Ericsson Plans More Cost Cuts as Revenue Trails Estimates

Vestberg Vows to Continue Ericsson Transformation
  • Network maker to reduce research on Internet products
  • Demand for wireless gear falling in Europe, Russia, Brazil

Ericsson AB will accelerate cost cuts after posting sales that missed analysts’ estimates, as Chief Executive Officer Hans Vestberg battles waning demand for mobile-network gear.

Ericsson said it will reduce research and development spending and try to reap efficiency gains from a new company structure. Second-quarter sales fell 11 percent to 54.1 billion kronor ($6.3 billion) as phone carriers in Europe, Russia and Brazil curbed investments in wireless equipment. Analysts predicted a 9 percent drop to 55.2 billion kronor on average.

Hans Vestberg at Ericsson Studio on July 19.
Hans Vestberg at Ericsson Studio on July 19.
Photographer: Johan Jeppsson/Bloomberg

With sales in decline, Vestberg has little choice but to keep cutting costs while Ericsson fights for market share and waits for an upturn in spending from coming 5G wireless networks. A partnership with Cisco Systems Inc. allows the company to lower its investments in so-called internet protocol networks that carry web traffic.

“It’s tough out there and we believe it will stay so for at least the remainder of this year,” Chief Financial Officer Jan Frykhammar said in an interview. “We’re going to keep investing in our 5G leadership while reducing some of our spending in the IP space.”

Shares of Ericsson fell 2.3 percent to 62.90 kronor at 11:54 a.m. in Stockholm. They had slumped 22 percent this year through yesterday.

The new expense reductions will include job eliminations, Frykhammar said. In the second quarter, about 4,000 employees left Ericsson amid previous cost-cut programs.

The expense cuts are set to bring the annual run rate of operating costs to 53 billion kronor in the second half of 2017, Ericsson said. That would be down from 63 billion kronor in 2014.

“The savings program is substantial -- 10 billion kronor in lower costs while we have a currency headwind and we have to keep investing more in areas such as 5G and the Internet of things,” Vestberg said in an interview. “This is an enormous task.”

Sales in western and central Europe slumped 13 percent last quarter, while revenue in northern Europe and central Asia dropped 18 percent. North American sales fell 8 percent and Latin American revenue declined 10 percent. The wireless equipment market is set to shrink 5.5 percent this year to $67.8 billion, according to researcher IHS.

“The product mix in the second quarter is slightly negative, but the announced cost cuts are what investors were hoping for,” said Hannu Rauhala, an analyst at OP Financial Group in Helsinki.

The adjusted gross margin, the share of sales left after subtracting the cost of production, shrank to 33.2 percent. Analysts predicted 33.3 percent on average.

Ericsson partnered with Cisco in November to sell more complete networks and compete with Finland’s Nokia Oyj and China’s Huawei Technologies Co., which has been outpacing it in revenue growth.

Vestberg and Ericsson have spent the past few months fending off criticism from investors over the lackluster share performance during his more than six years at the helm. He’s faced questions on probes into alleged corruption in Asia and Europe and on Monday, the company rejected a report in Swedish media that it may be inflating sales by booking revenue before some clients are invoiced.

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