hiddenOct 13, 2016 10:59:48 IST
The crisis at Ericsson deepened on Wednesday when the world's biggest maker of mobile network equipment reported a 94 percent plunge in quarterly operating profit and tumbling sales at its core networks division. Shares in the Swedish company dropped more than 15 percent in early trading after it missed analysts' forecasts for a fifth straight quarter and said it saw no signs of a quick upturn.
Ericsson is struggling with weak demand for mobile network equipment in developed markets and stiff competition from Finland's Nokia and China's Huawei, with the former boosted by radical cost-cutting following its merger with Alcatel. The Swedish firm is now also cutting thousands of jobs, but it has come under fire from analysts and investors for being too slow to respond. Hans Vestberg was ousted at CEO in late July and the company is still looking for a permanent replacement.
"It seems that the main reason was the important business area networks which deviated the most," research firm Redeye said of the profit slide. "Combining the market development with the lack of a permanent CEO and a major cost reduction programme, there are the few things to be happy about," it said in a research note.
Ericsson said in a statement its third-quarter operating income plunged to 300 million Swedish crowns ($34.8 million) from 5.1 billion crowns a year ago, including restructuring charges of 1.3 billion crowns. Sales dropped 14 percent to 51.1 billion crowns, including an almost 20 percent drop in its core networks division. Analysts' mean forecasts were for operating income of 4.3 billion crowns and sales of 53.6 billion.
"Our result is significantly lower than we expected, with a particularly weak end of the quarter, and deviates from what we previously have communicated regarding market development," said acting Ericsson CEO Jan Frykhammar. "More in-depth analysis remains to be done but current trends are expected to continue short-term."
Ericsson said the sales decline was mainly driven by markets with a weak macroeconomic environment such as Brazil, Russia and the Middle East. Sales in Europe were also hit due to the completion of mobile broadband projects in 2015. At 0720 GMT, Ericsson shares were down 16.7 percent at 51.65 crowns, after hitting an eight-year low of 50.50 crowns. The stock has fallen around 37 percent so far this year.
"Unless Ericsson can provide a solid explanation to why the gross margin should rebound during early parts of 2017 and why the market should pick up ... we see clear risk that the share will come down sub 50 crowns as estimates will have to come down heavily and (the) dividend likely will have to be cut," SEB analysts said.