Ericsson’s as first-quarter results demonstrated that the Swedish network-equipment vendor is finally making progress in a protracted effort to reverse its fortunes, according to Bloomberg.
Shares soared the most in almost a decade after Ericsson posted earnings that were stronger than analysts had expected. Its closely watched gross margin rose to 35.9 percent on an adjusted basis from 18.7 percent a year earlier, lending credence to CEO Borje Ekholm’s expense reductions.
“I think people may have underestimated the force of our cost cuts and our ability to execute on those measures,“ CFO Carl Mellander said. “This quarter proves that the measures are starting to bite.“ The stock rose as much as 18 percent, the steepest intraday advance since October 2008, and was trading 16 percent higher on Friday in Stockholm.
The gross margin improvement is a welcome sign that the company’s cost cuts and a new product range are translating into improving profitability, despite sluggish demand for network equipment. Ericsson is facing a weak market for mobile equipment and struggling with past missteps, as it’s burdened by unprofitable businesses that were acquired as Ekholm’s predecessors tried to diversify the company’s offering and customer base. The company aims to lift its adjusted operating margin to more than 10 percent by 2020, from less than 1 percent last year.
In its key network division, Ericsson said its product portfolio had become more competitive in the last three quarters of 2017, resulting in market share gains. The adjusted gross margin for that unit improved to 40 percent in the quarter, from 35 percent a year earlier. Ericsson’s prospects may also have brightened after the U.S. Commerce Department barred China’s ZTE from buying any components from U.S. suppliers until 2025.
The company still faces a daunting task in improving the situation at its unprofitable digital services business. The unit, which provides software solutions and IT products, posted a smaller deficit than analysts had expected in the first quarter, following a 28 billion-krona loss in 2017. “It’s an improvement, but there’s a lot of work left to be done,“ Mellander said about the unit. “We are still making a 2 billion-krona loss, and that’s the kind of thing that can keep you awake at night.“
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