Further deterioration in EMs, European mix worsens
Ericsson issued a major sales and profit warning
Ericsson pre-announced Q3 Sales down 14% y/y to SEK51.1bn (4% below cons.) with Networks
down 19%. Gross margin declined c4pp seq. to 28%. We believe a third of this GM slip is due to a
worsening Networks v. Services mix. Low spending on capacity in Europe and EMs, and lower
scale likely explain the rest of GM deterioration. Op. income reached SEK0.3bn v. SEK4.5bn cons.
Current environment likely to prevail until mid-2017 according to Ericsson
Ericsson cited Brazil, Russia, and the Middle East as the chief culprits. To a lesser extent, capacity
sales declined in Europe y/y. Ericsson highlighted that market conditions deteriorated quickly in
September, notably demand for software-rich capacity additions.
We lower our dividend expectations
We lower our estimates to reflect softer sales and gross margin (see inside). We now expect FCF
to reach SEK6.0bn in 2016 and SEK6.3bn in 2017 before rebounding to SEK15.4bn in 2018 (cost
reductions). ERIC could still afford to cash out cSEK11.5bn of dividends next year equating to DPS
of SEK3.5 in 2016 v. SEK3.70 in 2015. This would leave ERIC with SEK30bn net cash at end-17.
Nokia likely affected as well: we lower our estimates
Nokia generates c15% of its sales from Brazil/Russia/ME v. 20%+ for ERIC. Nokia’s main
customer in Brazil was already weak in Q2 and management indicated that they had passed on
some aggressively priced deals in ME. Russia could still hurt. Also, gross margin could suffer from
slow capacity additions in Europe. We lower our estimates (inside) and TP (-5% to EUR5.3).
Ericsson could be pushed to radical decisions; we still believe Nokia is safer short term
Tough market conditions and weak performance had already pushed Ericsson to up its
restructuring ambitions in July, and to let go of the CEO. With demand worsening further and
reference shareholders increasingly disgruntled, ERIC might decide to radically refocus on its core
activities, thereby kicking off a turnaround story. Shorter term, we continue to prefer Nokia.