Ericsson sinks like a stone

It’s not easy being a chief executive. Investors hang on your every word, and you’re constantly under pressure to maintain their confidence. But even so, we’re guessing that Ericsson chief Carl-Henric Svanberg wishes he’d been a little more discreet when he was in London last month.

Last Updated: 31 Aug 2010

In town for the company’s strategy day, Svanberg bullishly told the assembled throng that all was going swimmingly at the Swedish telecoms equipment manufacturer. Market share was up across the board, he said – and there was more to come. “It’s an exciting time. It just goes beyond any expectation’, he beamed.

Turns out he was right – but probably not in the way he intended. On Tuesday Ericsson admitted profits would be down 36% in the third quarter – not surprisingly, investors promptly dropped it like a hot Swedish meatball, with more than 25% wiped off the company’s value in a matter of hours.

Ericsson’s woes were not due to handset sales (although its joint venture with Sony also saw profits drop 11% last quarter, after cutting its prices in an attempt to grab market share). The real problem has been the network division, which has been spending more time doing low-margin new network roll-outs in emerging markets, rather than expensive and high-margin upgrades to existing networks. As a result, Ericsson’s expected profit margin has dropped from 21.2% to 12.9% in 12 months.

Of course, many of the problems facing Ericsson are systemic. The whole telecoms sector has been fairly depressed for a while now, despite our increasing dependence on it – a far cry from the ridiculous earnings multiples at the end of the last decade. With developed markets increasingly saturated and emerging markets highly competitive, it’s getting harder and harder for established players to maintain profitability levels.

A red-faced Svanberg conceded that the company may have ‘underestimated… the effect of market dynamics’. Which we’re sure will be a big consolation to the shareholders who now find themselves $15bn out of pocket. Perhaps at next year’s strategy day he might want to stick to handing out the canapés?

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