Ericsson Profit Warning Sends Shares Tumbling

Ericsson's woes deepened on Wednesday when a grim profit warning triggered a 17.5% fall in the Swedish vendor's share price during morning trading in Stockholm.

The company revealed that both revenues and profits dropped sharply in the August-to-September quarter, blaming the setbacks on a weak sales environment and the failure of cutbacks to buoy earnings.

Ericsson AB (Nasdaq: ERIC) offered no crumbs of comfort to investors, indicating in a statement that "current trends are expected to continue short term."

Third-quarter sales fell by 14% compared with the year-earlier quarter, to 51.1 billion Swedish kronor ($5.6 billion), while operating income slumped by an eye-watering 93%, to just SEK300 million ($34 million).

Table 1: Ericsson's Headline Figures for Q3

SEK b. Q316 Q315 YoY change Q216 QoQ change
Sales 51.1 59.2 -14% 54.1 -6%
− of which Networks 23.3 28.8 -19% 26.8 -13%
Gross income 14.5 20.1 -28% 17.5 -17%
Gross margin 28.3% 33.9% - 32.3% -
Operating expenses -14.1 -14.9 -6% -14.5 -3%
Operating income 0.3 5.1 -93% 2.8 -88%
− of which Networks -0.3 2.8 -109% 1.6 -116%
Operating income excl. restructuring charges 1.6 6.1 -73% 3.8 -58%
Source: Ericsson.

The latest update comes just a week after Ericsson said it would cut about 20% of its Swedish workforce and follows the resignation of former CEO Hans Vestberg in July after a series of disappointments. (See Eurobites: Ericsson to Close Remaining Swedish Plants – Report, Vestberg's Seeds May Yet Bear Fruit for Next Ericsson CEO – Analyst and Ericsson Board Has Been Asleep at the Wheel – Consultant.)

Some 16,000 of Ericsson's 115,000 employees are currently based in Sweden.

This is fast turning into an annus horribilis for Ericsson, which has been reeling in the face of economic uncertainty, a slowdown in spending on network gear and a challenge from lower-cost rivals, including Chinese behemoth Huawei Technologies Co. Ltd. (See Is There No Stopping Huawei?)

In response to new customer demands, and the growing importance of software technologies, Ericsson has been trying to reinvent itself as a telco partner focused on cloud, virtualization and media activities. But sales in these areas are not growing quickly enough to offset a decline in mainstream equipment markets.

Like other equipment vendors, Ericsson is banking on a wave of investment in 5G technologies to rekindle growth, but it will be at least four years before 5G standards arrive in the market.

For all the latest news from the wireless networking and services sector, check out our dedicated mobile content channel here on Light Reading.

Ericsson's overall networks business, which mainly flogs mobile broadband equipment, suffered a 19% year-on-year drop in sales in the third quarter, to SEK23.3 billion ($2.6 billion).

While Ericsson has put various efficiency measures in place, the ongoing sales declines and restructuring costs have been eroding its margins: The closely watched gross margin shrank to just 28.3% in the third quarter, from 33.9% in the year-earlier period. (See Ericsson 'Doubles' Savings Goal as Sales Slump.)

Even excluding restructuring charges, operating income would have fallen by 73% in the quarter, to about SEK1.6 billion ($180 million).

"Our result is significantly lower than we expected, with a particularly weak end of the quarter, and deviates from what we previously have communicated regarding market development," said Jan Frykhammar, Ericson's chief financial officer and acting CEO. "The negative industry trends have further accelerated, affecting primarily segment networks."

Ericsson is due to report detailed results for the third quarter on October 21.

Shares had recovered slightly at the time of publication and were trading 15.4% down on their closing price on Tuesday.

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

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