Ericsson (ERIC) Plans Massive Layoffs to Streamline Costs
According to an article in Svenska Dagblade, Ericsson ERIC is planning to cut 25,000 jobs outside Sweden in a desperate bid to contain costs and take its restructuring efforts to the next level. Although CEO Börje Ekholm announced impending job cuts earlier this month, the sheer magnitude has left industry insiders stunned.
Last month, the beleaguered infrastructure giant announced that it plans to double its 2016 underlying operating margin of 6% by ramping up its cost-reduction drive. To meet this end, Ericsson announced to implement cost savings with an annual run rate effect of at least SEK 10 billion ($1.2 billion) by mid-2018.
Job Cuts in Store
Over the past year, the company has sacked 7000 jobs in North America. The company is striving hard to slash common and service delivery costs, while keeping research and development costs unaltered. Details of the latest planned layoffs has been kept under wraps, as Ericsson did not comment which departments or countries will bear most of the brunt.
People familiar with the matter expect that the troubled media business, which is under review, and Managed Services division may be the worst affected. If sources are to be believed, Ericsson has plans to streamline operations by a whopping 80-90% in some markets and centralize operations in others.
Headwinds Galore
The premium networking, telecommunications equipment and services provider’s financial troubles over the past few years have been well documented. Ericsson’s repeated earnings misses, eroding profitability and precipitous revenue decline have left investors high and dry. Also, shrinking gross margins have been putting immense pressure on the bottom line. The stock has lost 9% in the past three months, wider than the industry’s average decline of 4.3%.
Concurrent with its second-quarter 2017 results, the company slashed its full-year guidance, signaling bleak times ahead. Mr. Ekholm warned that an uncertain market could wipe out as much as SEK 5 billion ($600 million) of operating income over the next year. There is also an increased risk of market and customer project adjustments, which can have a negative impact of SEK 3-5 billion on the operating income in the coming 12 months.
The consensus analyst community is showing no favor toward the stock, as the Zacks Consensus Estimate for full-year 2017 earnings has tumbled from 27 cents to 3 cents, dragged by three downward estimate revisions versus zero upward. Most of the company’s troubles have stemmed from drying-up investments by major telecom equipment makers across the world.
These companies continue to slash investments in 4G and 3G services while waiting for the introduction of 5G networks. Ericsson expects a high single-digit percentage drop in the market for radio access networks this year, which is worse than previously expected. Also, sky-rocketing restructuring expenses, as part of itsconsistent efforts to turn around its ailing business, are making matters worse for Ericsson.
Despite these challenges, the Zacks Rank #3 (Hold) company believes that its cost-streamlining efforts, with focus on structural changes, will help generate lasting efficiency gains and boost cost competitiveness. Also, the company’s focus on stabilizing its IT and cloud-product portfolio, and Managed Services business is expected to be conducive to long-term growth.
It remains to be seen whether Ekholm’s restructuring plan can help Ericsson improve profitability and revitalize its leadership in technology and markets.
Stocks to Consider
A few better-ranked stocks in the industry are listed below:
Applied Optoelectronics, Inc. AAOI delivered an average positive earnings surprise of 21.0% in the trailing four quarters, beating estimates all through. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Broadcom Limited AVGO has an average earnings surprise of 6.7%, beating estimates all through, over the trailing four quarters. It carries a Zacks Rank #2 (Buy).
Adobe Systems Incorporated ADBE holds a Zacks Rank #2 and generated an average earnings surprise of 8.1%, beating estimates in each of the trailing four quarters.
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