January 31, 2018 / 7:39 AM / 22 days ago

UPDATE 2-After fifth quarter of losses, Ericsson sees recovery signs

* Q4 op loss 19.8 bln crowns vs forecast 17.3 bln

* Q4 adj gross margin 29.9 pct vs forecast 29.6 pct

* Sees decline in China, positive U.S. momentum

* Shares drop as much as 9 pct, halting recent rebound (Adds CEO/CFO comments; cost-cutting details; signs of turnaround)

By Olof Swahnberg and Helena Soderpalm

STOCKHOLM, Jan 31 (Reuters) - Ericsson reported larger than expected losses for the fourth quarter on Wednesday and said it expected the Chinese market to continue to decline, dampening hopes of any short-term rebound for the struggling mobile equipment maker.

The Swedish company has made sweeping cost cuts and replaced much of its top management to try to turn around its business, cutting 10,000 jobs from its workforce in the fourth quarter alone. It had nearly 106,000 employees worldwide in September.

It faces competition from China’s Huawei and Finland’s Nokia as well as weak emerging markets and falling spending by telecoms operators for which big purchases of next-generation 5G technology are likely to be years away.

However, the company said it had spied possible signs of a turnaround in a few key markets. For example, it said sales of its mainstay radio access equipment were likely to dip 2 percent in 2018 after an estimated 8 percent drop last year.

But its shares dropped as much as 9 percent to a 2-1/2 month low of 50.64 Swedish crowns, halting a recent recovery based on hopes of a turnaround in underlying markets later this year.

The company said the latest results were in line with its expectations, with a gradual improving performance in its networks business but lingering losses in its digital operations offering network management and cloud-based services.

“The losses as they are today were, in a way, expected, but not acceptable”, Chief Executive Börje Ekholm told a news conference after the fifth straight quarter of operating losses.

Ericsson said the Chinese market was expected to continue to decline due to reduced investments in the latest 4G network equipment, while there was positive momentum in North America, aided by tax reforms to encourage infrastructure investment, spending on a new public safety network and early 5G contracts.

Ericsson cited new 4G and 5G contracts from Deutsche Telekom and Verizon, which has said it plans to roll out 5G networks in three to five U.S. cities by later this year, and a market share gain with an unidentified operator in China.

“5G will come. We can debate when in certain parts of the world. But it’s quite clear that the race is heating up in North America and northeast Asia,” Ekholm said.

The company saw lower network sales from India to Mexico and across most of Europe, where operators face continued pressure to cut capital spending on mobile networks.

COST CUTTING

Ericsson’s quarterly loss widened to 19.8 billion crowns ($2.5 billion) from a loss of 280 million a year earlier, and compared with a mean forecast loss of 17.3 billion crowns in a Reuters poll of analysts.

Its quarterly gross margin, excluding restructuring charges, was 30 percent, roughly unchanged from the third quarter. The company has pledged to deliver a gross margin of 37-39 percent and an operating margin of 10 percent by 2020.

“Our target of 10 percent operating margin in 2020 still remains very firm,” Chief Financial Officer Carl Mellander said.

The cost-cutting programme is now saving around 6 billion crowns on an annual basis compared with a target of at least 10 billion crowns of annual savings by mid-2018. Resulting profit improvements will start to show later in 2018, Ericsson said.

Fourth-quarter results were hit by previously announced impairments, mainly of goodwill in its digital and media arms, to the tune of 14.2 billion crowns.

“We see no additional need for any more impairments or provisions,” Ekholm told reporters.

The company said it had agreed a partnership with One Equity Partners in its media solutions unit, leaving Ericsson with a 49 percent stake. Separately, it will keep its broadcast media services business after failing to find a buyer.

Ericsson said it had exited 23 of 42 poorly performing contracts in its struggling managed services business, a business which runs networks for its customers.

It kept its annual dividend at 1.00 crown per share, in line with expectations.

$1 = 7.8646 Swedish crowns Reporting by Helena Soderpalm and Olof Swahnberg; Writing by Eric Auchard; Editing by Jane Merriman and Mark Potter

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