Radio Access Network equipment market will decline by -2% during 2018, and by -1% during 2019. In 2020, the market is expected to remain flat with no further decline.
  • Beginning in Q4 2017, Ericsson will report its results in four segments: Networks, Digital Services, Managed Services and Other. 
  • Ericsson is expected weaker short-term performance in segment IT & Cloud, due to past contract commitments.
  • The Cisco-Ericsson partnership will not reach its goal of $1 billion in sales in 2018.
  • Ericsson is looking to sell its Media business.

See also