October 21, 2016
Ailing Swedish equipment vendor Ericsson has slumped to a net loss for the first time in four years, blaming the latest setback on weak global demand and the failure of cutbacks to bolster margins.
The news follows a profit warning earlier this month in which Ericsson AB (Nasdaq: ERIC) revealed that sales and earnings would decline sharply for the July-to-September quarter. (See Beginning of the End for Ericsson? and Ericsson Profit Warning Sends Shares Tumbling.)
Acting CEO Jan Frykhammar told analysts earlier today that current conditions would prevail for the next two or three quarters and said the "renegotiation" of a large managed services contract in the US would also have an impact in the current fourth quarter.
Details provided by Frykhammar suggest that contract is the $5 billion, seven-year deal that Ericsson signed with Sprint in 2009.
Previously the world's biggest supplier of equipment used in mobile telecom networks, Ericsson was overtaken by China's Huawei Technologies Co. Ltd. last year and has been struggling to cope with a weak spending environment and changing customer needs. (See Is There No Stopping Huawei?)
Having dispensed with the services of former CEO Hans Vestberg in July, it is currently scouting for a new leader with the kind of bold strategic vision that can restore its fortunes.
In the meantime, Ericsson is pressing ahead with cost-cutting measures, including staff reductions, under the temporary direction of Frykhammar, who has been the company's chief financial officer since 2009.
As indicated in its recent profit warning, third-quarter revenues fell by 14% compared with the year-earlier period, to 51.1 billion Swedish kronor ($5.7 billion), while operating income was almost wiped out entirely, dropping 93% to just SEK0.3 billion ($33.7 million).
As a consequence, the company swung to a net loss of SEK0.2 billion ($22.5 million), after reporting a profit of SEK3.1 billion ($350 million) in the same quarter last year.
In a predictably glum earnings presentation, Frykhammar blamed a worsening of macroeconomic conditions and the cyclical slump for Ericsson's present malaise. "If you look at the decline it is mainly in the networks and in radio -- there we have a decline of close to 20%," he told analysts.
With the services business accounting for a bigger share of overall sales, Ericsson's closely watched gross margin shrank to just 28.3%, from 33.9% in the third quarter of 2015.
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Ericsson has been trying to compensate for the slowdown in mainstream business activities through its targeted growth areas program, which covers the cloud, IP and services related to operational and business support systems. Yet sales in these areas still account for just a fifth of the total and grew by only 3% in the third quarter.
The hope is that 5G will trigger a new wave of investments, but standardized versions of 5G technology are still several years away from commercial reality.
Even so, Ericsson says a new product platform in its networks business will support the migration path to 5G and represent a much bigger share of business next year. "We are making important changes to the product portfolio at the moment," said Frykhammar. "That is about 10% of volumes but next year more than 50% of all deliverables will be from the new product platform."
On the cost side, Ericsson is working to reduce operating expenses to an annual run rate of SEK53 billion ($5.6 billion) by the second half of next year from about SEK63 billion ($7.1 billion) over the whole of 2014.
"We are taking action in Sweden but also in the UK, Finland, the US and Spain," said Carl Mellander, who has replaced Frykhammar in the CFO role, in reference to headcount reductions. "We are now at a run rate of SEK56.7 billion [$6.4 billion], which is SEK1 billion [$110 million] lower than one quarter ago and SEK4.7 billion [$530 million] lower than in 2015."
After a spate of takeover activity, Ericsson finished 2015 with about 116,000 employees, about 30% more than in had in 2010, and has recently announced plans to cut about 3,000 jobs in Sweden, where it employs about 16,000 workers.
Shares in Ericsson were trading down about 4% in Stockholm at the time of publication and have fallen by about 42% since the start of this year.
— Iain Morris, , News Editor, Light Reading
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