Ericsson Speeds Cost Cuts as Turnaround Proves Challenging

  • Shares fall most in nine months as earnings miss estimates
  • CFO Mellander asks for patience: ‘there is no quick fix’

Ericsson AB cautioned that turning around the beleaguered phone-equipment maker will require even steeper cost cuts, testing the patience of investors who sent the stock tumbling the most this year.

Ericsson fell as much as 13 percent in Stockholm after the company posted a second-quarter loss and warned that a faltering market amid technology shifts could cause as much as 5 billion kronor ($600 million) of operating income to evaporate over the next 12 months.

“We’re three months into the strategy,” Chief Financial Officer Carl Mellander said in an interview. “You should have patience because this is about value creation and the long game. There is no quick fix, this is about strategic work and a repositioning of the company.”

Chief Executive Officer Borje Ekholm, who took the helm in January, is under pressure from activist investor Christer Gardell to deliver a speedy turnaround. His plan hinges on reducing costs and scaling back expansion plans that haven’t panned out, while refocusing on Ericsson’s core business of selling networking equipment ahead of the expected roll-out of 5G networks. Gardell’s fund Cevian has acquired about a 6 percent stake in the company since March.

“We are not satisfied with our underlying performance with continued declining sales and increasing losses,” Ekholm said in a statement Tuesday. “In light of current market conditions, we are accelerating the planned actions to reduce costs.”

Borje Ekholm

Photographer: Chris Ratcliffe/Bloomberg

Ericsson’s closely watched adjusted gross margin shrank by 3.4 percentage points from a year earlier to 29.8 percent in the second quarter. The company swung to a net loss of 1 billion kronor from a profit of 1.59 billion kronor a year earlier.

Ericsson said it will accelerate cost cuts over a previously set goal to achieve an annual run-rate reduction of at least 10 billion kronor by mid-2018. Ekholm said Ericsson has identified 42 service contracts that the company will exit, renegotiate or transform. The company has hired banks to review a possible sale of its media holdings, people familiar with the matter said in June.

In 2016, Ericsson’s sales declined by 9.8 percent, and the company said Tuesday it expects a “high single-digit percentage” drop in the market for radio access networks this year, a bigger fall than previously expected.

To read a Gadfly column on the Ericsson news, click here

“There is a change in environment,” Ekholm said on a conference call. “We see a more challenging investment environment in Europe and Latin America. That’s clearly the market areas with the biggest impact.”

The shares were down 12.5 percent to 53.30 kronor at 2 p.m. in Stockholm, after earlier touching 52.95. Ericsson’s 1 7/8 notes maturing in March 2024 fell to their lowest since February.

Ericsson now expects “stabilization, but still a challenging market” next year, according to Ekholm, who said the company remains on track to reaching a target of boosting the operating margin to 12 percent beyond 2018.

Radical Change

Since Ekholm’s appointment, Ericsson’s stock had gained 15 percent through Monday. Although Cevian’s Gardell hasn’t given much detail on his plans for Ericsson, his penchant for asset sales has led to speculation that he may seek more radical change. In a June 5 memo to employees, Ekholm wrote that Gardell can be expected to increase the pressure on Ericsson to restore profitability and that the manufacturer must boost its sense of urgency in doing so.

Revenue in the three months ended in June fell 7.8 percent to 49.9 billion kronor, the Stockholm-based company said. Analysts predicted sales of 50.7 billion kronor on average. Adjusted operating profit of about 300 million kronor was lower than the average estimate of 1.7 billion kronor.

“The market conditions have been tough,” Ekholm said. “It’s quite clear that we need to improve our own efficiency.”

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