Ericsson banks on expanded Cisco partnership to get back on track

REUTERS/Stig-Ake Jonsson/TT News Agency/File Photo

STOCKHOLM (Reuters) – Struggling telecoms equipment maker Ericsson is looking to expand the scope of its partnership with Cisco as it hunts for ways to offset weaker growth for the industry over the next two years.

Ericsson shares, which have slumped 44% this year, rose 3.7% on Thursday after the Swedish firm gave a new outlook that was less bearish than some analysts had expected and said its Cisco partnership was gaining momentum.

Nonetheless, Ericsson’s acting CEO told investors in New York he was not satisfied with the company’s performance.

“We have a tough market situation out there,” Jan Frykhammar said, pointing to weakness in emerging markets where its best hopes for more 4G mobile network upgrade contracts are located, as well as slower mobile network demand in Europe.

“We understand that we need to perform better but you also as investors need to give us some time,” Frykhammar said.

The company is wrestling with a drop in spending by telecoms firms, with volume demand for next-generation, 5G technology still years away and amid stiff competition from Huawei and Nokia.

Ericsson said negative industry trends from the first half of 2016, when demand weakened for mobile broadband equipment across the industry, were expected to prevail for at least the next two or three quarters.

It expects average annual growth of 1% to 3% from 2016 to 2018 for areas of the market where its provides products and services. In its previous market forecast, issued a year ago, Ericsson predicted 2% to 4% total market growth each year from 2014 to 2018.

“Ericsson is perhaps a bit more optimistic about 2017 and 2018 than the market,” Redeye analyst Greger Johansson said.

Ericsson said its Cisco partnership, which was announced a year ago, got off to a slow start but was gaining traction with more than 60 joint customers and scope to collaborate in areas such as data centers, Wi-Fi, security and the Internet of Things.

“The opportunities go beyond where we originally had been focusing, which is the core and IP networks,” said Rima Qureshi, Ericsson’s chief in North America. “As a consequence, we’re looking at expanding the scope.”

Hard times

Ericsson has had a brutal year. Former CEO Hans Vestberg was ousted in July and the company shocked investors last month when it warned of a 93% plunge in operating profit for the third quarter and tumbling sales.

The firm has been slashing jobs and last month appointed veteran board member Borje Ekholm to take over as CEO in January and steer the firm through its worst crisis in a decade.

It said on Thursday that its results would be weighed down by a 10% to 15% fall in the global mobile infrastructure market this year and a 2% to 6% decline in 2017.

That puts Ericsson roughly in line with Nokia, which warned last month its addressable market for mobile network equipment would likely decline by low single digits in 2017, after it announced a drop in third-quarter sales.

Shares in Nokia rose 2% on Thursday and network equipment makers were among the top performers on the STOXX European tech index, which was down 0.9% overall.

Still, Ericsson is more dependent on mobile broadband demand than its main rivals, as the Alcatel-Lucent merger gave Nokia a larger fixed-line networks business while Huawei has a broader telecom offering than Ericsson.

For its mainstay networks business which generates 75% of group sales, Ericsson cut its growth outlook, forecasting its market would be flat or shrink by as much as 2% between 2016 and 2018.

Its new IT & Cloud division is expected to grow 5% to 7% in the same period and generate 20% of net sales.

(By Olof Swahnberg; Writing by Mia Shanley,; editing by Eric Auchard and David Clarke)

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