The Market Was Not Happy
On Wednesday, after weeks of turmoil, Swedish telecom giant Ericsson AB, otherwise known as Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC), issued a warning to investors. Profits were going to collapse in the company’s third quarter. The new guidance confirmed investors’ suspicions that Asian rivals have encroached on the Western markets.
Competitors like Huawei Technologies Co., Ltd. have been making inroads throughout Europe, offering customers a wider selection of products than Ericsson. The Swedish tech giant usually sticks to building wireless broadband networks, such as for 4G or 5G networks.
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But mobile carriers have pretty much finished their bandwidth buys. They spent so much cash gaining access to 4G networks that there is little demand left right now. As a result, Ericsson’s sales collapsed by 19% in its core mobile network equipment business.
Meanwhile, gross margins also fell from 34% to 28% year-over-year. (Source: “Ericsson Shares Plunge on Profit Warning,” The Wall Street Journal, October 12, 2016.)
Ericsson has invested heavily into what it sees as growing parts of the technology space, from 5G towers to the Internet of Things (IoT). Building connectivity for a range of home devices could prove to be a winning strategy in the long term, but the company still has to survive the short term.
That’s where the concern lies for investors. They are not sure that Ericsson can keep standing for long enough to collect on those investments, and the lowered earnings forecast did nothing to quell their fears.
By its own account, Ericsson expects third-quarter earnings to plunge a whopping 93% to $33.96 million from $577.39 million in the same quarter last year. Considering that this steep fall comes on the back of a much shallower 12% dip in sales, investors are concerned about the company’s financial resilience. That explains the 17% slide in Ericsson’s share price.
Credits: Pixabay.com/StockSnap
As pre-emptive damage control, the company announced huge job cuts. Nearly 20% of its 16,000-person home-country workforce is about to be laid off, while further job cuts are coming to the 115,000 staffers worldwide.
“Continued progress in our cost-reduction programs did not offset the lower sales and gross margin,” said CEO Jan Frykhammar. “We will continue to drive the ongoing cost program and implement further reductions in cost of sales to meet the lower sales volumes.” (Source: “Ericsson shares plunge after it issues profit warning, weak broadband demand,” CNBC, October 12, 2016.)
