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Ericsson Shares Drop on Analyst Downgrade

Shares in Ericsson have taken a beating after analysts at Deutsche Bank lowered their outlook for the Swedish equipment maker, flagging concern about its IP routing business and emerging-market risks.

The company's stock fell by around 6% on the Nasdaq during morning trading on Friday after Deutsche Bank issued a research note in which it downgraded its rating from "buy" to "hold" on Ericsson shares.

"We continue to believe that Ericsson should make progress towards its SEK9 billion [$1.05 billion] cost savings target by 2017 (4% of sales) but this is reflected in our estimates and upside from further cuts in problem areas like IP routing seems unlikely for now despite the Cisco partnership," analyst Johannes Schaller is quoted as saying in the note by StreetInsider.com.

"With worse than expected revenue declines and high EM [emerging market] risk, we expect no EPS [earnings per share] growth in 2016," Schaller is said to have elaborated.

Ericsson AB (Nasdaq: ERIC) is expected to come under renewed pressure in the IP equipment market following this week's merger between rivals Nokia Corp. (NYSE: NOK) and Alcatel-Lucent. (See Finn de Siècle for Alcatel-Lucent.)

IP networks represent one of the Swedish company's target growth areas but its IP capabilities have been relatively weak next to those of Alcatel-Lucent (NYSE: ALU).

In November, Ericsson announced a strategic partnership with Cisco Systems Inc. (Nasdaq: CSCO) -- the world's biggest maker of IP network equipment -- that looks aimed at addressing the threat posed by Nokia's takeover of Alcatel-Lucent. (See Cisco + Ericsson: From Soup to Nuts.)

Ericsson may be expected to provide updates on how its partnership with Cisco is developing when it reports full-year results on January 27.

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Last October the company's shares took a tumble after it blamed economic weakness in major emerging markets, including China and Russia, for a 9% year-on-year fall in sales on a constant-currency basis. (See Ericsson Slumps on China, Russia Weakness.)

Earlier this week, Fitch Ratings said the outlook for Ericsson remained "stable," lauding the new Cisco relationship.

"The recently announced partnership with Cisco, the market leader in IP routing, should help round out Ericsson's service offering," said Fitch in a research note.

Ericsson made net income of SEK3.1 billion ($360 million) in the third quarter of 2015, 19% more than in the year-earlier period, and saw revenues increase by 3%, to SEK59.2 billion ($6.9 billion), on a reported basis.

As noted by Deutsche Bank, Ericsson is looking to reduce annual operating costs by around SEK9 billion ($1.05 billion) between 2014 and 2017 and has been laying off staff accordingly.

Employee numbers fell from 117,183 in June to 116,240 in September.

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

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Susan Fourtané 1/26/2016 | 12:47:05 PM
Re: Swings and roundabouts Nasimson, in this case, 151 years of history among other things. -Susan
nasimson 1/26/2016 | 10:31:56 AM
Re: Swings and roundabouts @Susan: After all. As they say what's in a name!
Susan Fourtané 1/20/2016 | 6:32:33 AM
Re: Swings and roundabouts Phil, 

Yes, of course I think Nokia is more appropriate. :) I also know Nokia Networks won't change the name. 

Phil Morrison 1/19/2016 | 3:08:37 PM
Re: Swings and roundabouts Personally speaking I find the names amusing.    Ciscosson is an attempt at taking a partnership between Cisco and Ericsson and making it appear as if they are joined at the hip.   

As Kelly Ahuja so eloquently pointed out, there are areas where they will partner with Ericsson, and other areas where they will compete.

As for the other name, Nokia seems more appropriate don't you think :).
Susan Fourtané 1/18/2016 | 1:30:30 PM
Re: Swings and roundabouts I wonder what the companies think about the "Ciscosson" and "NokiaLu" names. Anything that I have missed? -Susan
danielcawrey 1/18/2016 | 1:25:28 PM
Re: Swings and roundabouts I do think the Cisco-Ericsson partnership was a long-term strategic move to shore up some weaknesses within both companies. Cisco is particularly good at doing this, but usually through M&A. Ericsson obviously believes it can still make a go of it alone, and I would probably agree with that. 
DHagar 1/18/2016 | 1:20:53 PM
Re: Swings and roundabouts @nasimson, you may be right.  Certainly Cisco is a shrewd player and knows the field well.  If they have put toether the right combination of strengths, they could be coming up with something truly competitive.

Note:  I find interesting Steve's point as well that this is a JV not a merger - could be another indicator of clear strategy!
Joe Stanganelli 1/16/2016 | 9:49:14 AM
Re: huh @Steve: Perhaps they are not that excited about Ericsson's partnership with Cisco because of the latter's ongoing patent litigation with Arista?  Pending litigation always makes analysts and investors uncertain.  Other analysts have upgraded Arista recently, so perhaps that is indicative of the way the market is thinking in relation to Cisco overall.
nasimson 1/16/2016 | 5:33:04 AM
Re: Swings and roundabouts I think it's a little too early to dismiss Ciscosson as a nobody. Huawei and NokiaLu are tough but Ciscosson might have something up it's sleeve.
Steve Saunders 1/15/2016 | 11:27:38 PM
Re: huh Iain, Ray,

If the Cisco/Ericsson partnership had been a merger rather a JV the regulators would have stopped it, right? 

Just thinking out loud here; bare with me!



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