Ericsson takes $1.8bn in writedowns, hitting digital services

Ericsson last week said it would book SEK14.2bn ($1.8bn) in charges after carrying out impairment testing and the revaluation of US tax assets. Besides booking an impairment writedown of SEK13.2bn ($1.6bn) Ericsson took a SEK1bn ($120m) non-cash tax charge because of changes to US corporate income tax rates.

The writedowns acknowledge that some of its segments are now worth less than Ericsson paid for them. The digital services sector, including cloud, took the biggest hit, at $830m of goodwill and $50m of intangible assets.

The ‘Other’ segment saw impairments of $750m of goodwill, $40m intangible assets and $50m fixed assets. This division includes the media business, licensing revenues, power modules, mobile broadband modules and Ericsson-LG Enterprise, which operates out of South Korea. Most of these were activities in which the Swedish giant has been reducing its engagement.

The two major businesses did not get off scot-free. Managed Services had impairments of $40m of deferred costs, while Networks had impairments of $20m of capitalized development expenses related to technologies that are no longer planned to be used.

“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.

However, investors rallied around the share price, appearing confident that once a company takes a long hard look at itself, these types of writedowns are inevitable and even welcome.

Digital Services mainly contains 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 around the world.

Less than two years ago Ericsson filed its OSS/BSS results under the umbrella of Professional Services and Support Solutions, and 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 previous writedown, totalling $1.86bn, 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.

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 $2bn at peak market, but have shrivelled to well under $1bn 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. It is said to be on-boarding 1m customers a day at Reliance Jio, with its OSS/BSS service, despite the writedown at Digital Services.

Ericsson will also take a $125m non-cash slap on the wrist as part of the US tax reform. It will announce its quarterly results on January 31.