By Matthias Verbergt
STOCKHOLM -- Ericsson AB, one of the world's largest makers of
telecom equipment, Wednesday capped a series of management- shakeup
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 20% on
Wednesday.
Ericsson has been caught in a perfect storm. Spending by
mobile-service providers on latest-generation, or 4G, networks
largely has 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 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, due 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 ($17.2 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.
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.
The partnership hasn't provided noticeable benefits so far for
Cisco, which is grappling with a series of its own challenges. The
Silicon Valley giant has run into tepid demand for some of its core
routing and switching systems lately, as some big telecom carriers
have begun shifting to software-based offerings run on commodity
hardware that allows greater choice of vendors and helps deploy
services more rapidly. Cisco reported that orders from service
providers fell 5% in the quarter ended in July.
Cisco, which announced plans in August to cut 5,500 jobs, also
faces stiff competition from well-known hardware providers,
including Huawei and Arista Networks Inc. Still, the company
retains a dominant share in many categories of equipment and gross
profit margins above 60%, compared with the 28% figure that
Ericsson projected Wednesday.
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."
--Don Clark contributed to this article.
Write to Matthias Verbergt at Matthias.Verbergt@wsj.com
(END) Dow Jones Newswires
October 13, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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