Struggling Swedish telecom equipment maker Ericsson can’t seem to catch a break. The company reported worse-than-expected second quarter earnings today and said it would accelerate previously announced cost reduction plans. The firm also warned that its operating income could be further impacted by between $360 million to $600 million over the coming year because of customer contracts that will need to be renegotiated.
Ericsson reported an operating loss of $145.3 million in the second quarter compared with a $340 million profit in the same quarter last year. Sales were $6.02 billion, which was below analyst estimates of $6.1 billion. Gross margin was 27.9 percent, which was lower than analyst estimates of 28.4 percent.
CEO Börje Ekholm didn’t elaborate on the specifics of the customer contracts that might require renegotiating other than to say that they are across multiple business lines and different regional areas. Ekholm did say that all of these contracts come with some risks, but that the $360 million to $600 million range was an estimate to provide investors with some guidance.
Interestingly, Ekholm also said the company saw a decline in its radio access network business in the second quarter. It had estimated a decline of 2 percent to 6 percent this year, but now is expecting a decline in the higher single digit range. One reason for the decline, Ekholm said, was because operators have funneled more investment into expanding their fiber assets rather than expanding their radio capacity.
The further decline of the network business was a bit of a surprise to analysts as the company had painted the networks business as a bright spot in the first quarter.
More Cost Cuts
The company reiterated its plans to re-establish profitability in 2018, and double its 2016 operating margin. This includes plans to accelerate its cost efficiency program by reducing service delivery costs and other company costs like real estate and IT without dipping into R&D, which it still considers necessary to compete with future technologies like the Internet of Things (IoT) and 5G. The company said its goal is to have an annual run rate of $1.21 billion by mid-2018. Ekholm reiterated that Ericsson is still exploring options for its media business and is trying to improve the performance of its IT and cloud business units. “We have had some challenging conditions and have made efforts to stabilize them,” he said.
Despite the dire results, Ekholm said the company believes it is no longer losing market share. Instead he said the company appears to be gaining customer momentum around its new radio system platform. He added that as customers are preparing for 5G, they believe they are well positioned with Ericsson’s product platform.
At deadline, Ericsson’s stock was tracking at $5.37 per share, a decline of 16.22 percent from the previous day’s close of $6.41 per share.