Ericsson Cost-Cutting Begins to Pay Off as Q1 Loss Shrinks

Ericsson beat quarterly profit expectations on Friday as savings started to kick in, fuelling hopes for a recovery at the struggling mobile equipment maker and sending its shares up 15 percent.

The Swedish company, which is restructuring and has replaced much of its top management, has struggled with falling spending on networks by telecoms operators and weak emerging markets demand.

Its first-quarter loss shrank to SEK 0.3 billion ($35.6 million) from a 11.3 billion loss a year earlier and beat a mean forecast for a 2.4 billion loss in a Reuters poll of analysts.

The company cut its workforce by more than 3,000 jobs during the quarter, part of reductions that have eliminated 18,000 jobs since last July, it said.

Ericsson said factors behind the improvement included cost reductions, a continued ramp-up of its 5G-ready radio system product platform and good progress in addressing poorly performing customer contracts in managed services.

"Our efforts to improve efficiency in service delivery and common costs are starting to pay off," Chief Executive Borje Ekholm said in a statement.

Ericsson, which competes with Huawei, Nokia and ZTE, said it expected the Chinese market to decline further due to reduced 4G investments, but that its momentum was positive in its biggest market, North America.

Chief Financial Officer Carl Mellander told Reuters following the report the company had gained market share in Europe and North America. These gains have yet to show up in results due to the timing of projects, however.

Sales fell 6 percent in North America, but were up 6 percent on a currency-adjusted basis. Europe and Latin America was up 7 percent, with most of that growth coming in Latin America, the company said.

Gross margin excluding restructuring charges, was 35.9 percent, up from an adjusted gross margin of 29.9 percent in the previous quarter and above the analysts' consensus forecast of 32.1 percent.

It has vowed to attain gross margins of 37-39 percent by 2020.

Mellander said that half of the gross margin improvement came from costs savings, while another third was tied to sales of the Ericsson Radio System, which is key to future upgrades.

"The big jump in profitability provides evidence that Ericsson's efforts at cost reduction, addressing loss-making contracts and investing in R&D is paying off," said Liberum analyst Janardan Menon, who holds a "neutral" rating on the stock.

Redeye financial analyst Greger Johansson said gross margin for Ericsson is typically better in the first quarter than other periods of the year, so the big question is how sustainable these improvements would be.

Nonetheless, Johansson said he plans to raise his forecasts.

Ericsson still has work to do. Its operating margin was -0.7 percent versus a goal for an operating margin of at least 10 percent by 2020 and at least 12 percent beyond 2020.

The company is aiming for at least 10 billion Swedish crowns of annual savings by mid-2018, and Ekholm said last month the company would reach that on time.

© Thomson Reuters 2018