Ericsson Shares Slide Amid Q3 Earnings Miss, Higher Restructuring Expenses

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Ericsson Shares Slide Amid Q3 Earnings Miss, Higher Restructuring Expenses
Credit: © Reuters.

By Scott Kanowsky -- Shares Ericsson (ST: ERICb ) tumbled by more than 14% on Thursday after the Swedish telecommunications company posted lower-than-expected third-quarter core income and flagged a hike in restructuring costs.

Earnings before interest, taxes and amortization during the period dropped to SEK 7.6B, down by 18% annually, due to increased investment in research and development and a one-off expense of SEK 0.5B that offset an uptick in group net sales.

Selling costs related to the $6.2B acquisition of Vonage, the cloud-based services business Ericsson bought in its biggest-ever transaction in a bid to boost its offerings to companies and developers, also rose.

Profit margin subsequently slipped to 11.2% from 16.5% in the third quarter of 2021.

Chief executive officer Börje Ekholm said in a statement that the company has moved to raise prices and slash costs in response to a recent spike in inflation, as it looks to ease the pressure on future margins.

Ekholm added that the firm will "take out" expenses to secure the delivery of its long-term target of an EBITA margin of 15% - 18% no later than 2024.

However, he flagged: "In order to deliver on the cost reductions, we expect restructuring costs to increase and be more in line with our long-term guidance of 1% of net sales, albeit varying by quarter."

In a note to clients, analysts at Citi noted that the overhaul seems to suggest that Ericsson may be struggling to manage its expenses. They added that they now expect to see more pressure on Ericsson's margins than previously expected.

Much of these concerns over expenses and profitability stem from a race over the past decade by European telecom firms to upgrade their networks to new fifth-generation, or 5G, technology.

Ericsson's Finnish rival Nokia Oyj (HE: NOKIA ) also reported a slide in quarterly operating profit margin on Thursday, falling to 10.5% from 11.7% year-on-year. A jump in R&D spending - designed to "maintain technology leadership" - combined with a surge in costs to outweigh growth in net sales.

Shares in Nokia slumped by more than 5%.

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