"We Didn’t Know Things Were This Bad" - Ericsson Shares Plunge 17% After Shocking Profit Warning

Our condolences to anyone long Swedish telecom giant Ericsson, who will observe the following chart first thing upon waking up today.

The reason for Ericsson's 17% crash, is that the Swedish network maker reported a surprising slump in third-quarter sales and profitability, warning investors that its business was deteriorating faster than expected, with no turnaround in sight. Unexpectedly, the company said sales in the third quarter had dropped by 14% while its operating profit was all but wiped out, falling from SKr5.1bn a year ago to SKr300m. The sales drop was the biggest in 13 years, going back all the way to 2013.

Cited by Bloomberg, Mathias Lundberg, an analyst at Swedbank said that “we knew that the business climate was weak, and that would show in the numbers, but we didn’t know that things were this bad,” Lundberg said by phone. “That was a surprise both to us and the market.”

Jan Frykhammar, the acting chief executive, said: “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.”

Hardly encouraging for mobile companies (elsewhere Samsung had a just as ugly morning after the Korean handset maker slashed its quarterly profit forecast by a third), according to the FT, Ericsson blamed a "further deterioration in demand for mobile broadband and said the current trends were likely to continue in the short term." Since selling its mobile phone business in 2012, the group has focused on selling network equipment to telecoms operators as well as a less-than-successful push into media and services. Not helping matters is that troubled Ericsson has been without a permanent chief executive, having ousted Hans Vestberg in July.

Discontent among its two main shareholders, holding companies Industrivarden, and Investor, the Wallenberg family investment vehicle, has led to pressure to cut costs with a fifth of workers in Sweden axed last week. But rumors are swirling around Stockholm that one or other of the two main owners could sell out as Ericsson’s performance worsens.

Acting CEO Frykhammar hinted at more restructuring to come as the group adapts to fierce competition from rivals such as Finland’s Nokia and China’s Huawei. “We will continue to drive the ongoing cost program and implement further reductions in cost of sales to meet the lower sales volumes.”

As the FT adds, Ericsson's sales decline was worst in its main networks business, which saw revenues drop 19 per cent. Ericsson blamed markets such as Brazil, Russia and the Middle East for much of the decline as well as lower sales in Europe. Ericsson’s gross margin fell to 28 per cent from 34 per cent a year ago and 32 per cent in the previous quarter.This was the lowest margin since the dot com bust.

Even excluding restructuring charges of SKr1.3bn taken in the quarter, operating profit fell by nearly three-quarters.

Cited by FT, Gareth Jenkins, analyst at UBS, said the warning implied a cut of 15-25 per cent in expected full-year operating profits. “It will be the job of the new CEO to turn Ericsson around,” he added.

“Since we now are in a situation where volumes are dropping, we have to adjust the cost of sales resources both external and internal,” Frykhammar said. “That’s clear given the volume reductions.”