Ericsson’s new CEO Borje Ekholm tried to sooth investor concerns after the company cut its annual dividend by 73 percent. It was the firm’s first dividend cut since 2008. Ekholm said the reduction was necessary in order to invest in areas of growth and help the company regain its financial footing.
Investors seemed to take news of the dividend cut in stride. Ericsson shares were trading up 0.1 percent to $5.6 per share from $5.54 per share at yesterday’s close.
Much of Ericsson’s troubles were a result of the maturity of 4G wireless technology, which many operators have deployed throughout their networks. While 5G is on the horizon, orders for that technology are not likely to start until closer to 2020. “We are preparing for 5G, and that will affect business models,” Ekholm said.
Ericsson reported an overall sales decline of 11 percent year-over-year with the company’s largest market, North America, dropping 13 percent year-over-year. In Western and Central Europe sales declined 21 percent.
The company reported a net loss of $180 million in the fourth quarter, which was down significantly from a profit of $770 million in the previous year. The company’s gross margin was 29.8 percent in 2016, lower than it has been in two decades.
Interestingly, the company said that it has one customer in the U.S. that has been reducing its capital expenditures by a lot, but that its other customers are stable. This comment is most likely directed at Sprint. In July the two companies renegotiated Ericsson’s managed services contract. Although terms of the new deal were not disclosed, Sprint did lower its Capex guidance down from $4.5 billion to $3 billion in 2016.
Ekholm also noted that the company’s revenues from intellectual property also declined to $1.13 billion due to the company’s licensing deal with Apple. In December 2015 the two companies resolved a year-long patent dispute — details of which were not disclosed. Going forward, Ericsson says the baseline for its IPR licensing portfolio is approximately $790 million, but Ekholm added that the company is looking at other ways to monetize its intellectual property.
Cost Reduction Plan
Ericsson’s cost reduction plan, which it launched in 2014, with a goal of saving the company more than $1.05 billion in expenses by year-end 2017 is on track. Ekholm said the company had some additional restructuring expenses in 2016 to keep it on course, but it expects to hit the target in the second half of the year. “We executed faster in some countries, and this led us to take a higher restructuring charge,” said Carl Mellander, Ericsson’s CFO.
Ekholm didn’t provide many details about the status of Ericsson’s partnership with Cisco other than to say that while the deal is important, Ericsson needs to look for more ways to leverage it. “We are not leveraging the full benefits of that partnership,” he said. “We need to work on that with Cisco.”