STOCKHOLM—Swedish telecommunications equipment maker Ericsson AB
Friday posted a 19% drop in second-quarter net profit, hit by hefty
restructuring costs and strife competition.
Net profit at the world's largest network provider by revenue
fell to 2.09 billion Swedish kronor ($245 million) in the second
quarter from 2.58 billion kronor in the corresponding period a year
earlier. Analyst had expected flat profit.
Revenue increased to 60.7 billion kronor from 54.9 billion
kronor a year earlier, but the company's closely watched gross
margin, which has been under pressure over past years, shrunk to
33.2% from 36.4% a year earlier.
The company said the restructuring charge of 2.7 billion kronor
it booked against second-quarter earnings was mainly related to job
cuts in Sweden, where the company is laying off over 2,000
employees, or more than 10% of its staff in the Nordic country.
The tough telecommunications gear market is getting tougher.
Ericsson and its rivals must spend big to develop new
technologies, such as 5G—the next wireless broadband standard whose
slim antennas could start appearing on rooftops at the end of the
decade. But telecommunications carriers are cautious in buying new
equipment as they strain to pass on costs to customers, and
Ericsson's competitors are flexing their muscles.
Ericsson's direct challenger, Huawei Technologies Co. of China,
has conquered a large market share in Europe and displays a
voracious appetite.
Meanwhile, Finland's Nokia Corp. could take over Ericsson's
crown as market leader if it succeeds in completing its proposed
$16.6 billion acquisition of Alcatel-Lucent SA.
"Of course it is tough," Ericsson Chief Executive Hans Vestberg
said in an interview. "Over the past 10 years, we've transformed
the company dramatically to deal with that."
Since taking the reins in 2010, Mr. Vestberg has ditched the
company's handset business and plowed investment into building
cellphone network equipment and developing software to service
those networks. The company has also recently expanded beyond
supplying traditional telecommunications operators, placing more
focus on television, media and cloud services.
But networks still make up nearly half of its revenue base and
that market isn't expanding as much as it used to.
In the U.S., profitability is under pressure because of a
slowdown in well-paid network deals. In China, growth is fast-paced
but the contracts are less lucrative.
"The business mix continues to be a drag on gross margins," said
Credit Suisse analyst Achal Sultania.
A row with iPhone maker Apple Inc. also dented the company's
margin as revenue from patents declined.
Ericsson and Apple have been suing each other over alleged
patent infringements in the U.S. In May, Ericsson took the battle
to European grounds, filing suits in Germany, the U.K. and the
Netherlands.
The Swedish company says Apple is refusing to pay royalties for
using patented Ericsson technology that is critical to many aspects
of the U.S. tech giant's popular mobile devices, such as iPhones
and iPads.
Apple has characterized the royalties Ericsson has been asking
for as "excessive" in a federal court filing linked to the
dispute.
Mr. Vestberg said he still hoped to resolve the matter in an
amicable way, but noted that negotiations with Apple were moving
slowly.
"Our ambition is to clear this outside courts and have the
industry move forward but right now we're not there," Mr. Vestberg
said.
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