Ericsson AB reported better-than-expected first-quarter earnings but warned that a pull back in 5G spending in some of the company’s more mature markets was set to continue.
(Bloomberg) — Ericsson AB reported better-than-expected first-quarter earnings but warned that a pull back in 5G spending in some of the company’s more mature markets was set to continue.
The Swedish maker of mobile networks on Tuesday reported an adjusted earnings before interest and taxes of 4.0 billion kronor ($387 million) in the quarter, more than the analysts’ estimate of 3.28 billion kronor, according to the average in a Bloomberg survey. Revenue rose to 62.6 billion kronor, more than the expected 60.78 billion kronor.
Ericsson shares fell as much as 6.4% at 9:01 a.m. in Stockholm. The stock has lost about a quarter of its value over the past year.
The company also gave guidance that the second-quarter margin for earnings before interest, taxes and amortization will “reach mid-single-digit level” on the group level and gradually recover in the second half amid “a choppy environment during 2023 with poor visibility.”
“In the second quarter, we expect operators to remain cautious with capital expenditure investments and continue to adjust inventories,” Chief Executive Officer Borje Ekholm said in a statement. “We expect this dynamic to largely be offset by growth from large roll-out projects which, as noted earlier, will be dilutive to gross margin in the short term.”
Mobile operators globally have spent billions on the roll out of fifth-generation mobile networks, which offer faster speeds and lower latency. But global economic headwinds following the pandemic and Russia’s invasion of Ukraine have put pressure on vendors, with sales shifting toward lower-margin markets like India and spending at US carriers declining.
Rival Nokia Oyj, which is reporting earnings on Thursday, is likely to experience the same dynamic.
In Networks, Ericsson’s biggest unit, sales this quarter are expected to be in line with the first three months of the year. Sales adjusted for comparable units and currency decreased by 2% from a year ago, despite growth on a reported basis.
Cost Cuts
In February the company said it planned to cut 8,500 staff — equivalent to 8% of Ericsson’s workforce — to lower expenses. It now plans to reduce costs by 11.1 billion kronor by year end, up from a previous target of 9 billion kronor. Restructuring charges are projected to reach about 7 billion kronor for the full year, of which more than half is likely to be booked this quarter, it said.
“Ericsson’s turnaround is taking shape, particularly with the prospect of greater cost savings, but is taking slightly longer,” Citigroup Inc. analysts led by Andrew Gardiner and Amit Harchandani wrote in a note to clients on Tuesday. “We are encouraged by the greater cost cutting, in particular, as we think that will help support margin expectations into 2024.”
Cevian Capital AB, one of Ericsson’s biggest owners with just under 5% of shares, said while the earnings beat the market’s expectations, they’re “far below the level we think the company should be performing at.”
“We note with satisfaction that the level of ambition to remedy the excessively high costs is being raised,” Managing Partner Christer Gardell said in emailed comments.
Chief Financial Officer Carl Mellander said in an interview the report was in line with the company’s guidance.
“We keep the message that we believe in a gradual recovery for the second half of the year,” he said. Ericsson remains “steadfast” on the 2024 target of 15-18% Ebita margin, he added.
Ericsson’s “muted” outlook “is likely to keep a lid on optimism over the pace of the profit recovery as slower carrier spending on 5G infrastructure weighs on sales. Reaching the lower end of a reiterated 15-18% adjusted Ebita margin goal by 2024 still looks a stretch to us, with analysts calling for 13%, but it should get a boost from an expanded 11 billion-kronor cost-cutting target.”
— Matthew Bloxham, BI telecoms and media analyst. Click here to read more.
First-quarter Ebita excluding restructuring charges came in somewhat lower than a year earlier, as the Stockholm-based company had warned in January.
Ericsson said late Monday that Mellander plans to step down as finance chief at the end of the first quarter of 2024. The company will begin recruiting a replacement for the executive, who is moving on after working for Ericsson for more than 25 years and sitting on its executive team for almost seven.
The CEO, together with several board members, was denied a discharge from liability by shareholders at the annual general meeting in March, for a second year in a row, over a lingering bribing scandal.
–With assistance from Kati Pohjanpalo and Jonas Ekblom.
(Updates with shares in 3rd paragraph, analyst, investor comments from 9th)
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