Ericsson plans more cost cuts as revenue trails estimates
We’re going to keep investing in our 5G leadership while reducing some of our spending in the IP space.
ERICSSON 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. Secondquarter sales fell 11 per cent to 54.1 billion kronor ( RM25 billion) as phone carriers in Europe, Russia and Brazil curbed investments in wireless equipment.
Analysts predicted a nine per cent drop to 55.2 billion kronor on average.
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 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
Chief Financial Officer Jan Frykhammar
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 per cent to 62.90 kronor at 11.54am in Stockholm. They had slumped 22 per cent this year through Monday.
The new expense reductions will include job eliminations, Frykhammar said. In the second quarter, about 4,000 employees left Ericsson amid previous costcut 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 programme 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 per cent last quarter, while revenue in northern Europe and central Asia dropped 18 per cent. North American sales fell eight per cent and Latin American revenue declined 10 per cent.
The wireless equipment market is set to shrink 5.5 per cent this year to US$ 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 per cent. Analysts predicted 33.3 per cent on average.
Ericsson partnered with Cisco in November to sell more complete networks and compete with Finland’s Nokia 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. — WP-Bloomberg