Ericsson Q2’17 Preview: Not Much In Store For Ericsson Amidst Weak Markets And Inefficient Cost Savings Program

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Ericsson (NASDAQ:ERIC) is all set to release its Q2’17 results on July 18.
Ericsson has been suffering from the slowdown in mobile network infrastructure market as the investments in 4G are phasing out and the 5G technology is not expected to kick in with full force before 2020. Amidst this transition phase, Ericsson’s operating income had fallen by over 70% in 2016 in comparison to 2015.

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In Q2, the company has conducted various successful trials including 1 GBPS tests on 4G mobile networks, and has struck new deals with operators around the world, but despite these new deals, we believe that results are not likely to present a huge surprise in this quarter. Here are the reasons why:

There Are No Signs Of Market Improvement Yet

According to IHS Markit, the mobile infrastructure market dropped by 10% in 2016 to $43 billion. This decline is likely to continue as LTE spending is expected to fall by over 12% over the next few years. Ericsson re-iterated the fact that the broader market conditions will remain sluggish in 2017. It expects the RAN (radio access network) market to see a decline of between 2-6%.

Apart from this, even the intermediate technology in the way to 5G is still in the testing and trial phase which is not likely to generate any meaningful revenue before the next year. This makes the case for Ericsson’s revenue growth in Q2 weaker as the company continues to face strong competition from Nokia and Huawei in the race to 5G.

Bottom Line Likely To Shrink Further As Cost Efficiency Program Is Turning Out To Be Inefficient!

Ericsson had earlier set an aim to save SEK 53 billion in costs during the second half of 2017, which it said might get delayed due to weak performance and extraordinary restructuring charges. This is not a good sign for the bottom line because in the wake of falling revenues, cost savings could have been the only savior for Ericsson. While the company still aims to double its operating margin beyond 2018, the present scenario for the earnings remain bleak.

On the positive side, it will be interesting to note Ericsson’s performance in Networks business which was the best performing segment in Q1. Ericsson is looking forward to focus its investments and resources in the core Networks business in order to prevent itself from lagging behind technologically, which will be of key importance if it has to remain competitive in the market, especially during the time when the mobile network infrastructure market can bottom out in the near future.

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