Stagnating sales forces Ericsson to cut costs further

Ericsson posts weaker sales than rivals Nokia and Huawei in fast growing economies. In photo: A general view shows an office of Swedish telecom giant Ericsson in Lund, Sweden Photograph:( Reuters )

Reuters Stockholm, Sweden Jul 19, 2016, 12.00 PM (IST)
Mobile telecom gear maker Ericsson forecast a third consecutive year of comparable sales declines on Tuesday, saying it would step up cost cuts in the face of deteriorating market conditions after its results fell short of market expectations.

With demand stagnating in developed markets where the newest networks have mostly already been built, Ericsson is now feeling an additional pinch from lower spending in countries such as Russia, Brazil, the Middle East and Nigeria, hit by weaker currencies and low oil prices.

"This has become even more pronounced during the second quarter, so it has impacted the investment levels at the operators, and that hits the mobile broadband market," stated Ericsson Chief Financial Officer Jan Frykhammar.

"So that is the most important trend."

For the past couple of years, Ericsson has been forced to cut its outlook for market growth, weighed down by sluggish demand for its core mobile network base stations. It also has a weaker position than rivals Nokia and Huawei in faster growing areas such IP-based communication.

To offset the shrinking market for mobile infrastructure, Ericsson is investing in new areas to grow sales, such as IP- and cloud-based communication, but so far these are not growing fast enough to compensate.

Like-for-like sales dropped by 7 percent in the quarter, the seventh in a row of declining underlying sales, though CEO Hans Vestberg told a conference call it didn't appear that Ericsson was losing market share. In 2015, group sales fell 5 percent on a comparable basis after declining 2 percent in 2014.

"The current sales trends and business mix are expected to prevail for the second half of the year," Ericsson said in a statement.

Cost reduction plan could have far-reaching affects

Operating profit was 2.8 billion Swedish crowns ($327 million) compared with 3.6 billion a year-ago, weighed down by its networks divisions and below a mean forecast of 3.0 billion crowns.

Ericsson said it would roughly double cuts in operating expenses to adapt to a weaker market, meaning annual savings of some 10 billion Swedish crowns from the second half of 2017 compared to 2014, adding that a previously announced cost savings programme was going according to plan.

Ericsson's beaten-down shares, which dropped 15 percent in a single day in April after weak results, slipped 1 percent to 63.70 crowns.

"While Ericsson seems to be more serious now about its cost reduction efforts, it seems to be chasing a bit of a moving target," Liberum said in a note to clients.

"The cost reduction plan is expected to show some results which should lead to higher operating margins, though the extent is difficult to predict."

Ericsson did not say how planned cost cuts would affect jobs but said almost 4,000 employees had left during the quarter though an acquisition had contributed to a net increase in staff. Ericsson employed 116,507 people by June 30, versus 115,300 by the end of the first quarter.