Ericsson Second-Quarter Earnings Fall by 43%; Net Sales Miss Estimates
Bloomberg News
Swedish telecom equipment and infrastructure firm Ericsson (ERIXF) did little to dispel concerns over the near-term performance of the business Tuesday morning after second-quarter sales and earnings numbers missed estimates by a country mile. However, the shares were boosted slightly by a pledge from management to cut costs aggressively in order to save around $6 billion in operating costs once into 2017.
"In light of market development, management has, with the support of the board of directors, initiated significant actions to further reduce cost," said CEO Hans Vestberg in statement.
Net sales came in at Skr54.1 billion ($6.2 billion) for the Nordic firm during the period, representing a miss of around 7% against analysts' consensus estimate, which had suggested that net sales would be in the region of Skr58.2 billion.
In tandem with the downturn net sales the gross margin at Ericsson also fell to 32.3% from 33.2% after revenues fell and top-line costs rose as a result of a heavier allocation to mobile broadband and service revenues in the sales mix for the period.
Adjusted earnings per share were also lower during the period, by a considerable 43%, at Skr0.83. The sharp fall was due to lower intellectual property licensing revenues and mark-to-market losses on currency hedging contracts.
In response to the update, management pledged to cut operating costs by Skr53 billion in the second half of 2017 in order to shore up the bottom line.
The prospect of action on costs appears to have gone down well with investors as the shares rose by as much as 1.6% during early European trading, but shares remain 19.9% lower than they were in January this year.
Ericsson has been attempting to restructure its business in response to a decline in profitability, macroeconomic challenges in core markets such as Europe, the U.S. and China as well as increasing competition in mobile and fixed line network infrastructure and services.
The group announced a turnaround plan in April this year but the market has been skeptical of what management will really be able to achieve, prompting the shares to fall to lows of Skr58.00 in June from April highs of Skr80.00.
Analysts at Liberum Capital in London reiterated their buy recommendation for the stock.
They said it is unlikely that core markets like the U.S. and China will deteriorate further, and the bottom line could benefit in future periods from actions to cut costs.
Liberum reiterated its price target of Skr90.00 for Ericsson shares on Tuesday morning, which implies upside of around 40% from current levels of Skr64.00.