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Ericsson Just Had a Really Bad Quarter

Hans VestbergHans Vestberg
Hans Vestberg, former CEO of Ericsson, will be the next CEO at Verizon. Photo credit: Per Myrehed

First quarter sales and profit for Swedish telecoms equipment maker Ericsson fell short of forecasts on Thursday, sending its shares more than 10% lower and lending added urgency to plans to reorganize its business.

“We are not satisfied with our overall growth and profitability development over past years,” Chief Executive Hans Vestberg said in a statement.

Ericsson (ERIC) said its new structure would consist of business units focused on type of customer and type of business, adding it had started to take additional measures on top of an ongoing savings program to fight a slow market.

Ericsson shares fell as much as 11% to a three-year low after the disappointing first quarter.

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

Those comments led to speculation in Swedish media that Industrivarden, which holds Ericsson shares equal to 15% of votes and whose own performance has disappointed investors, could be looking to sell its shares.

Ericsson’s service division was the main weak spot, with sales down on the previous year due to lower rollout activities in Europe and Latin America.

“An unexpected weakness coming from the Professional Services business unit just at the moment the Networks division starts showing good developments makes us worry about Ericsson’s ability to ever be run tightly and improve profitability sustainably,” Bernstein said in a note to clients.

“On the other hand, a loss of scale in professional services can be rapidly addressed through restructuring, which would drive group profitability back on track rapidly.”


Cost Cuts

Ericsson is facing increased competition after Finland’s Nokia bought Alcatel-Lucent.

In the face of sluggish or zero growth for its core networks business, Ericsson has been cutting costs to boost profitability. It said on Thursday it had started to take additional measures beyond the promised 9 billion crowns in annual savings by 2017 compared with 2014 in the quarter.

Like-for-like sales dropped by 1%. In 2015, group sales dropped 5% on a comparable basis after declining 2% in 2014.

Operating profit was 3.48 billion Swedish crowns ($428 million), up from 2.13 billion a year earlier but below a mean forecast of 4.37 billion in a Reuters poll of analysts.

Sales at the world’s number one mobile network equipment maker were 52.2 billion crowns, below a forecast of 54.6 billion.

Growth in North America, mainland China and South East Asia was offset by weak development in Europe and some emerging markets, Ericsson said, adding restructuring charges for the year would be 4 to 5 billion crowns versus a previous forecast of 3 to 4 billion.