Ericsson announced financial results for the third quarter of 2018. As part of the earnings release, management provided an update on the performance of Ericsson’s media business, consisting of the managed services businesses Red Bee Media and the soon-to-be-divested media solutions business MediaKind.
The divestiture of the Media Solutions to private equity firm One Equity Partners was announced in late January. Ahead of the IBC Show, the Media Solutions business was rebranded to MediaKind (the brand launch video is available at www.mediakind.com). MediaKind’s activities in Amsterdam included CEO Angel Ruiz participating on the Technology Supplier C-Suite panel featured at the Devoncroft Summit | Amsterdam (picture below).
Technology Supplier C-Suite: Strategies for an Evolving Market
(from left to right: Joe Zaller, Devoncroft; Dr. Abe Peled Chairman Synamedia; Tim Shoulders, President Grass Valley; Geir Bryn-Jensen, CEO Nevion; Angel Ruiz, CEO MediaKind.)
We hope to share some of the quotes from this panel in a later post.
The Q3 2018 results suggest MediaKind operating profile has made significant progress.
The combined media business had Q3 2018 revenues of SEK $1.4 billion ($156 million USD), flat versus Q3 2017 and a growth of 7.6% compared to the previous quarter, Q2 2018. For the first nine months of 2018 media business revenues were SEK $3.7 billion ($431 million USD), a decline of 12% compared to the same period in 2017.
Year-over-year stability in revenue and sequential growth are themselves notable. Beginning in late November 2017 at Ericsson’s Capital Markets day, management indicated substantial progress had been made in turning around the media businesses. During the Capital Markets presentation, Ericsson CEO Börje Ekholm said the team had successfully removed 30% of sales, general, and administrative costs out of the Media Solutions business (now MediaKind).
Operating loss in Q3 for the media business was SEK $400 million, which equates to USD $44.7 million or an operating margin of -28.5%. This understates the true losses of this business since operating income is presented before restructuring charges or corporate allocations, so it is more of a contribution margin. Year-to-date thru Q3 2018 operating loss was SEK $1.3 billion (USD $151.6 million) for the media business. This equates to an operating margin of -35.1%.
Again, those numbers actually show meaningful progress. Operating loss in Q3 2017 was SEK $600 million (USD $172.1 million). So Q3 2018 was a 1400 basis points improvement. In terms of year-to-date, the first nine months of 2017 recorded an operating loss of SEK $3.9 billion (USD $452.4 million), representing a -92.8% operating margin. The 2017 operating performance was impacted by a significant write-down of goodwill in Q1 2017.
Dividing performance between Red Bee and MediaKind is challenging given the aggregate level of reporting of the media business. Previous guidance indicated 2017 revenue of MediaKind was SEK $3.2 billion (USD $374 million), and 2017 performance of Red Bee was SEK $2.5 billion (USD $292 million) revenue, and Red Bee’s operating loss was SEK $300 million (USD $35 million) in 2017.
Ericsson stated on its Q4 2017 conference call that operating losses were substantially higher at the media solutions (now MediaKind) portion of the media business. A review of the various data points would indicate losses attributable to MediaKind were likely in excess of SEK $4.0 billion (USD $450 million+) in 2017, though again a large portion of those losses are a write-down of goodwill in Q1 2017.
For the first half 2018, Ericsson’s commentary indicated sales related to MediaKind declined given the discontinuation of certain product lines. The commentary also states Red Bee has experienced declines in both quarter of the first half due to scope changes of contracts and negotiations. The 2018 decline adds to an 8% decline in 2017 for Red Bee, again attributable to contract renegotiation.
It is interesting to note, the BBC’s recent efficient initiatives are likely a contributing cause to the decline in Red Bee. Here is an excerpt from the just released BBC efficiency review, “Contractual savings were made with the renewal of the playout services contract (delivering the technology and operations enabling linear TV channel broadcasting) to Ericsson.”
One media organization’s efficiency is often a supplier’s revenue.
Ericsson Media Business Outlook
After receiving bids for Red Bee Media, Ericsson decided to keep the business (and rebrand to Red Bee) since “the bids received did not reflect the value of the business.” Management stated the goal is to achieve sustainable profitability with Red Bee Media, while managing the business as an independent unit of Ericsson.
The MediaKind divestiture to One Equity Partners had been anticipated during the third quarter. It has been deployed due to the complexities of the transaction, which has Ericsson retaining a 49% ownership stake. The recent earnings filing cites this structure as allowing “Ericsson to capture the upside of the business while at the same time taking an active part in the expected consolidation of the industry.”
Consider the thought expressed in the above sentence: Consolidation through divestment!
The MediaKind transaction is expected to close before year-end.
As I stated in my speech at the Devoncroft Summit | Amsterdam, it is not appropriate to judge the current management teams and new owners based on historical revenue levels or the cumulative monies invested into today’s assets (slide below). The current teams didn’t spend the money; it was spent well before they arrived.
Now is the starting position for these groups; judge them from here forward.
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