Telecommunications equipment maker Ericsson on Wednesday announced a colossal 32 billion Swedish crown ($2.9 billion) impairment charge related to its acquisition last year of Vonage. The company, which primarily provides networks and mobile communications gear, bought the cloud communications provider in a $6.2 billion deal. The financial hit is a consequence of a significant drop in the market capitalization of Vonage’s publicly traded peers, increased interest rates, and an overall slowdown in Vonage’s core markets.
The company expects to book SEK14.2 billion ($1.8 billion) in charges in the fourth quarter as part of a review of its position and a revaluation of US tax assets, which will eat into operating income. The bulk of the write-down will be in its Digital Services and Other divisions, with another SEK1 billion charge in the other non-cash items affecting profitability.
During the quarter, Ericsson saw demand tumble across all its segments as customers delayed investment in new technologies and reduced spending on upgrades and service plans. Sales fell by 16% in the Networks unit, excluding currency translation effects. That’s the worst quarterly performance for the unit since the second quarter of 2023 and a sharp turnaround from a year ago, when demand was strong.
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The result was a core profit before amortization, restructuring and impairment charges of 4.7 billion kronor. That was below the analyst consensus forecast of 5.2 billion and reflects the impact of the weakness in the telecommunications market on revenue and margins.
Investors will look to the company’s next move, which is expected to be a significant overhaul of its business. That could include selling the telecommunications software and other technology assets the company has built up over the years and its mobile phone manufacturing business.
A big write-down from one of the most significant purchases in recent history will ratchet pressure on CEO Borje Ekholm, who has struggled to revive the company’s fortunes since taking over last year. Investors are waiting to see whether his changes will help Ericsson take on the challenge of 5G, the ultra-fast wireless network that will soon be the norm for smartphones and other devices.
Ericsson shares rose 1.3% after the announcement, although the stock has lost almost half its value this year and is trading at modest forward price-to-sales and price-to-earnings ratios. Other telecommunications stocks also rose on the news, with Publicis up 3.7% after the world’s largest advertising group raised its 2023 sales and margin forecasts. Restaurant Group owner Apollo Global also saw its shares rise 4.5% after it boosted its purchase of the UK-based Wagamama chain. The rest of the FTSE 100 was flat.
