Shares of Ericsson tumbled more than 20% this morning after the company said it expects disappointing third quarter results. Ericsson is projecting a 93% year-on-year drop in operating profit and a 14% decline in sales. The company expects operating profit of roughly $577 million on sales of $5.8 billion. Ericsson took $147 million in restructuring charges this year, and today acting CEO Jan Frykhammar said further cost cutting measures may be needed because of lower sales volumes.
Ericsson has been struggling for several years in the face of strong competition from East Asian suppliers of wireless infrastructure, coupled with an industry shift to software-based solutions. The company is increasing its focus on software and has had to lay off many of the people whose work was primarily related to hardware. Earlier this month, the wireless infrastructure giant announced its latest round of layoffs, totaling roughly 3,000 people. At the same time, the company said it would recruit up to 1,000 additional employees to work in research and development.
This year Ericsson has also had to deal with a new competitor, as Nokia and Alcatel-Lucent combined forces. Ericsson traditionally competed primarily with Alcatel-Lucent in North America, but now that Alcatel-Lucent is part of Nokia, the combined entity has new opportunities in North America. Ericsson has partnered with Cisco in a move designed to give the Swedish company access to some of the same wireline capabilities that Nokia has gotten from its merger with Alcatel-Lucent.
Ericsson has for years led the market for wireless network radio equipment, but it’s looking to other markets and other customers as it plans for the future. The company is investing heavily in network software and video delivery, as well as in global services, which is the business of building networks. Earlier this year, Frykhammar said the global services market is growing at between 3% and 5% annually, while the network equipment market is growing between 1% and 3% annually.
This summer Ericsson said its longtime CEO Hans Vestberg would leave immediately, and the company began a search for a new CEO. Acting CEO Frykhammar was formerly CFO at the company. Vestberg’s departure followed a major corporate reorganization announced earlier this year.
The eventual rollout of “5G” networks is on the horizon for Ericsson, and the company has been a leader in research and testing. But actual orders for 5G equipment are probably years away. Meanwhile, orders for 4G equipment are likely to taper off as these network builds near completion in North America, Europe and East Asia.
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