Ericsson's (ERIC) - Get Reportsecond-quarter report feels very much like deja vu. Three months after the mobile infrastructure giant fell sharply due to weak results and took rival Nokia (NOK) - Get Report with it, it has done so again, and made new 52-week lows in the process.
One twist: The second-quarter report includes news Ericsson plans to significantly boost its cost-cutting efforts, with the company now hoping to lower its annual operating expense run rate to SEK 53 billion ($6.2 billion) in the second half of 2017 from SEK 63 billion in 2014.
The report highlights the challenges not only Ericsson, but also other telecom equipment suppliers such as Nokia, Ericsson partner Cisco (CSCO) - Get Report and Juniper Networks (JNPR) - Get Reportface in growing their sales to mobile carriers. And it might also increase the pressure for Ericsson to consider a big acquisition to lower its reliance on mobile infrastructure hardware and services.
Ericsson's sales fell 11% annually in the second quarter to SEK 54.1 billion -- a much steeper decline than the first quarter's 2.4%, even after accounting for the 4% impact of acquisitions/divestitures and currency swings -- and missed an SEK 55.2 billion Bloomberg consensus. Net profit fell 26% to SEK 1.59 billion. The company's Networks (hardware/software) business saw a 14% revenue drop, and its Global Services business posted a 7% decline.
Weak Networks sales are blamed on "markets impacted by a weak macro-economic environment such as Brazil, Russia and the Middle East," along with weak European demand following the completion of 4G projects in 2015 and lower Chinese 3G spending. North American Networks sales were "stable." Global Services demand was stung by weak carrier spending and Ericsson's attempts to restructure or exit less profitable contracts.
There are other factors that are weighing on Ericsson, and in some instances telecom equipment peers. With many 4G carrier build-outs at an advanced stage, 4G infrastructure spending is declining, and will likely continue doing so. Many mobile carriers are seeing little to no revenue growth as messaging apps, VoIP and other services eat into voice and text messaging revenue streams.
And competition is intense: Nokia just greatly expanded both its sales reach and product line by merging with Alcatel-Lucent, and China's Huawei and ZTE have been pricing aggressively to win emerging markets deals.
With major 5G network build-outs still a few years away, telecom equipment spending by mobile carriers probably won't get much better in the near term. Nokia is counting on the addition of Alcatel-Lucent's resources, along with the deal's cost synergies, to create value for shareholders in such an environment. Ericsson, by contrast, took the low-cost approach of partnering with Cisco to create joint solutions and resell the other company's wares.
Though a smart move, the Cisco deal isn't doing enough by itself. A major acquisition or two might ultimately be necessary to put Ericsson's top-line performance on a better footing.
If the company heads in this direction, there are plenty of potential targets. Optical networking hardware firms Ciena (CIEN) - Get Report and Infinera (INFN) - Get Report, VoIP infrastructure provider Sonus Networks (SONS) , broadband wireless equipment provider Ubiquiti Networks (UBNT) and unified communications software/services provider BroadSoft (BSFT) are among the possibilities.