Skip to Content

Ericsson Cutting Costs Further to Soothe Investor Fears

Ericsson AB Results News ConferenceEricsson AB Results News Conference
The logo of Ericsson AB is seen outside the company's headquarters in Stockholm, Sweden.Photograph by Casper Hedberg — Bloomberg via Getty Images

Mobile telecoms gear maker Ericsson said it would cut costs further to match slower network spending in Europe and Latin America after quarterly profit and sales missed expectations, sending its shares plunging more than 14%.

With most of the latest generation of networks already built, especially in developed markets, the leading player in mobile infrastructure has been struggling to find growth elsewhere to mitigate falling sales for that part of its business.

The Swedish company reported a sixth consecutive quarter of underlying sales declines on Thursday. Operating profit was 21% below the average forecast in a Reuters poll of analysts, weighed down by its services unit which provides installation and manages operations for customers.

“In my opinion, the company isn’t doing anything badly—their problem is that their markets are falling,” said Joakim Ahlberg, senior analyst at Nordea Investment Management, which is underweight on Ericsson in its Swedish and Nordic funds and has picked Cisco over Ericsson in its global funds. “But they have had a too optimistic market view, having to guide down growth forecasts at their capital markets days in the past several years.”

Get Data Sheet, Fortune’s technology newsletter.

Unhappy with sales growth and profitability, Ericsson announced a reorganization to tailor its operations more to customer needs in the fast-changing communications industry.

“We are not changing strategy, but we are setting a structure that better fits our customers and our offering and that also will address our possibilities to grow and improve profitability,” CEO Hans Vestberg told Reuters.

Major Ericsson shareholder Industrivarden had already called on the group to boost profitability in several areas of its business.

SHARES PLUMMET

Ericsson shares fell as much as 15% to a three-year low after the disappointing first quarter and were on track for their biggest one-day decline since 2007.

By contrast, shares in rival Nokia which will next month report on its first quarter after combining with Franco-American Alcatel-Lucent, were down just 1.5% by 1510 GMT.

“The read for Nokia is not too bad,” analysts at UBS said in a note to clients, adding Ericsson’s first-quarter problems looked mostly company specific.

For more about the telecom industry, watch:

Nokia, which had a 16% operating margin last year against 9% for Ericsson excluding restructuring charges, is seen by analysts as a more efficient company after years of measures to boost profits and streamline operations.

Ericsson’s services division was the main weak spot, with sales down on the previous year due to lower rollout activities in Europe and Latin America and operating profit at just a third of what analysts had penciled in.

“Services are critical to Ericsson’s planned transformation of the company, and shortcomings in sales and profits in this area have made the market lose faith in the company,” Swedbank analyst Mathias Lundberg said.

In the face of sluggish or zero growth for its core networks business, Ericsson is cutting costs to boost profitability and said on Thursday it was on track to reach the promised nine billion crowns in annual savings by 2017.

It gave no target for the new cost cuts, but said restructuring charges for the year would be four to five billion crowns versus a previous forecast of three to four billion.