Ericsson plans more cost cuts as revenue trails estimates

Stockholm: Ericsson will accelerate cost cuts after posting sales that missed analysts’ estimates, as Chief Executive Officer Hans Vestberg battles waning demand for networking gear.
The shares rose as much as 5.2 per cent after 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 per cent to 54.1 billion kronor ($6.3 billion) as carriers in Europe, Russia and Brazil curbed investments in wireless gear. Analysts predicted a 9 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 for coming 5G wireless networks. A partnership with Cisco Systems Inc. allows the company to lower spending on 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 rose as high as 67.75 kronor and were up 4.1 per cent to 67.05 kronor at 9:35am in Stockholm. They had slumped 22 per cent this year through Monday.
The new cost reductions will include job cuts, Frykhammar said. In the second quarter, about 4,000 employees left the company amid previous cost-reduction 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.
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 8 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 $67.8 billion, according to researcher IHS.
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.
Vestberg has made acquisitions to accelerate a push beyond wireless hardware. Ericsson bought Telcordia Technologies for $1.15 billion in 2012 and Mediaroom for about $200 million to tap into new growth streams such as billing and internet-based TV. The company partnered with Cisco to sell more complete networks and compete with Finland’s Nokia, which agreed to acquire hardware rival Alcatel-Lucent last year to add gear used to transmit landline and internet traffic, giving it a more complete offering.
Carriers are restraining investments after spending billions of dollars building fourth-generation systems so users can stream music and video on phones and tablets. Mobile data is expected to soar 10-fold over the next six years as users turn to services such as Netflix, but Europe’s biggest phone companies have warned that investments in a faster fifth-generation networks may be held back by regulations on so-called net neutrality.
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.