Ericsson’s Q1 Earnings Affected By Sluggish Demand And Delay In Cost Savings Measures
Ericsson (NASDAQ:ERIC) reported its Q1’17 earnings on April 25th. The company underperformed expectations by reporting a 16% decline in revenues (in constant currency), led by sluggishness in the network infrastructure market, lower IPR (Intellectual Property Rights) license sales and the struggling IT & media business. The company’s earnings also declined due to the lower revenues and difficulties in executing its cost savings program.
Going forward, the company has hinted towards a possible strategic spinoff of its media business to focus more on its primary networks segment, which can allow the networks business to grow faster once market conditions stabilize. The company has reiterated its guidance to double its 2016 operating profits by the end of 2018, but we believe that in the short term, the bottom line might continue to see pressure as the cost savings program has yet to deliver the expected results.
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See our complete analysis for Ericsson
Networks Back Into Focus As Struggle To Grab Market Share Intensifies
Amid difficult conditions in the network infrastructure market, the fight between Ericsson, Nokia and Huawei to gain market share is likely to intensify further, as it is currently the only out to stabilize top line pressure. The situation may not improve soon, as Ericsson continues to forecast a 2- 6% decline in the RAN (radio access networks) market in 2017.
Keeping in mind these conditions, it seems that Ericsson does not want to divert its focus away from this competitive segment, which contributes 75% of its total revenues. Networks (including managed and digital services) turned out to be the most profitable segment for Ericsson in the first quarter, reporting 12% adjusted operating margins. Therefore, the decision to spin off underperforming segments may turn out to be beneficial for the company in the long term if it manages to capitalize on the opportunities when 5G hits the market in 2020. According to a report by Qualcomm, 5G is expected to contribute over $3 trillion to the global GDP over time.
Bottom Line Could Suffer As Cost Savings May Get Delayed
Ericsson launched a cost efficiency program in 2014, under which it announced that it plans to save SEK 53 billion in the second half of 2017. However, this timeline may take a hit going forward. In addition, the company had to make provisions for certain deals in the IT & Cloud business which are expected to cost more than previously estimated. Accordingly, we expect further bottom line pressure.
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