Why Telefonaktiebolaget LM Ericsson Stock Plunged Today

By Steve SymingtonMarketsFool.com

Image source: Ericsson.

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What happened

Shares of Telefonaktiebolaget LM Ericsson (NASDAQ: ERIC) were down 20% as of 1:00 p.m. EDT Wednesday after the Swedish telecommunications giant released disappointing preliminary third-quarter 2016 results.

So what

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Ericsson isn't formally slated to release third-quarter results until Oct. 21, 2016. But in advance of that report, the company warned that its those results "will be significantly lower than company expectations." The culprit, according to Ericsson, is the acceleration of negative industry trends from the first half of the year, primarily given weaker demand for mobile broadband in markets facing macroeconomic headwinds.

More specifically, revenue fell 14% year over year to 51.1 billion Swedish krona (SEK), including a 19% decline in its segment networks business. Gross margin also fell to 28% from 34% in the same year-ago period, thanks to a combination of lower segment networks volume, lower mobile broadband capacity sales, and a higher share of services sales. As a result, operating income plunged 94% year over year, to SEK 0.3 billion.

Now what

"Continued progress in our cost reduction programs did not offset the lower sales and gross margin," elaborated Ericsson CEO Jan Frykhammar, who took the helm on an interim basis after CEO Hans Vestberg stepped down in July. "More in-depth analysis remains to be done but current trends are expected to continue short-term."

In the meantime, Ericsson will continue focusing on its cost-reduction initiatives, including "further reductions in cost of sales" to help offset the effects of lower sales volumes. But that's little solace for investors who've watched Ericsson stock fall to levels not seen since the market effectively melted down in 2008.

While it might be tempting to take advantage of the drop, I think investors would be wise to watch Ericsson's struggles from the sidelines until it demonstrates concrete signs of sustained improvement.

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Steve Symington has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.