Thursday 23 May 2019

Ericsson boosted by cost cuts and US sales

Ericsson CEO Borje Ekholm
Ericsson CEO Borje Ekholm

Niclas Rolander

Ericsson has soared on signs that CEO Borje Ekholm's turnaround of the Swedish maker of wireless networks is taking hold.

Profitability improved at a quicker pace than analysts had estimated for the second consecutive quarter, as cost cuts boosted earnings and customers embraced new products.

The company's gear gained traction, particularly in North America, where all major carriers are preparing for fifth-generation networks.

Ekholm, who took over 18 months ago, has pledged to refocus the company by ending or renegotiating unprofitable service contracts and ready it for when carriers start spending on faster technology.

Ericsson has reduced its workforce by 20,500 since the second quarter of 2017 as part of a programme that has saved more than 10bn kronor (€0.9bn) in costs.

"We have good market traction in networks," Ekholm said. "Customers turn to new technology in order to manage growing demand for data with sustained quality and without increasing costs."

The stock advanced as much as 9.7pc, the most since April 20, and was up 9.2pc to 73.80 kronor at 9:23 am in Stockholm.

The shares have added 37pc this year as investors welcomed sales momentum in North America and stronger margins, giving the company a market value of 247bn kronor.

The company's gross margin - or portion of sales remaining after deducting production costs - rose to 36.7pc in the second quarter on an adjusted basis, from 30.9pc a year ago, Ericsson said.

Analysts had predicted 35.2pc on the back of cost cuts, the shedding of unprofitable contracts and stronger sales of new, more lucrative products.

The turnaround hasn't been quick enough for activist Christer Gardell's Cevian Capital, which amassed a stake in the company and has called for deeper cost cuts, sooner.

Under Ekholm, Ericsson has ended or renegotiated unprofitable service contracts and taken at least 35bn kronor in writedowns and other charges as many core markets remain weak.

Chief Financial Officer Carl Mellander said that sales in Ericsson core network unit rose for the first time since 2015 in the quarter.

"This is confirmation that we're on the right track, but we haven't started cooling the champagne," he said by phone.

"We have worked very hard to get this far and we will continue doing that."

Sales rose 11pc in North America and were little changed in Europe and Latin America.

Total sales of 49.8bn kronor fell 1pc from a year earlier, beating the average analyst estimate of 48.3bn kronor.

Ericsson repeated its forecast of a total market decline in networks this year of 2pc even as its own sales of networks rose 2pc in the quarter.

Ericsson and rivals like Finland's Nokia expect 5G to boost earnings and sales from 2020. (Bloomberg)

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