Ericsson Speeds Cost Cuts as Turnaround Proves Challenging

Ericsson cautioned that turning around will require even steeper cost cuts, testing the patience of investors who sent the stock tumbling the most this year, according to Bloomberg.

Ericsson fell as much as 13 percent in Stockholm after the company posted a second-quarter loss and warned that a faltering market amid technology shifts could cause as much as 5 billion kronor of operating income to evaporate over the next 12 months.

Revenue in the three months ended in June fell 7.8 percent to 49.9 billion kronor, the company said. Analysts predicted sales of 50.7 billion kronor on average. Adjusted operating profit of about 300 million kronor was lower than the average estimate of 1.7 billion kronor.

In 2016, Ericsson’s sales declined by 9.8 percent, and the company said it expects a “high single-digit percentage“ drop in the market for radio access networks this year, a bigger fall than previously expected.

Ericsson’s adjusted gross margin shrank by 3.4 percentage points from a year earlier to 29.8 percent in the second quarter. The company swung to a net loss of 1 billion kronor from a profit of 1.59 billion kronor a year earlier.

CEO Borje Ekholm is under pressure from activist investor Christer Gardell to deliver a speedy turnaround. His plan hinges on reducing costs and scaling back expansion plans that haven’t panned out, while refocusing on Ericsson’s core business of selling networking equipment ahead of the expected roll-out of 5G networks. Gardell’s fund Cevian has acquired about a 6 percent stake in the company since March.

“We are not satisfied with our underlying performance with continued declining sales and increasing losses,“ Ekholm said in a statement. “In light of current market conditions, we are accelerating the planned actions to reduce costs.“

The company plans to accelerate cost cuts over a previously set goal to achieve an annual run-rate reduction of at least 10 billion kronor by mid-2018. Ekholm said Ericsson has identified 42 service contracts that the company will exit, renegotiate or transform.