Ericsson warns Q3 will be ugly, stock plummets

Networking giant Ericsson has issued preliminary Q3 2016 earnings and they indicate a significant acceleration in its decline.

Overall sales declined by 14% year-on-year, the main culprit being the networks segment, which declined 19% annually and 13% on the previous quarter. Especially worrying for Ericsson and its shareholders is that the increased decline seems to have taken place quite recently, making it likely that Q4 will be a car crash too.

“Our result is significantly lower than we expected, with a particularly weak end of the quarter, and deviates from what we previously have communicated regarding market development,” said acting CEO and former CFO Jan Frykhammar. “The negative industry trends have further accelerated affecting primarily Segment Networks.

“Continued progress in our cost reduction programs did not offset the lower sales and gross margin. More in-depth analysis remains to be done but current trends are expected to continue short-term. We will continue to drive the ongoing cost program and implement further reductions in cost of sales to meet the lower sales volumes.”

Ericsson is trying to focus attention on economically weaker regions such as Brazil, Russia and the Middle East but also concedes capacity sales in Europe have hit a lull. The situation in North America has been disappointing for a while and APAC is extremely competitive so there is little sanctuary available.

The cost reduction programme has also been underway for some time and, as Frykhammar conceded, Ericsson is struggling to keep up with the rate of revenue decline. That situation is clearly unsustainable, but on the flip side getting rid of talented employees is rarely a recipe for long term success. The real problem has been the pace at which Ericsson’s diversification has happened, with things like professional services, software and media not picking up the slack quickly enough.

Ericsson’s shares in Sweden were down 14% at time of writing and down 17% in NASDAQ pre-market trading. The table below summarises the headline numbers and they make ugly reading. Ericsson will publish its full Q3 report on 21 October, which may well include a further round of redundancies.

Key numbers (preliminary and unaudited)