Ericsson Reports Lower-Than-Expected Earnings Amid Uncertainty

Ericsson AB Reported a Bigger-than-expected Drop In Fourth-Quarter Earnings After Some Of Its Major Customers For 5G Networks Pulled Back On Spending Because Of an Uncertain Economic Environment.

The shares dropped sharply in response to the news. This is a setback for the company, which had been hoping to benefit from the rollout of 5G networks around the world.

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On Friday, the Swedish maker of mobile networks reported an adjusted earnings before interest and taxes of 8.1 billion Swedish kronor ($785 million) in the quarter. This is well below analysts’ estimate of 10.74 billion kronor, according to the average in a Bloomberg survey.

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The Stockholm-based company, one of the world’s biggest providers of 5G networking equipment, said first-quarter earnings before interest, taxes and amortization excluding restructuring charges, would be lower than a year ago. The company forecast lower margins on its networks business in the first half of 2023, but said cost-savings initiatives would start having an effect beginning in the second quarter.

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"There are some uncertainties in the short term, but we are still in the early phase of global 5G rollout and widespread enterprise digitalization," Chief Executive Officer Borje Ekholm said in the statement. Ericsson shares fell sharply on Thursday morning, dropping as much as 8.5% to the lowest level since 2018. The stock is now down about 40% from where it was a year ago.

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Mobile operators around the world have invested billions of dollars in the rollout of fifth-generation mobile networks. These networks offer faster speeds and lower latency, making them ideal for applications such as connected devices. Ericsson and Finnish rival Nokia Oyj are the two biggest European companies offering these types of networks.

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Even so, bigger 5G customers have been cutting back on the inventory they built up during a global supply-chain crunch, CFO Carl Mellander said in an interview. The company is instead focusing on growth markets for the technology, such as India. A patent-license agreement with Apple Inc. has boosted revenue from intellectual property rights in the fourth quarter. The agreement, which has been in place for several years, has helped to increase income from patents and other intellectual property.

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The report included an already-flagged 2.3 billion-kronor provision for a potential fine regarding alleged breaches of Ericsson's deferred prosecution agreement with the US Department of Justice. The company had also flagged a one-time hit of about 1 billion krona in its Enterprise business, related to the divestment of its IoT Accelerator.

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Management has previously warned that 2023 could be a difficult year, with Ekholm saying it would be "choppy." To offset the headwinds, the company announced last month that it would accelerate its plan to cut 9 billion kronor in costs by the end of 2023. These cost cuts are "on track," Mellander said after the company's latest report.
"When it comes to inflation, we have actually been able to mitigate most of that in the quarter," Mellander said. He added that the company has been able to keep prices stable and that they expect inflation to remain under control in the coming months.

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According to Bloomberg, 11 analysts recommend buying the stock, 17 recommend holding, and 4 recommend selling.