Ericsson Under Pressure as Second-Quarter Earnings Loom
Bloomberg News
Tuesday, July 19 may prove to be a day of reckoning for Ericsson (ERIC) - Get Report CEO Hans Vestberg.
Battling to lift sales, the CEO faces a litany of operational challenges and analysts aren't expecting any upturn when the company reports second-quarter results.
The Bloomberg consensus is that Ericsson, whose sales have declined for six consecutive quarters when stripping out currency benefits, will report second-quarter revenue of 58.2 billion Swedish kronor ($6.7 billion).
That compares with Skr52.2 billion in the first quarter, but is down Skr60.7 billion on the second quarter of 2015. The consensus for earnings per share is Skr0.96, compared with Skr1.04 in the second quarter of 2015.
69.2% of analysts recorded as covering the stock on Bloomberg rate the stock as a hold, while 15.4% say sell and 15.4% say buy. The shares have fallen by more than 17% so far in 2016.
The company arrived last at the restructuring party when it announced a reorganization plan in April, with the hope of addressing its cumbersome internal structure by dividing the company into five smaller business units and cutting costs. Since this time it has signed at least two partnership agreements, one with Cisco Systems (CSCO) - Get Report, and another with TeliaSonera, both of which are designed to build up its position in 5G, Internet of Things and Cloud infrastructure and services.
However, the restructuring is yet to yield any visible results and additional restructuring charges have offset the benefits anticipated from Ericsson's attempts to cut costs from the business. Some believe that the company has not done enough, even after Svenska Dagbladet reported in mid-June that it could be on the verge of cutting 25,000 more jobs.
"The measures have been too late and too small... the pressure is increasing on management," said Barclays analyst Andrew Gardiner.
Ericsson announced in April that its sales had fallen by 2% year-on-year in the first quarter and were down 1% after currency adjustments. The company blamed weak macroeconomic conditions in Europe and some emerging markets. The downbeat assessment from Barclays comes just weeks after Ericsson's second-largest shareholder, Industrivaerden, publicly criticized the company for its recent performance.
Gardiner believes that for Ericsson to garner any meaningful benefits from its restructuring, it would need to get rid of underperforming units such as its optical transport and IP routing divisions. Ericsson declined to comment on potential disposals.
Adding fuel to the fire, Ericsson will now also need to contend with greater competition from Nokia (NOK) - Get Report, which merged with Alcatel-Lucent earlier this year.
In addition to the financial and operational pressures, Ericsson faces corruption investigations in jurisdictions including the U.S. and Greece. Ericsson said last month it's cooperated with U.S. authorities since first receiving a request for information in March 2013. A few days earlier it disclosed that current and former executives had been summoned by Greek prosecutors as part of a "preliminary inquiry" into a 1999 radar system sale. Its website said it has a "zero tolerance approach against bribery and corruption" that "aims to ensure that we operate our business globally with transparency and integrity."
But the probes could spell bad news for CEO Vestberg, said Ovum analyst Daryl Schooler.
"When you see that many quarters of revenue loss, and you combine that with issues about fraud-those are the kinds of things that lead to CEOs getting fired," Schooler.
There could be light at the end of the tunnel, though.
The European Commission's work on creating a so called "digital single market" could prove a boon for capital expenditure on wireless infrastructure in Europe over the coming years. And that presents an opportunity for Ericsson and peers, according to analysts at Liberum Capital in London.
On Thursday 17 European telecoms and equipment makers, including Ericsson, detailed plans to roll out 5G services in at least one city in every European Union member nation by 2020 in a so-called 5G manifesto welcomed by EU Commissioner Gunther H. Oettinger. The manifesto states that any 5G roll-out will require substantial infrastructure investment and calls for the Commission to make grants available to fund early trials and developments. Ericsson's core business is in radio and telecom network infrastructure and as a result, it should benefit if the plans are realized.
Ericsson shares closed on Friday up 2.5% at Skr64.90. Liberum rates the stock a buy with a price target of Skr90.