Restructuring To Weigh On Ericsson’s Results : Q1 Earnings Preview
The world’s leading network infrastructure company, Ericsson (NASDAQ:ERIC), will release its Q1’17 earnings on April 25th. FY’16 has been a dismal year for Ericsson and for the network infrastructure companies as a whole. Its revenues tumbled from SEK 246.8 billion to SEK 222.6 billion, primarily because of the 10% drop in the mobile infrastructure market size in 2016, which was led by a slowdown in the telecom spending around the world, especially in China. Within the slowing market, the growing competition from its peers such as Nokia and Huawei also hurt Ericsson’s top line in 2016. Due to the lower capacity sales, the margins also suffered, as EBITDA margins slipped from 17% in FY’15 to 14% in FY’16 leading to a fall in diluted EPS from SEK 4.17 to SEK 0.57 during the same period.
To overcome the slowdown, Ericsson has recently made changes to its business strategy along with some restructuring. Under the new business strategy, it will turn its focus to IT & Cloud and Media, and the results of these businesses will be announced in a separate division from Q1 onward. However, restructuring will have a significant impact on its Q1 results as announced by the company, which can be offset to some extent by cost saving initiatives that the company has undertaken over the last two years.
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New Business Strategy: IT & Cloud, Media In Focus
Here is what Ericsson has planned for each of its business segment under the new strategy:
Legacy Business: Ericsson is aiming to improve the profitability of its legacy networks business by establishing an early lead in the 5G technology, which is likely to receive huge investments from the telecom operators by 2020. Apart from this it will focus on automation of its managed services to increase the efficiency and reduce the operating expenses.
Media Business: Mobile data video traffic currently constitutes 50% of the total mobile traffic currently. According to Ericsson, this figure will reach up to 75% by 2022. Therefore the company wants to fully exploit this segment by providing its services and technology solutions to the media companies. Its recent 7-year managed services deal with BBC is an example of this.
IT & Cloud Business: This segment mainly comprises of Operations Support System (OSS), Business Support System (BSS), and IoT (Internet of Things), under which Ericsson provides its cloud and software services such as CRM (Customer Resource Management) and order management to its customers. A separate division for this is indicating the hidden potential and Ericsson’s optimism in this business which is likely to receive a boost, especially as the new telecom operators spring up in the emerging nations. For instance, Ericsson has recently struck a deal to provide OSS services to an Indian telecom operator, Reliance Jio, which has become the world’s fastest growing operator by acquiring 100 million customers within six months of its launch.
Expected Impact of Restructuring
- Due to the write off of intangible assets in media & cloud business, Ericsson has guided for SEK 3-4 billion of impairment charges, which will affect the Q1 operating profit.
- In order to pace up its cost savings program, the company is expecting a SEK 6-8 billion restructuring charges for FY’17, out of which about SEK 2 billion will be seen in Q1.
- Also, the company announced that it had taken the provisions of SEK 7-9 billion in Q1, which it said has been “triggered by recent negative developments related to certain large consumer projects.” It however, did not mention in detail about these negative developments.
Excluding the short term impact, the restructuring and strategy enhancements can lift Ericsson out of the current phase of slowdown. The second half of the year is expected to be better for the company, as it will reap the benefits of the recent changes, along with the cost savings of SEK 53 billion guided for the second half.
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