October 12, 2016 / 7:49 AM / 3 years ago

Ericsson crisis deepens as profits plunge 94 percent

STOCKHOLM (Reuters) - The crisis at Ericsson (ERICb.ST) deepened on Wednesday when the world’s biggest maker of mobile network equipment reported a 94 percent plunge in quarterly operating profit and tumbling sales.

Flags with Ericsson logo are pictured outside company's head office in Stockholm, Sweden, October 4 , 2016. TT NEWS AGENCY/Maja Suslin via REUTERS

The Swedish company is struggling with a drop in spending by telecoms companies, with new 5G technology still years away, and stiff competition from Finland’s Nokia and China’s Huawei.

Its shares dropped more than 15 percent to an eight year low in early trading after it missed analysts’ forecasts for a fifth straight quarter and said it saw no sign of a quick upturn.

Having been slower to cut costs than recently merged rivals Nokia and Alcatel, Ericsson ousted Hans Vestberg as chief executive in July. It has since announced plans to axe thousands of jobs, but analysts said third-quarter results showed the challenges facing the firm as it looks for a new leader.

“Now the market is pressuring them for transformation and clarifying what they are, and what they need to do,” said Gartner analyst Sylvain Fabre. “It’s a case of being a little more clear of what they want to do when they grow up.”

Acting CEO Jan Frykhammar was confident Ericsson could fight back, noting it had faced a similar situation in 2007-2009 when it was waiting for demand for 4G technology to kick in.

“This is absolutely not the beginning of the end for Ericsson,” he said on a call with analysts and media.

Ericsson said third-quarter operating income plunged to 300 million Swedish crowns ($34.8 million) from 5.1 billion crowns a year ago, including restructuring charges of 1.3 billion crowns.

Sales dropped 14 percent to 51.1 billion crowns, including an almost 20 percent drop in its core networks division.

Analysts’ mean forecasts were for operating income of 4.3 billion crowns and sales of 53.6 billion.


Ericsson said sales fell most in markets with weakening economies such as Brazil, Russia and the Middle East. Sales in Europe were hit by the completion of mobile broadband projects in 2015.

Frykhammar said current market trends were expected to continue in the short term, suggesting two to three quarters.

Mikael Rautanen, an analyst at Inderes Equity Research, said the results did not bode well for Nokia (NOKIA.HE), whose shares fell more than 4 percent on Wednesday.

But he added the Finnish firm was less dependent on mobile broadband demand than Ericsson as its merger with Alcatel gave it a bigger fixed-line network business.

With Ericsson struggling and its stock sliding, speculation has resurfaced it could be a bid target for Cisco Systems (CSCO.O), the world’s biggest supplier of data network gear.

The two firms struck a sales partnership last year, but some analysts say this has yet to produce meaningful results and there are few benefits that would justify Cisco paying a premium for Ericsson shares.

“We would rarely rule out speculated consolidation but feel it is unlikely,” UBS analysts said, adding there was a lack of overlap between the two businesses and Cisco’s prized 30 percent operating profit margin would only be dragged lower by Ericsson.

At 1030 GMT, Ericsson’s shares were down 17.3 percent at 51.10 crowns, after trading as low as 50.50 crowns. The stock has fallen around 36 percent this year.

“Unless Ericsson can provide a solid explanation to why the gross margin should rebound during early parts of 2017 and why the market should pick up ... we see clear risk that the share will come down sub 50 crowns as estimates will have to come down heavily and (the) dividend likely will have to be cut,” SEB analysts said.

($1 = 8.6231 Swedish crowns)

Additional reporting by Niklas Pollard, Bjorn Rundstrom, Johannes Hellstrom in Stockholm, Tuomas Forsell and Jussi Rosendahl in Helsinki, Eric Auchard in Frankfurt, Simon Jessop in London; Editing by Subhranshu Sahu and Mark Potter

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