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What Went Wrong for Ericsson?

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Higher-than-expected loss

Ericsson (ERIC) investors should fasten their seatbelts for a bumpy ride, at least throughout 2017. Though the company was expected to post a loss in 1Q17, the size of the loss it reported was shocking.

A significant portion of Ericsson’s 1Q17 revenue of 46.4 billion Swedish kronor was swallowed by provisions, write-downs, and reorganization costs, which totaled 13.4 billion kronor. With that, Ericsson ended up with a loss of 10.9 billion kronor in the quarter, higher than the 8.3 billion kronor loss Wall Street was expecting and a far cry from its 2.1 billion kronor profit in the comparable quarter last year.

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What’s next?

Ericsson still has a gaping hole to fill. The company said that its provisions consumed 8.4 billion kronor in 1Q17, its write-downs swallowed 3.3 billion kronor, and its restructuring ate 1.7 billion kronor. These costs will likely persist in the company’s 2017 balance. For example, Ericsson expects its restructuring bill to reach between 6 billion and 8 billion kronor by the end of the year.

Paying today to earn tomorrow

The structural changes that Ericsson is undertaking should eventually yield operating efficiencies that will improve its profitability. The company expects to start seeing its operating margin improve in 2018.

While Ericsson is promising a better future after a period of belt-tightening, investors would do well to understand that while the transition to the cloud is making some IT (information technology) companies rich, Ericsson is struggling in that area.

The latest quarter saw the company’s IT & Cloud and Media losses rise significantly. Amazon (AMZN), Microsoft (MSFT), Alphabet’s (GOOGL) Google, and IBM (IBM) are notable vendors of some of the cloud computing technologies that are disrupting the traditional networking equipment industry.

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