- Shares have underperformed as CEO Vestberg reshapes company
- Revenue growth has been outstripped by that of rival Huawei
Ericsson AB Chief Executive Officer Hans Vestberg has had a hard time competing against rivals Huawei Technologies Co. and Nokia Oyj in a market for wireless gear that’s declining after carriers built their fourth-generation mobile networks in many mature markets.
Ahead of Ericsson’s second-quarter results on July 19, analysts predict an 8.9 percent drop in sales and a 22 percent fall in net income on average. With revenue and profitability under constant pressure and capital tied up in China, the company’s “progressive” dividend policy may be at risk, Carnegie analyst Lena Osterberg wrote in a July 7 note to clients.
Half-way through his seventh year at the helm of the Swedish company, Vestberg is fending off criticism from shareholders over sluggish share performance and more recently on how the company informed the market of probes into alleged corruption in Asia and Europe.
Ericsson’s current cost-cutting plan is meant to produce about 9 billion kronor ($1 billion) in annual savings in 2017, compared with three years earlier. But Vestberg is under pressure to quicken the pace, and Ericsson could outline additional measures next week, according to analysts at Kepler Cheuvreux led by Sebastien Sztabowicz.
To reshape the company, Vestberg sold Ericsson’s stake in its phone joint venture with Sony Corp. and closed down a chip venture with STMicroelectronics NV in 2013 to focus on infrastructure and software. In November, Ericsson partnered with Cisco Systems Inc. to let both companies sell more complete network systems.
Ericsson continues to spend heavily to deliver advanced network management, data analytics and cloud technology and fend off rivals, especially with the development of speedier fifth-generation wireless gear. At about 200 billion kronor since Vestberg started as CEO in 2010, cumulative R&D spending is approaching the company’s market value, with the lion’s share going to software development, according to the company.
Ericsson has also invested to expand beyond networking gear. Vestberg bought Telcordia Technologies for $1.15 billion in 2012 and Mediaroom for about $200 million to tap into new growth streams such as billing and internet-based TV.
The infrastructure market for 2G, 3G and 4G wireless networks is forecast to drop to $24.7 billion in 2020 from $47.9 billion in 2015, according to IHS.
“Ericsson is caught in a difficult technology transition where spending on 4G wireless infrastructure is declining, while investment in new 5G technology has yet to ramp up,” John Butler, a senior analyst at Bloomberg Intelligence, said by phone. “They’re not stumbling on technology, but the reality is that until the 5G market really takes off in earnest, they’re going to be pressured.”
Ericsson rose 0.2 percent to 66.75 kronor at 9:35 a.m. in Stockholm.