Ericsson has decided to further reduce costs beyond its restructuring plan, after reporting another disappointing quarter. CEO Borje Ekholm said the company was not satisfied with its underlying performance in the second quarter and that he sees further downside in the market going forward.
Ekholm talked about an "increased risk of further market and customer project adjustments". The negative impact on results over the next 12 months is seen at SEK 3-5 billion, of which 30 percent will hit cash. To counter this, Ericsson will reduce spending on the capitalisation of its product platform, on software release development and on hardware. Together, this will have a net negative impact on operating profit for the second half of SEK 2.9 billion, though not on cash. In Q2, the negative impact was SEK 0.3 billion on operating profit.
Ericsson reported Q2 revenues down 8 percent from the year before to SEK 49.9 billion, with the gross margin falling to 27.9 percent from 32.3 percent. Networks sales, adjusted for units and currencies, declined by 14 percent, driven mainly by lower revenues in Europe, Latin America and the Middle East & Africa. Sales also fell in North America, North East Asia and Mainland China. Bucking the trend, sales increased in Japan, North Korea, Vietnam and Australia, and were stable in South East Asia, Oceania and India.
The operating result sank 145 percent to a loss of SEK 1.2 billion from a gain of 2.8 billion, and the operating margin fell to minus 2.5 percent from plus 7.0 percent. The company did recover somewhat from the SEK 12.3 billion loss recorded in the first quarter. The same can be said about the net result, which slid to a loss of SEK 1.0 billion from a profit the year before of 1.6 billion, but improved from the 10.9 billion loss in the previous quarter. Cash flow from operating activities was breakeven, improving from minus 0.7 billion the year before.
Networks, with an operating margin slipping to 7 percent from 12 percent year-on-year, was hit by lower software sales. At IT & Cloud, with its operating margin falling to minus 26 percent from minus 13 percent, the operating profit was depressed by less capitalisation of development expenses. Sales at Networks fell 8 percent to SEK 36.8 billion while at IT & Cloud, revenues were down 5 percent to SEK 10.9 billion. The company noted however that the new product portfolio at IT & Cloud had rolling 12-month sales up 7 percent. The company said the division is key for customers preparing for 5G and that action is being taken to improve performance.
Ericsson said performance at Networks should improve through both the continued ramp-up of Ericsson Radio System (ERS) and cost reductions, mainly in service delivery. ERS made up almost half of radio unit deliveries in the quarter. To safeguard the portfolio and its innovation, Ericsson started upping R&D investments at Networks by SEK 0.2 billion in the quarter. It has also signed an agreement to divest the power modules business.
Work to refocus the company’s Managed Service business continues. Sales there decreased to SEK 6.3 billion from 7.3 billion. Together, addressing this segment and optimising the offering in Network Rollout are expected to reduce full-year sales by up to SEK 10 billion by 2019.
Looking to the future, Ericsson has downgraded its view for the Radio Access Network (RAN) equipment market to a high single-digit percentage decline for the full year, from the previous estimate of minus 2-6 percent.
Ericsson is still working towards its goal of doubling the 2016 operating margin beyond 2018. The plan is to implement cost savings with an annual run rate of at least SEK 10 billion by mid-2018, of which half will be related to common costs. Restructuring charges for the full year are seen at the higher end of the SEK 6-8 billion range.
