Ericsson has condemned three business segments to further humiliation by announcing a hefty $1.8 billion write-down, including markets where Ericsson was known to be struggling, alongside surprise fields with seemingly steady performance. Some observers have noted that the latest write-down could be the company’s last, when clearly the Swedish vendor’s fall from grace is far from over.
However, investors have rallied around its share price, appearing confident that once a company takes a long hard look at itself, these types of write-downs are inevitable and therefore welcome.
Perhaps the surprise show was Ericsson’s Digital Services segment, which experienced impairment of $830 million of goodwill and $50 million of intangible assets. This primarily comprises cloud computing, which houses OSS/BSS operations – an area Ericsson had talked up as a key growth area going forward after winning multiple transformation deals the world over.
Whether Ericsson was actually making any money from the numerous OSS/BSS contracts it picked up was always a moot point – one that may have finally been answered. Less than two years ago Ericsson filed its OSS/BSS results under the umbrella of Professional Services and Support Solutions, when it claimed that the growth of mobile broadband was driving operators to transform their OSS/BSS systems as a way of monetizing data growth, while at the same time managing the increased complexity.
Juggling different business segments in order to patch up glaring holes makes it difficult to pinpoint just what kind of cash OSS/BSS deals are (or were) bringing in, although both its Networks Services and IT & Cloud Services sectors dropped net sales in Q3 2017.
The company’s $1.86 billion write-down back in March sent alarm bells ringing industry-wide. A buyer for Ericsson’s ailing media and broadcast services business remains elusive, while the company’s second-largest shareholder, investor firm Cevian Capital, has reportedly been aggressively pushing for additional cost cutting.
In addition, Ericsson’s Other segment saw impairments of $750 million of goodwill, $40 million intangible assets and $50 million fixed assets, including the media business, licensing revenues, power modules, mobile broadband modules and Ericsson-LG Enterprise, which operates out of South Korea.
Managed Services had impairments of $40 million of deferred costs, while Networks had impairments of $20 million of capitalized development expenses related to technologies that are no longer planned to be used.
Cisco is still rumored to be placing its NDS unit in the shop window alongside the combined video assets of Ericsson, which should have been worth a combined $2 billion at peak market had these been looked after properly, but have shriveled to well under $1 billion today. These assets are different beasts, yet Cisco and Ericsson are both heading in similar directions towards network infrastructure.
Ericsson’s future focus looks clear, with contracts in many operator accounts including major management or implementation deals, plus 5G and IoT trials, at Vodafone, Orange, NTT DoCoMo, KDDI, Telstra, Verizon, AT&T, Korea Telecom, Telefonica and China Telecom – almost a full global set. It is said to be on-boarding 1 million customers a day at Reliance Jio, with its OSS/BSS service, hence our surprise at the write-down of its Digital Services segment, but this revenue may have shown in services.
This week’s write-down does not bode well for Ericsson’s full year 2017 earnings report due at the end of this month, when we will analyze in more detail what is happening inside Ericsson, particularly within its media sector, to warrant another huge reduction in asset valuation.
“The majority of goodwill originates from investments made 10 years ago or more, and has limited relevance for Ericsson’s business going forward. All impairments are non-cash accounting adjustments. The adjustments have no influence on Ericsson’s commitment to executing its strategies and to investing in technology to support customers’ success,” said a statement from Ericsson.
Microsoft’s Mediaroom was bought by Ericsson in 2012 for a rumored $100 million, excluding this business from the investments made a decade ago, although Mediaroom is essentially dead and has been revived as MediaFirst. Ericsson acquired multiscreen technology vendor Azuki in 2008 and real-time encoding platform Tandberg TV in 2007, the latter costing $1.4 billion, so there is every possibility these are some of the shrinking assets Ericsson is referring to. It snapped up Envivio a couple of years ago to bolster its encoding business, but AWS Elemental has won more and more of this market, likely contributing in part to the Ericsson media downfall.
Ericsson will also take a $125 million non-cash slap on the wrist as part of the US tax reform.