By Matthias Verbergt 

STOCKHOLM-- Ericsson AB, one of the world's largest makers of telecom equipment, Wednesday capped a series of management shake-up and job-cut announcements with a profit warning that sent its share price tumbling and laid bare how the rise of Asian rivals has wounded Western suppliers.

Sweden's flagship tech company said its third-quarter earnings would almost completely evaporate, citing a 19% sales decline in its core mobile-network equipment business, while its gross margin fell to 28% from 34% in the same period last year.

The news sent the company's share price down as much as 18% on Wednesday.

Ericsson has been caught in a perfect storm. Spending by mobile-service providers on latest-generation, or 4G, networks has largely dried up, with most mobile-broadband projects having been completed last year. At the same time, competition has risen, with Huawei Technologies Co. of China expanding aggressively on the traditional European turf of Ericsson and Finland's Nokia Corp.

The Swedish company is betting big on the development of faster wireless networks, called 5G, and software-based systems such as the so-called Internet of Things, with connectivity built into everyday objects such as fridges. But the first revenue from 5G is several years away, analysts say, leaving Ericsson dangerously exposed to hefty research and lab costs in the interim.

Ericsson said it expected to post third-quarter sales of 51.1 billion Swedish kronor ($5.79 billion), down 14% from 59.2 billion kronor last year, with operating profit falling 93% to 300 million kronor from 5.1 billion kronor, partly on restructuring charges of 1.3 billion kronor.

The forecast came days after Ericsson announced plans to lay off nearly 20% of its 16,000-strong home-country workforce. The job cuts are a first step in a wider restructuring program in which Ericsson plans to significantly reduce its global staff of 115,000.

Jan Frykhammar--who took over as interim chief executive in July after CEO Hans Vestberg was ousted --offered no prospect for a quick turnaround, warning he expected current trends to continue in the next two to three quarters and that additional cost-cutting measures may be necessary.

"Continued progress in our cost reduction programs did not offset the lower sales and gross margin," Mr. Frykhammar said. "We will continue to drive the ongoing cost program and implement further reductions in cost of sales to meet the lower sales volumes."

Mathias Lundberg, an analyst at Swedbank, said Ericsson's profit warning "is troublesome and underlines how very weak the business climate is within radio and mobile broadband." He added that the slowdown in global mobile-phone sales was also denting Ericsson's lucrative patent business.

In contrast, analysts said Huawei has a larger product portfolio, spanning fixed-line and internet equipment, making the Chinese company far less dependent on cyclical wireless network sales.

While sales of wireless network gear are down globally, demand for faster fixed networks is rising, thanks to the development of cloud computing, by which applications run remotely on internet-connected servers.

Ericsson and Nordic rival Nokia have both taken steps to broaden their offerings beyond mobile networks. This year, Nokia completed the EUR15.6 billion ($17.3 billion) acquisition of France's Alcatel-Lucent SA, a leading producer of fixed internet products such as routers and switches. For its part, Ericsson has struck a partnership with Cisco Systems Inc., a world leader in internet equipment.

But Ericsson said the alliance would only add about $1 billion in annual sales by 2018, worth roughly 4% of the company's revenue last year.

Nokia, too, has been restructuring, cutting thousands of jobs globally in an attempt to cut costs, but has an experienced management in place, while Ericsson is still on the lookout for a new permanent CEO, analysts say.

"Nokia's organization has a better visibility on the market, and its management is not interim," said Daniel Djurberg, an analyst at Handelsbanken.

Before his dismissal, Ericsson CEO Mr. Vestberg often described how 5G would enable more innovations such as remote surgery, self-driving cars and energy-efficient sensors in everyday objects, .

The world is "going into new times where this infrastructure is going to be hugely important for our society," he said in March.

But in looking into the future, Mr. Vestberg may have neglected Ericsson's present needs, analysts said. It is still unclear what 5G technology will exactly entail, as the standard-setting process is still at an early stage, said Hannu Rauhala, an analyst at OP Financial Group.

"We don't know yet what will be the use cases," he said. "Big-scale implementation of 5G will only happen after 2020."

Write to Matthias Verbergt at Matthias.Verbergt@wsj.com

 

(END) Dow Jones Newswires

October 12, 2016 10:27 ET (14:27 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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