Ericsson sends a note to self
This is about value creation and the long game – there’s no easy quick-fix
ERICSSON yesterday cautioned that turning around the beleaguered phone-equipment maker would require even steeper cost cuts, testing the patience of investors who sent the stock tumbling the most this year.
Ericsson fell as much as 11 percent to 54 kronor (R84.34) 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 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. “I think 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 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 have not 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 a 6.5 percent stake in the company since March.
“We are not satisfied with our underlying performance with continued declining sales and increasing losses,” Ekholm said yesterday. “In light of current market conditions, we are accelerating the planned actions to reduce costs.”
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.
The company said it would accelerate cost cuts over a previously set goal to achieve an annual run-rate reduction of at least 10 billion kronor by mid2018. Ekholm said Ericsson had identified 42 service contracts that the company would 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 yesterday said it expected a “high single-digit percentage” drop in the market for radio access networks this year, a bigger fall than previously expected.
“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.
“But the market conditions have been tough,” Ekholm said. “It’s quite clear that we need to improve our own efficiency.” – Bloomberg
Borje Ekholm, chief executive of Ericsson, says tough market conditions warrant steeper cost cuts to turn around the beleaguered phone equipment maker and wants the company to improve its own efficiency.