Ericsson shares plummet 15% on disappointing Q2 earnings

Ericsson
Ericsson was particularly challenged by slowing growth in Europe and some emerging markets.

Shares of Ericsson plummeted more than 15% after the company posted a disappointing second quarter and lowered expectation for all of 2017.

The venerable telecom gear vendor saw an operating loss of $145.3 million during the period, marking a dramatic reversal from the $338.2 million profit it posted during the same period a year ago and far worse than the $29.4 million loss expected in a Reuters poll of analysts. Sales decreased by 8% year over year and revenue was down 7.7%.

The company said it expects the global market for mobile equipment for 2017 “to show a high single-digit decline” compared to its previous estimate of contraction ranging from 2% to 6%.

“We are not satisfied with our underlying performance with continued declining sales and increasing losses in the quarter,” CEO Borje Ekholm said in a prepared statement. “The decline in the networks result in the quarter was mainly caused by lower software sales, driven by two key factors; unusually strong software sales in the second quarter last year and cautious mobile broadband investment levels.”

Ericsson was particularly challenged by slowing growth in Europe and some emerging markets, analysts at Wells Fargo Securities noted.

“Sales in Europe and Latin America (down 11%) were impacted by lower broadband investments while Middle East and Africa (down 17%) faced difficulty (in) a macro environment,” Maynard Um of Wells Fargo wrote in a note to investors. “North Africa was stable though declined due to a loss of a service contract and North East Asia (down 3%) saw a decline in China partially offset by growth in Japan and Korea.”

Ericsson is in the midst of executing a turnaround plan it unveiled in March to streamline its operations by combining products and services and upping its investments in both R&D and “services capabilities” in several core areas. In May the company announced that Rima Qureshi, senior vice president and head of Market Area North America, had left the company.

As part its restructuring, the company plans to shift its internet of things strategy from a systems integration-led approach to a platform- and solutions-led strategy to better leverage its global scale and industry expertise.

Ericsson posted a net loss of $181 million in the fourth quarter of 2016 as sales were down 10% for all of 2016.

“Execution of our focused business strategy is gaining traction,” Ekhom said. “However, in light of current market conditions, we are accelerating the planned actions to reduce costs.”

One major looming question is whether Ericsson’s recent struggles reflect a broader slowing of the worldwide market for mobile telecom gear. Nokia is likely to shed some light on that question when it posts its second-quarter results next week.