March 28, 2017 / 6:21 AM / in 4 months

Ericsson's provisions raise concern over health of business

A general view of an office of Swedish telecom giant Ericsson is seen in Lund, Sweden, September 18, 2014.Stig-Ake Jonsson/TT News Agency/File Photo

STOCKHOLM (Reuters) - An attempt by Ericsson's (ERICb.ST) 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 (NOKIA.HE).

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 percent and the lack of clarity pushed its shares 1.6 percent 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? 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 U.S. mobile operator Sprint (S.N), which renegotiated a managed services contract with Ericsson in July.

Borje Ekholm, President and Chief Executive Officer of Ericsson, delivers his speech at Mobile World Congress in Barcelona, Spain, February 27, 2017.Eric Gaillard

Execution Risk

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 (INVEb.ST) and Industrivarden (INDUa.ST), 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.

Credit Suisse, which rates Ericsson "Underperform", said in a note to clients it was unimpressed by the strategic overhaul and that Ericsson stock remained overly expensive.

"We would argue that a lot of anticipation around positive outcome of strategic review is already priced in the current share price, but related execution risks and top-line pressures are not," it said.

Ericsson also said it would write down intangible assets within the Media and IT & Cloud businesses in the first quarter, with an estimated impact on operating income of 3-4 billion crowns, and that it would "explore strategic opportunities" in those businesses.

It estimated restructuring charges would amount to 6-8 billion crowns in 2017, up from an earlier estimate of 3 billion crowns, of which it would book 2 billion in the first quarter.

Ericsson cut its total workforce by almost 5,000 last year to around 111,000 as part of efforts to improve its profitability. Ekholm said he expected significant improvements from the actions outlined as early as 2018.

Additional reporting by Johannes Hellstrom in Stockholm and Eric Auchard in London; Editing by Louise Heavens and Keith Weir

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