Ericsson reports lousy Q2 as telcos continue to not buy anything

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STOCKHOLM (Reuters) – Sweden’s Ericsson reported a worse than expected second-quarter loss on Tuesday and lowered its forecast for the mobile infrastructure market, blaming persistent low investment by telecoms companies.

Ericsson shares fell more than 11% to 54.20 crowns by 1110 GMT, with the figures fuelling concerns that plans by CEO Borje Ekholm, who took charge in January, will not be enough to restore profitability.

The company is facing mounting competition from China’s Huawei and Finland’s Nokia as well as weak emerging markets and falling spending by telecoms operators with demand for next-generation 5G technology still years away.

Ericsson has responded by cutting jobs and costs but those efforts are yet to stop the rot.

“We are in a phase of turnaround but it’s going to take some time,” Ekholm said on Tuesday, repeating the firm was on course to double 2016 margins after 2018.

Operating loss in the second quarter was 1.2 billion Swedish crowns ($145.3 million), compared with a 2.8 billion profit a year earlier and a mean forecast for a 244 million crown loss seen in a Reuters poll of analysts.

Ekholm’s strategy to stabilize the business includes exploring options for its loss-making media arm and reviewing unprofitable managed services and network rollout contracts.

“We see a more challenging investment environment in Europe and Latin America, that’s clearly the market area with the biggest impact,” Ekholm added.

“We see macro economic uncertainty in Middle East and Africa that is hurting investment. We see also that operators have funneled the investments more into fiber investments for example than into radio capacity.”

The company, backed by prominent Wallenberg family-backed Investor AB and Industrivarden, said it was targeting cost cutting to achieve an annual run rate reduction of at least 10 billion crowns by mid-2018.

Market decline

Ericsson stunned investors earlier this year by announcing $1.7 billion in provisions, writedowns and restructuring costs.

Moody’s cut the company’s credit rating to junk in May, partly due to worries that the cost-cutting could hamper innovation.

Adding to the sense of gloom, Ericsson said it now sees the mobile infrastructure market falling by a high single-digit percentage this year, compared to its earlier guidance of a 2-6% decline.

“Ericsson doesn’t deliver, they lose versus the market and the market is weak,” said Inge Heydorn, fund manager at Sentat Asset Management, which has no position in Ericsson shares.

In 2018 it expects the mobile infrastructure market to fall by a low single digit percentage and to flatten out in 2019, CFO Carl Mellander told Reuters.

Sales at Ericsson, one of the top global mobile networks equipment makers, were 49.9 billion crowns below a consensus forecast of 50.5 billion, while the gross margin came in at 27.9% versus the 28.4% seen by analysts.

Operating profit in the Networks segment almost halved to 2.6 billion crowns in the second quarter, while both IT & Cloud and the media segments posted higher losses versus a year ago.

It had a net cash position of 24 billion crowns by the end of June, down from 28 billion at the end of March.

(Reporting by Helena Soderpalm and Olof Swahnberg; editing by Justyna Pawlak and Keith Weir)

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