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.
Nokia (NYSE:NOK)
Historical Stock Chart
From Feb 2024 to Mar 2024 Click Here for more Nokia Charts.
Nokia (NYSE:NOK)
Historical Stock Chart
From Mar 2023 to Mar 2024 Click Here for more Nokia Charts.