Ericsson's year went from bad to worse on Tuesday when another weak set of quarterly results forced the Swedish equipment maker to "double" the cost savings it is targeting next year.
The company has been badly hit by a reduction in spending on network equipment and services among its biggest customers and continues to come under intense pressure from rivals, particularly Huawei Technologies Co. Ltd. and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763), despite restructuring efforts and a major partnership with Cisco Systems Inc. (Nasdaq: CSCO) (See Huawei: New King of the CSP Market and Enterprise Pitch for Ciscosson.)
The latest figures will add to the pressure on CEO Hans Vestberg following allegations of company corruption in China and a Swedish newspaper report this week that questioned Ericsson AB (Nasdaq: ERIC)'s accounting practices. (See Trouble at Ericsson: Can the CEO Survive July? and Eurobites: Doubt Cast on Ericsson Reporting.)
Revenues in the April-to-June quarter slumped by 11% compared with the year-earlier period, to 54.1 billion Swedish krona ($6.3 billion), due largely to macroeconomic weakness in Brazil, Russia and the Middle East. Even accounting for currency fluctuations and other adjustments, the vendor's revenues were down by 7% year-on-year.
Vestberg provided investors and analysts with little cause for optimism during a presentation of the numbers. "The current sales trends and business mix will prevail in the second half," he said. "These markets won't come back quickly -- we won't see a quick recovery."
Equally troubling was a fall in profitability despite efforts to save SEK9 billion ($1.1 billion) in costs next year through various efficiency initiatives. Net income fell by 26%, to SEK1.6 billion ($190 million), and the closely watched gross margin shrank to 32.3% from 33.2% a year earlier.
Table 1: Ericsson's Headline Figures for Q2 (SEK Billions)
|Q2 2016||Q2 2015||YoY change|
|Gross margin||32.3%||33.2%||-0.9 percentage points|
|Operating margin||5.1%||5.9%||-0.8 percentage points|
|−networks||6.0%||8.0%||-2 percentage points|
|−services||6.0%||6.0%||0 percentage points|
|−support solutions||-15.0%||-8.0%||-7 percentage points|
Ericsson blamed lower revenues from licensing and a higher share of services sales for the gross-margin disappointment.
Aiming to address its ongoing problems and boost profitability, the company plans to reduce the annual run rate for operating expenses to SEK53 billion ($6.2 billion) in the second half of next year from SEK63 billion ($7.4 billion) in 2014. In a statement, Ericsson said this would equate to "double the previously targeted savings in operating expenses."
"We have a cost program of SEK9 billion but that is not enough," Vestberg told analysts during a conference call. "We need to initiate more activities to dimension down the company and improve profitability and be competitive in the market."
Ericsson announced plans to restructure its business around five new units in April. While the company did not increase savings targets at the time, Vestberg today told analysts the new structure was "designed" for lower cost and greater efficiency. (See Ericsson CEO Seeks New Growth Formula and Ericsson Restructures as Sales, Gross Margins Falter in Q1.)
The Swedish vendor is also hoping to find savings by scaling back the resources needed for some OSS/BSS projects that were in their start-up phase. It further plans to reduce investments it is making in IP networks and services following the tie-up with Cisco.
The new plans will clearly entail additional redundancies at Ericsson. Vestberg would not be drawn on the specific details but confirmed that further job cuts would take place across the business: He noted that 4,000 employees left the company in the April-to-June quarter as part of the previously announced cost reduction program.
"Of course there will be an impact on employees," he said. "Four thousand left in the quarter and there are larger reductions [needed] to secure the future of Ericsson. There is no market that is excluded [from this]."
Despite the staff cuts that were made in the recent quarter, Ericsson had 116,507 employees at the end of June, compared with 115,300 in March, due to hiring and takeover activities.
A major challenge for the company is to reduce headcount while recruiting the experts it needs for software, virtualization and media projects in future.
Ericsson is trying to sharpen its focus on cloud, IT and media capabilities, increasing the amount of revenue it generates from software and services as it slowly moves away from its hardware origins.
Asked about progress on the corporate restructuring announced a few weeks ago, Vestberg told analysts that most leaders at the business units had now been appointed but acknowledged there was some "anxiety" throughout the organization about the changes being made.
One small bright spot in the latest figures was the stabilization of the operating margin at the Global Services business, which accounts for about 45% of Ericsson's overall revenues.
On a regional basis, South-East Asia was the only part of the world in which Ericsson flagged revenue growth, with sales up by 8%, to SEK5.3 billion ($620 million), in the quarter.
Revenues in North America, which accounts for about a quarter of Ericsson's business, dropped by 8%, while sales in western and central Europe fell by 13%, to SEK4.5 billion ($530 million).
Having risen in early-hours trading following news of the latest cost-saving plan, Ericsson’s share price had fallen by more than 3% in Stockholm at the time of publication.
The stock closed down 3.2% yesterday after Svenska Dagbladet, a Swedish newspaper, questioned the way the vendor had booked anticipated future sales from long-term contracts. Ericsson was quick to deny it had done anything wrong from an accounting perspective.
Ericsson's share price has fallen by about 20% so far this year.
— Iain Morris, , News Editor, Light Reading