Ericsson new CEO warns about profits

Alan Burkitt-Gray
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Sales down 10% as new CEO Börje Ekholm says Ericsson must generate the cash in order to be competitive

Ericsson’s new CEO, Börje Ekholm, and the management team are taking a close look at the company’s future direction, though in his first public appearance today he was tight-lipped about whether they were looking at a leaner and smaller company.

Ekholm was reporting sales down 10% in a year in the first quarterly results conference since he took over at the company earlier in January. Previous CEO Hans Vestberg was fired in July 2016 after the company reported falling sales.

“The market has been challenging. Operators have reduced spending,” said Ekholm.

Shareholders will take a big hit, with the company cutting the dividend to just one krona per share – after four years when the dividend went up from 2.75 kronor in 2012 to 3.70 kronor in 2015. Over the same period Ericsson’s share price has gone from around 65 kronor up to over 100 in April 2015 down to 53 today.

Ekholm comes from Investor, the Swedish investment company that is one of the two big shareholders in Ericsson.

But employees are also suffering. The number has fallen from 113,797 at the end of September 2016 to 111,646 at the end of December, and this trend is likely to continue as the company continues what it calls its cost and efficiency programme.

The performance of Ekholm and colleagues – including executive vice president Jan Frykhammar and acting CFO Carl Mellander – was strikingly different from that of Vestberg in the old days. They adopted a serious, measured attitude, a contrast from Vestberg’s apparently boundless enthusiasm and optimism.

It was almost like watching a school principal telling students their behaviour had let themselves down and let the school down – and they had better improve or face the consequences.

And they have a lot to be serious about. “We are not currently satisfied with the level of our gross margin,” said Frykhammar, who was acting CEO in the interregnum between Vestberg and Ekholm.

Mellander added: “Restructuring is giving a result in the gross margin, but not enough.” The trend in the gross margin “is clearly down”, he said, though he offered a crumb of cheer because the margin was stable over the past two quarters.

“We are very unhappy with the level and it’s our job to improve this margin,” said Mellander. The cost reduction programme is running on track, he added, and the underlying opex is coming down.

“It’s very important that we cast out our future direction,” said Ekholm. “We are going to take some time to develop that plan. We need to re-establish solid profitability. The level we are at now is simply not good enough.”

Ekholm warned that “the industry keeps changing at a very rapid pace”, and added: “We have to generate the free cash flow to allow us to remain competitive.”

He explained, in response to a question about core and non-core activities in the company, that “this is the work we are doing right now”. He did not identify what is core and what is non-core but said: “We need to make sure this is something we can execute on.”

Ericsson needs “to invest in the areas where we can win – we must win”, he said. “It’s very important to execute on what we do … It is really important for us to be number one in the areas we are participating in.”

He asked people to “keep in mind that the market for communications is growing. There is a demand for the product. We need to make sure we are in the right areas.” But Ericsson needs to “establish ourselves at a profitability level to allow us to operate in the future”.

Asia and the Middle East have given Ericsson growth, said Frykhammar, while North America was 13% down. In Latin America the company expected a challenging period from Brazil but expected that to be offset by Mexico – “but that was not the case”, he added, saying Mexico was “a disappointment”. Europe “continues at a low level”.