Ericsson Posts First Net Loss in Four Years as Demand Wanes

(Bloomberg) -- Ericsson AB reported its first loss in almost four years, wrapping up a disastrous third quarter that cratered the stock last week when the Swedish maker of wireless equipment reported preliminary figures.

The net loss totaled 233 million kronor ($26 million), the company said in a statement Friday. The average analyst estimate was for a loss of 112 million kronor. Ericsson surprised investors last week, reporting a 14 percent drop in third-quarter sales, and warning that its full results would significantly trail its forecasts.

Ericsson, which ousted its chief executive officer in July, has been muddling through an industry slump that’s cut deeper than it expected as competition from China exacerbated a cyclical downturn. That’s tested the patience of investors -- the stock, down 49 percent this year already, dropped another 5 percent on Friday. After the latest shock, Moody’s Investors Service downgraded its debt and the company has yet to find a new CEO.

“Ericsson suffers from a bloated cost base, major dysfunctions and an empty CEO seat,” Pierre Ferragu, an analyst at Bernstein, said in a note to clients. However, the company’s market position remains strong, Ferragu said, adding he’ll be more positive on the stock again if Ericsson addresses governance issues and names the right CEO with the right mandate.

Jan Frykhammar, who took over for former CEO Hans Vestberg in July, said the company would be in even direr straits if Ericsson hadn’t addressed the cost base “forcefully” at the end of 2014 and taken further steps earlier this year. Restating a position that he doesn’t want the job permanently, the former chief financial officer said Ericsson had been proactive, given the circumstances.

“As far as I know, the company is not for sale” he said in an interview with Bloomberg TV’s Francine Lacqua. “The company is very strongly supported by long-term owners.”

The crisis has uncharacteristically, if briefly, drawn out Ericsson’s two biggest shareholders -- and pillars of Swedish industry -- Industrivarden AB and Investor AB, which both have made public comments on the situation. This week the CEO of Investor AB, Johan Forssell, said the biggest priority is finding a new CEO with the strategy chops to guide the company through the industry’s technology shifts.

The share fell as much as 5.2 percent in Stockholm and was trading down 5 percent to 45.52 kronor at 4:17 p.m., heading for its lowest close in eight years.

Ericsson Posts First Net Loss in Four Years as Demand Wanes

Ericsson faces fierce competition from Huawei Technologies Co. and Nokia Oyj that’s been compounded by slumping demand in some countries, notably Russia and Brazil. In response, the company is cutting costs to reduce its operating expenses by 10 billion kronor by 2017 compared with 2014.

Job Cuts

Last week, Ericsson acknowledged that announced savings and job reductions aren’t biting quickly enough in the face of rapidly declining demand. The company’s gross margin -- what’s left of sales after production costs -- fell to 28 percent, the lowest level in 15 years, as European carriers held back investments in network capacity.

Ericsson Posts First Net Loss in Four Years as Demand Wanes

The company will cut costs that are volume dependent, which could be subcontractors within production and in projects as well as a reduction of Ericsson’s own employees, Frykhammar said. The CEO doesn’t anticipate an increase the company’s mobile network capacity business in the U.S. and Japan in the short term, which could have helped offset the slump in Brazil and Russia.

“The negative industry trends from the first half of 2016 have further accelerated,” Frykhammar said. “We will implement further short-term actions mainly to reduce cost of sales, in order to adapt our operations to weaker mobile broadband demand.”

The Stockholm-based company had only posted a quarterly loss once in the last decade, in the fourth quarter of 2012, after taking a 8 billion kronor writedown on its wireless-chip alliance with STMicroelectronics NV.