- Push beyond phone-network gear has failed to revive growth
- Competition from Nokia, Huawei putting pressure on margins
Ericsson AB shares fell the most in a year after its first-quarter sales missed analysts’ estimates, showing the Swedish company’s efforts to expand beyond a shrinking wireless-network market are failing to boost growth.
Sales fell 2.4 percent to 52.2 billion kronor ($6.4 billion), the mobile-network equipment and software maker said Thursday. Analysts predicted 54.4 billion kronor, the average of estimates compiled by Bloomberg. The gross margin, the share of sales left after subtracting the cost of production, was 33.9 percent excluding restructuring expenses, compared with the 36 percent average estimate, weighed on by lower software revenue.
Chief Executive Officer Hans Vestberg plans to accelerate cost cuts and reorganize business units and executive positions to boost profitability and revive sales. Ericsson is trying to sell more TV and cloud software to broadcasters and enterprises to cope with intensifying competition from Huawei Technologies Co. and Nokia Oyj in the contracting wireless-network market.
The shortfall “makes us worry about Ericsson’s ability to ever be run tightly and improve profitability sustainably,” analysts at Bernstein said in a note to clients.
The shares fell as much as 11 percent, the biggest intraday drop since April 2015, and declined 7.5 percent to 72.95 kronor at 9:17 a.m. in Stockholm. The stock has slumped 34 percent over the past year, giving the company a market value of 241 billion kronor.
Ericsson plans to focus on improving profitability and increasing more lucrative software sales in 2016, and started to take steps to reduce costs beyond its plan to save 9 billion kronor annually, Vestberg said in a statement.
"We are not satisfied with our overall growth and profitability development over the past years and I am convinced this will make us more competitive and enable us to grow both our company and our earnings," he said.
Ericsson is reshuffling its management team as it creates new business units to reduce costs and focus on growth areas. Restructuring charges this year are expected to jump to 4 billion kronor to 5 billion kronor, compared with earlier estimate of 3 billion kronor to 4 billion kronor.
With much of the so-called fourth-generation networks already built in key markets such as the U.S. and China, carriers’ investments are set to slump by 7 percent this year and a further 5 percent in 2017, according to Deutsche Bank AG.
Carriers are curbing investments after spending billions of dollars in recent years building faster 4G networks so smartphone and tablet users can stream music and video. With device screens getting bigger and sharper, mobile data is expected to soar 10-fold over the next six years as users turn to service such as Netflix.