As sales of 5G equipment stagnated in high-margin regions like the United States, Ericsson (ERICb.ST) posted lower-than-expected fourth-quarter core earnings on Friday. The Swedish company’s shares fell to their lowest level since 2018.
The latest IT business to demonstrate the effects of consumers cutting expenses amid worries of a recession in the global economy is Ericsson. Others have already started laying off employees, such as Microsoft (MSFT.O), which announced plans to reduce 10,000 positions and record a $1.2 billion charge to earnings.
Early on Friday, shares of Ericsson were down 8%. Since February of last year, they have fallen in half.
By the end of 2023, the corporation intends to lower expenditures by 9 billion crowns ($880 million).
According to Chief Financial Officer Carl Mellander, this would entail lowering the number of consultants, real estate, and employees.
In reference to the cuts, Mellander remarked, “It’s varied from geography to geography, some are starting now, and we’ll take it unit by unit, considering the employment regulations of different countries.”
He refused to comment on whether the job cuts will be comparable to those made by Ericsson in 2017, when the company fired hundreds of workers and concentrated on research to turn the business around.
In the fourth quarter, the company’s net sales increased, while margins, net income, and core earnings declined.
Its gross margin decreased from 43.2% to 41.4% in the fourth quarter of 2022.
The first half of 2023 is likely to see a decline in margin for Ericsson’s Networks division, but the impact of cost savings will start to show in the second quarter.
Given the drop in margins and increasing investments, JPMorgan analysts predicted that 2023 earnings would decline by a double-digit percentage.
The fourth quarter once again demonstrates that the United States has a significant impact on Ericsson’s margins, according to Inge Heydorn, partner and fund manager at the investment firm GP Bullhound.
With American consumers like Verizon (VZ.N) cutting down on spending, Ericsson is hoping that emerging markets like India may spur expansion.
The only market for the company to expand during the quarter was South East Asia, Oceania, and India, which accounted for 13% of sales.
The company’s adjusted operating results for the fourth quarter decreased from 12.8 billion Swedish crowns to 9.3 billion, excluding restructuring costs.
According to Refinitiv Eikon data, that fell short of the analysts’ prediction of 11.22 billion.
In contrast to expectations of 84.2 billion, net sales increased by 21% to 86 billion crowns.
A patent settlement with Apple (AAPL.O) last month brought in 6 billion crowns in money, but Ericsson also incurred charges of 4 billion crowns, including a contingency for a prospective fine from American regulators and divestments.
Over the next 18 to 24 months, Ericsson anticipates patent revenue to expand significantly.