Ericsson soars as cost cuts start to carry through

Bloomberg

Ericsson AB shares soared the most in more than 9 years after the Swedish maker of wireless networks posted first-quarter earnings that were stronger than analysts had expected, proof that the company is making progress in a protracted effort to reverse its fortunes.
Ericsson’s closely watched gross margin — the share of sales remaining after production costs — rose to 35.9 percent on an adjusted basis, from 18.7 percent a year earlier. That was higher than the 32.7 percent analysts had predicted and lends credence to Chief Executive Officer Borje Ekholm’s expense reductions.
“I think people may have underestimated the force of our cost cuts and our ability to execute on those measures,” Chief Financial Officer Carl Mellander said by phone. “This quarter proves that the measures are starting to bite.” The stock rose as much as 16 percent, the most since October 2008, and was trading 12.3 percent higher to 62.38 kronor at 9:10 am in Stockholm.
The gross margin improvement is a welcome sign that the company’s cost cuts and a new product range are translating into improving profitability, despite sluggish demand for network equipment. Ericsson is facing a weak market for mobile equipment and struggling with past missteps, as it’s burdened by unprofitable businesses that were acquired as Ekholm’s predecessors tried to diversify the company’s offering and customer base.
During his 15-month tenure, Ekholm has conceded that righting Ericsson’s performance will take longer than initially thought. The company has been hit by lower investments by carriers whose revenues are stagnant, while also facing facing stiff competition from Huawei Technologies Co. Ltd. and Nokia Oyj.
Ekholm has responded by ending or renegotiating unprofitable service contracts while also investing in research and development to secure its position when operators start investing in new, fifth-generation networks.
“Our efforts to improve efficiency in service delivery and common costs are starting to pay off,” Ekholm said in a statement. “The improvements in the quarter are encouraging.” Like its Finnish rival, Ericsson has tried to turn investors’ attention to 2020, when the equipment vendors expect investments in new 5G networks to reach a level that will provide a tangible boost to their earnings.
Ericsson aims to lift its adjusted operating margin to more than 10 percent by 2020, from less than 1 percent last year.
Not everyone is content with the pace, though, and activist investor Christer Gardell, who has amassed a 9 percent stake in the company, has called for Ericsson to cut costs deeper and faster. The Wallenberg family’s listed holding company, Investor AB, said it has raised its stake in Ericsson to 7.2 percent of the capital. Investor AB controls a large number of vote-heavy A-shares in Ericsson, meaning its share of the votes is 22.5 percent.