Profitability improved at a quicker pace than analysts had estimated for the second consecutive quarter, as cost cuts boosted earnings and customers embraced new products. The company’s gear gained traction, particularly in North America, where all major carriers are preparing for fifth-generation networks.
Ekholm, who took over 18 months ago, has pledged to refocus the company by ending or renegotiating unprofitable service contracts and ready it for when carriers start spending on faster technology. Ericsson has reduced its workforce by 20,500 since the second quarter of 2017 as part of a program that has saved more than 10 billion kronor (US$1.1 billion) in costs.
“We have good market traction in networks,” Ekholm said in a statement Wednesday. “Customers turn to new technology in order to manage growing demand for data with sustained quality and without increasing costs.”
The stock advanced as much as 9.7%, the most since April 20, and was up 9.2% to 73.80 kronor at 9.23 am in Stockholm. The shares have added 37% this year as investors welcomed sales momentum in North America and stronger margins, giving the company a market value of 247 billion kronor.
The company’s gross margin — or the portion of sales remaining after deducting production costs — rose to 36.7% in the second quarter on an adjusted basis, from 30.9% a year ago, Ericsson said in the statement. Analysts had predicted 35.2% on the back of cost cuts, the shedding of unprofitable contracts and stronger sales of new, more lucrative products.
Activist Investor
The turnaround hasn’t been quick enough for activist Christer Gardell’s Cevian Capital AB, which amassed a stake in the company and has called for deeper cost cuts, sooner. Under Ekholm, Ericsson has ended or renegotiated unprofitable service contracts and taken at least 35 billion kronor in write-downs and other charges as many core markets remain weak.
Chief Financial Officer Carl Mellander said that sales in Ericsson core network unit rose for the first time since 2015 in the quarter.
“This is confirmation that we’re on the right track, but we haven’t started cooling the champagne,” he said by phone. “We have worked very hard to get this far and we will continue doing that.”
Sales rose 11% in North America and were little changed in Europe and Latin America. Total sales of 49.8 billion kronor fell 1% from a year earlier, beating the average analyst estimate of 48.3 billion kronor.
Ericsson repeated its forecast of a total market decline in networks this year of 2% even as its own sales of networks rose 2% in the quarter. Ericsson and rivals like Finland’s Nokia Oyj expect 5G to boost earnings and sales from 2020.