Tech

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Ericsson's shares are plummeting after the Swedish maker of telecommunications gear warned revenue is deteriorating quickly.

Ouch
Ericsson shares fell the most in nine years after the company's warning on sales
Source: Bloomberg
Intraday times are displayed in ET.

The company isn’t only suffering from an industry-wide slowdown as telecom operators cut spending after building out their 4G mobile networks. Ericsson also faces problems of its own making. It failed to cut its bloated costs fast enough. It failed to successfully develop its own products for fixed telecommunication networks, and then shunned acquisitions that could have plugged the hole in its product line.

Wednesday's 17 percent decline in the stock brings it to the lowest since 2008. Ericsson now trades at about 11 times estimated earnings -- a discount to rival Nokia's 16 times multiple. There's a reason for that steep discount: there are no easy fixes to Ericsson's woes. And the company hasn't even found a new CEO to address them.

Plunging Sales
Ericsson posted its biggest drop in quarterly revenue in more than a decade
Source: Bloomberg

Sales fell 14 percent in the third quarter, their biggest decline since 2003. The gross margin is an even bigger concern: it fell six percentage points from the year-earlier period to 28 percent in the third quarter, the lowest since 2001.

Wrong Way
Ericsson's gross margins are headed lower, showing the importance of an ongoing cost-cutting program
Source: Bloomberg

Nokia, Ericsson's only publicly traded peer, has also been hit this year as demand for mobile products ebbed. But the Finnish firm has a more diversified product line and cost savings from its acquisition of Alcatel-Lucent to cushion the blow.

Hole in the Portfolio
Ericsson leads in mobile gear -- but trails Nokia in fixed-line and broadband equipment
Source: Gartner 2015 figures

Even if telecoms operators started spending again on wireless gear tomorrow -- which they wont -- Ericsson is unlikely to be in a position to benefit as much as rivals. It still needs to overcome divisions at board level, set a new strategy and cut staff.

While consolidation has cut the number of key players in the telecom network equipment business to three, several harsh realities still plague the industry. Prices only go down, products rapidly become commodities and spending on research and development needs to be high to develop the next generation of products.

To thrive in such a market, companies need to be efficient, technology savvy, and open to change quickly. China's Huawei ticks these boxes but isn't publicly traded, so investors can't get in. Nokia has a good chance to get there if CEO Rajeev Suri delivers on the promises of the Alcatel take-over.

Meanwhile, analysts who track Ericsson seem to think this year will mark the low point. They're forecasting an improvement in gross margin improvement and Ebitda -- despite slightly lower revenue, according to Bloomberg data. Those predictions seem ripe for revision.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net