LM Ericsson Sets Sail With a New Captain

By Anders Bylund Markets Fool.com

Telecom-equipment maker Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC) reported fourth-quarter results on Thursday morning. Share prices rose more than 3% that day.

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Ericsson's fourth-quarter results: The raw numbers

Metric

Q4 2016

Q4 2015

Year-Over-Year Change

Revenue

$7.2 billion

$8.7 billion

(17%)

Net income

($177 million)

$823 million

N/A

Operating cash flow

$2.1 billion

$2.6 billion

(17%)

Adjusted EPS (diluted)

$0.07

$0.29

(76%)

Data source: Ericsson. Financial results reported in Swedish crowns, converted to average exchange rates of $0.11 USD per SEK in Q4 of 2016 and $0.12 USD per SEK in the 2015 period.

What happened with Ericsson this quarter?

This was a tumultuous quarter for the Swedish telecom infrastructure veteran.

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  • Borje Ekholm took the CEO office shortly after the end of the fourth quarter. Interim CEO Jan Frykhammar stepped down, but will remain on Ericsson's board of directors. Frykhammar's team of advisors, including interim CFO Carl Mellander and executive vice president Magnus Mandersson, will stay in place to give Ekholm guidance and continuity. That's the end of the aftermath of former CEO Hans Vestberg's seven-year reign.
  • A large chunk of the sales decline came from a tough comparison against the year-ago period. In that quarter, Apple (NASDAQ: AAPL) signed a patent licensing agreement with Ericsson that settled all litigation between the companies -- and temporarily added nearly $500 million to Ericsson's top line.
  • On top of the Apple effect, all three of Ericsson's reportable segments delivered lower sales and smaller operating profits on a year-over-year basis. However, network hardware sales increase 33% sequentially and drove global service revenues 15% higher, thanks to strong order volumes in several key markets.

Image source: Ericsson.

Ericsson's management did not provide firm guidance targets for the coming quarter or fiscal year. Instead, they said that markets would stay "tough" in 2017, putting pressure on sales expectations. Gross margins are expected to improve in the second half of 2017, ending a negative streak that started in the spring of 2016.

What management had to say

In a conference call with Wall Street analysts, Ekholm provided a reminder of what Ericsson is all about. Investors might see this note as a call to arms, getting back to the nuts and bolts of running a multinational technology business. Ekholm said:

We are in a technology industry. We need to be technology leaders and stay at the forefront of the technology development. Ericsson has a unique set of assets with our products but we also have services and solutions, and that package creates a unique position for us to compete in the market. That's something we need to leverage, but it's also something we continuously need to invest in and develop.

Looking ahead

With degrees in electrical engineering and economics and 10 years of service on Ericsson's board of directors, Ekholm seems exceptionally qualified for his new job.Vestberg is moving on to lead Sweden's Olympic committee, including efforts to host the Winter Games in 2026.

Ekholm is widely expected to restructure Ericsson around the next generation of mobile technology, known as 5G, alongside support for cloud computing and the Internet of Things. It's less obvious where he will start slashing Ericsson's efforts and expenses in order to achieve that sharper focus. Ekholm reportedly started making the rounds among Ericsson's top customers in North America, Asia, and Europe as soon as he was selected, giving him a three-month head start.

Starting in the first quarter of fiscal year 2017, Ericsson will report results in three new segments: networks, media, and IT and cloud.

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Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool has a disclosure policy.