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    HomeFinancial/RegulationEricsson warns network profit margins will continue to fall

    Ericsson warns network profit margins will continue to fall

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    Investors are not impressed by Q4 earnings and positive longer term outlook

    Ericsson posted weaker than expected earnings for the full year, resulting in its shares falling 7%. Although in Q4, Ericsson’s revenues increased 21% to SKr86 billion (€7.706 billion), operating profit fell by a third to SKr7.9bn, below expectations.

    CEO Börje Ekholm warned he expected profit margin for network equipment to continue shrinking in the first half of the new financial year and that group adjusted operating earnings would be lower in the first quarter than 2022’s SKr5 billion.

    Fortunes tied to network

    While Ericsson made promoted the growth potential of its enterprise, cloud and intellectual property units at its Capital Markets Day in December, the fact is more than 70% of its revenue in Q3, which ended on 30th September, came from network equipment with falling margins.

    In its Q4/full-year earnings statement, Ericsson said, “We expect operators to continue to sweat assets in response to macroeconomic headwinds. In addition, we expect operators to adjust inventory levels as supply situation eases. These trends started to impact Networks in Q4 and we expect them to continue at least during the first half of 2023. At the same time, we expect good growth from market share wins, albeit not fully offsetting the near-term headwinds. In the longer-term, capex is driven by traffic growth.”

    However, “Given near-term macroeconomic headwinds, we expect Enterprise to grow somewhat slower than during 2022.”

    The shadow of scandal

    The Swedish vendor’ shares had already halved over the last year after it acknowledged it could have made payments to terrorist group Isis in Iraq almost a year ago. Investigations are ongoing.

    The acknowledgement came just as Ericsson was finally hoping to move out of the shadow of scandal, having agreed in late 2019 to let the US Department of Justice (DoJ) oversee its trading for three years, ending in June 2023. This was part of the settlement it reached regarding corruption charges for activities in China, Djibouti, Indonesia, Kuwait and Vietnam.

    Last week it made a $220 million provision for breaching the 2019 deferred prosecution agreement with the US Department of Justice.

    Board games

    Cevian Capital, Europe’s largest activist investor, and stakeholder in Ericsson has harshly criticised its board for being weak and lambasted the lack of corporate governance which it says are costing shareholders billions. It is seeking to gain greater influence

    Earlier this month, chair Ronnie Leten announced he will step down. He is to be replaced by Jan Carlson who has been on the vendor’s board for the last six years. Kurt Jofs and Nora Denzel, who served on the board since 2018 and 2013 respectively, are also leaving.

    Jonas Synnergren, a senior partner at Cevian Capital, has been nominated for a place on the board.