Ericsson Shares Tumble After Results Miss Expectations - 3rd Update
April 21 2016 - 5:59AM
Dow Jones News
By Matthias Verbergt
STOCKHOLM-- Ericsson AB missed market expectations for
first-quarter sales and profit and announced a sweeping corporate
reorganization, raising questions about the Swedish
telecommunications-equipment maker's ability to find new sources of
growth amid rapid technological and market change.
The company's shares fell heavily in volatile early trading in
Stockholm, falling around 10%.
Ericsson, one of the world's largest wireless telecom-equipment
providers, said on Thursday that net profit rose 49% to 1.97
billion Swedish kronor ($242.6 million) in the three months to
end-March from 1.32 billion kronor in the same period a year
earlier on a 2% slide in revenue to 52.21 billion kronor.
Ericsson said its gross operating profit margin shrank to 33.3%
from 35.4% in the same period a year earlier.
The company attributed the decline in sales to slower economic
growth in emerging markets in the Middle East and Latin America as
well as in Europe where a number of large broadband projects were
completed last year. Equipment sales in North America and China
improved.
The results came in below analysts' expectations. Analysts
polled by FactSet expected a net profit of 3.13 billion Swedish
kronor, and sales of 54.52 billion kronor.
"We understand that there are disappointments," said Ericsson's
President and Chief Executive Hans Vestberg in an interview with
The Wall Street Journal. "We are taking this issue very
seriously."
Ericsson also announced sweeping changes to its executive team,
with the departure of three senior vice presidents and a number of
promotions, as part of a broader reorganization of the company into
five business units and one dedicated customer-service unit.
The shake-up at the Swedish company come as companies in the
sector, including Cisco Systems Inc. and Nokia Corp. face pressure
from telecom companies for a broader range of equipment, from
wireless gear to Internet routers, but have opted for different
solutions to achieve that goal.
While Nokia has agreed to a takeover of rival Alcatel-Lucent,
Ericsson has struck a broad technological and commercial
partnership with Cisco Systems Inc. that falls short of a merger.
Ericsson, a leader in wireless equipment, has agreed to put its
global sales force at the disposal of Cisco, which dominates the
market for Internet gear such as routers and switches, but has a
much smaller retail footprint.
Ericsson and Cisco projected at the time that their alliance
would add $1 billion or more in annual sales for each company by
2018.
For now, Ericsson is struggling to show that its shift in
direction is working given the pressure on its underlying
profitability. Johan Lagerström, an analyst at Handelsbanken, noted
Ericsson's profitability had been stable for years, hence investor
concern about the shrinkage in the first-quarter gross operating
margin. "This causes great uncertainty," Mr. Lageström said.
Mr. Vestberg said Ericsson's new, simplified, structure will
reduce the time between a product's development and its market
launch, allowing for a quicker reaction to new market developments.
"The new structure is much more end-to-end," he said. "We can speed
up the way we are delivering to the market."
As telecom providers in mature markets are currently mostly
focusing on acquisitions and spectrum auctions while cutting on
upgrade and expansion costs, Mr. Vestberg said Ericsson needed to
adapt its business to cope better the development of next
generation, or 5G, mobile technology as well as growth in the
market for connected devices, cloud computing and television.
In February, Ericsson and Cisco announced the development of a
first joint product: a high-speed Internet router for both business
and residential customers capable of handling 5G.
Ericsson and Cisco also face stiff competition from Huawei
Technologies Co., the Chinese network equipment maker that has been
quickly expanding throughout Asia, Europe and Africa, often
offering innovative products at competitive prices.
In the new business structure, Ericsson said two business units
would focus on network products and services respectively, with
another two on information technology and cloud computing, and a
fifth on media.
The company raised its estimate of this year's likely
restructuring costs to 4 billion to 5 billion kronor from a
previous estimate of 3 billion to 4 billion kronor.
"We aren't happy with the growth and the profitability that we
have," Mr. Vestberg said. "We try to take in control what we can
control," he said, adding that the new structure enables Ericsson
"to be more efficient."
Mr. Vestberg said the changes were necessary to accelerate
strategy execution and to drive efficiency and growth across the
company even harder.
Write to Matthias Verbergt at Matthias.Verbergt@wsj.com
(END) Dow Jones Newswires
April 21, 2016 05:44 ET (09:44 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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