Cost Cutting Must Continue, Says Ericsson's New CEO

Ericsson's incoming CEO Börje Ekholm has suggested that cost cutting aimed at bolstering profitability will be his initial priority on taking charge of the struggling equipment vendor in January next year. (See Ericsson Appoints Investor AB's Ekholm as New CEO.)

Addressing analysts and reporters during a press conference this morning, Ekholm said he would look to work with CFO Jan Frykhammar, who has been acting CEO since July, on knocking Ericsson into shape, but he gave zero indication of any grand strategic vision.

"Ericsson is clearly challenged now and we have to make adjustments to the cost structure," he said. "Jan [Frykhammar] has been doing that and it needs to continue -- we have to establish profitability first and get the right size of operations to meet the demand out there. Once we've reached the right level of profitability we need to get stability and the next phase of growth."

Ericsson AB (Nasdaq: ERIC) has already announced plans to reduce operating expenses to an annual run rate of 53 billion Swedish kronor (US$5.6 billion) by the second half of next year from about SEK63 billion ($7.1 billion) over the whole of 2014.

During a recent earnings call, executives said the axe would fall on operations in Sweden, the UK, Finland, the US and Spain and include about 3,000 job losses in Sweden, where Ericsson employs about 16,000 of its 116,000 workers. (See Ericsson Swings to First Net Loss in 4 Years.)

Despite efforts to date, Ericsson's gross margin shrank to 28.3% in the July-to-August quarter, from 33.9% in the year-earlier period, with revenues tumbling 14%, to SEK51.1 billion ($5.7 billion).

Moreover, Ericsson's workforce is much larger than it was in 2010 due to takeover activity and the difficulty of laying off staff. "We need to de-emphasize certain technologies," said Ekholm.

Asked about his other strategic priorities, Ekholm responded that it was "too early to say something about that" while refusing to criticize Ericsson's existing managers for recent failures.

"We've seen new competitors come up and existing companies go out of business or merge," he said. "Ericsson is one of the few that have survived this phase and I think credit should go to the company for the work it has done under these challenges."

While Ekholm was unlikely to announce a new strategy on the very date of his appointment, the comments may have disappointed analysts expecting more dramatic statements about the future roadmap for the Swedish equipment supplier.

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Ekholm comes to the leadership role following a series of disappointments at Ericsson and will be under immediate pressure to rekindle the company's fortunes.

He is familiar with Ericsson and the environment in which it operates, having spent ten years on Ericsson's board and in a variety of roles for Investor AB, one of the company's main shareholders. But he appears to lack much hands-on experience in the telecom and technology sectors.

"Being on the board is different from running a company," he acknowledged. "You are not involved in all the operational decisions being taken and you have some distance there."

Nevertheless, while most of Ekholm's previous executive roles have been in finance and consulting, his academic background is in engineering and is also a member of the University Board of KTH Royal Institute of Technology in Sweden. "I'm an engineer and will always be an engineer, and I'm proud of Sweden's engineering tradition," said Ekholm.

One investor concern may be Ekholm's ability to lead Ericsson while operating from the US, where he lives with his family, but Leif Johansson, Ericsson's chairman, insisted this would not be an issue given Ericsson's large US presence.

Johansson also said Ekholm was chosen as a replacement for Hans Vestberg, who left the CEO role in July, because of his experience in publicly listed companies, telecom background and leadership skills.

UPDATE: Following the press conference, Ericsson's shares were trading down about 0.8% in afternoon trading in Stockholm after rising by 3% on news of Ekholm's appointment this morning.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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