Ericsson Accelerating Cost-Cutting Plan After Exit of CEO Vestberg

Company Has Missed Estimates for Sales, Profit for Four Straight Quarters

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For Ericsson's newly departed chief executive officer, Hans Vestberg, the future didn't come fast enough.

While waiting for spending on so-called 5G networks to kick in, Ericsson, one of the world's biggest makers of networking equipment, has been losing sales to competitors like Nokia Oyj, which broadened its portfolio with the purchase of Alcatel-Lucent SA, and Huawei Technologies, which is beating Ericsson on price while offering a wider array of products. After another weak earnings report last week, Standard & Poor's warned on Monday that it could downgrade Ericsson's debt rating.

The global telecom carriers that are Ericsson's biggest customers are mostly done deploying the current generation of 4G networks that can handle cloud computing and streaming video. Mr. Vestberg has been a leading advocate of 5G, which will handle futuristic exploits like self-driving cars and remote surgery, but it hasn't been deployed yet.

In an interview, Ericsson Chairman Leif Johansson said the company's core strategy is sound and portrayed the board's decision to part ways with Mr. Vestberg as part of "normal" succession planning. While he wouldn't discuss Mr. Vestberg's performance, his comments shed light on the board's unanimous decision to remove the sitting CEO now before starting the search for a successor.

"Better than to review what could have been done is to look forward right now, and going forward we have a short-term challenge in making sure we can adapt and respond to much lower demand than what was earlier anticipated," Mr. Johansson said. "That is driven by the world around us -- that's Russia, Latin America, the Middle East -- we need to respond to that."

The depth of Ericsson's slump became clearer last week, when the Stockholm-based company reported results that missed analysts' estimates for sales and profit for the fourth straight quarter. Gross margins have missed the mark six straight times and seven in the past eight, according to data compiled by Bloomberg.

The company said then it would accelerate a cost-cutting plan, reducing operating expenses by about 9 billion kronor ($1 billion) per year, to 53 billion kronor ($6 billion). That "felt like another reactive rather than pre-emptive strike," said Neil Campling, an analyst with Northern Trust Capital Markets who has been particularly outspoken about Mr. Vestberg's failures.

"Ericsson has had enough fair warning," Mr. Campling said. "After all, Huawei won a 4G network build-out in Ericsson's home market way back in 2009, and has never looked back," he said, referring to business from Stockholm-based carrier Tele2 AB.

In its report, S&P said it expects the trend of weaker profitability to continue for the rest of the year. Ericsson shares lost about 4% during Vestberg's six-and-a-half-year tenure, versus a gain of more than 90% for the Stoxx 600 technology index.

That core strategy is still sound, Mr. Johansson said. He said the board still backs Mr. Vestberg's push to invest in new areas like media to broaden Ericsson's reach into the communications backbone. Mr. Vestberg, 51, has long touted a vision for coming wireless networks robust enough to support self-driven cars and remote surgery. As recently as last week, he offered one reporter an hour-long interview on the promise of 5G. Ericsson has invested heavily in the technology, which the company and others in the industry expect to serve as midwife of the so-called Internet-of-things, in which everything is connected in real time.

But for now, the board decided it's best to put the company in the hands of Chief Financial Officer Jan Frykhammar, who will serve as interim CEO. Mr. Frykhammar, 51, said in a separate interview that he's been leading the cost-cutting effort with Mr. Vestberg, and that it will continue.

The company has hired a headhunting firm and will evaluate internal and external candidates, Mr. Johansson said. Mr. Frykhammar isn't a candidate for the permanent job.

That's a sign "the board is looking for an external appointment, which is the right focus in our view," according to Mr. Campling, the Northern Trust analyst. "The key now is for the board to find a high-caliber restructuring specialist who can turn around the company."

-- Bloomberg News

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