Weak RAN Market And Additional Costs Can Weigh On Ericsson’s Results Going Forward
Ericsson (NASDAQ:ERIC) released its Q2’17 earnings on July 19th and went on to miss the analyst estimates for the second time in this year. The revenues continued to decline because of the weak mobile networks market which is experiencing an investment drought during the times when interest in 4G has peaked out and 5G technology has not yet entered the market.
The earnings, too, missed the analyst estimates due to declining revenues and an inefficient cost savings program. This was the third consecutive quarterly operating loss posted by Ericsson.
The two key highlights from the earnings are:
- Ericsson has further reduced its forecast of RAN (Radio Access Network) market growth for the rest of the year.
- The company is looking to further cut costs.
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Further Market Slowdown Can Hit Ericsson’s Focused Strategy
Ericsson earlier believed that the RAN market in 2017 will decline at a rate of between 2-6%. However, in the recent earnings call, it has revised its forecast for the same to fall at high single digits.
This swells the problems for Ericsson given the fact that under its new strategy, it is planning to focus more on the core Networks business in order to maintain its competitiveness and market share. The bleak market forecasts can hinder the plans of the company to revive its top-line growth under this strategy.
Cost Cuts May Not Be Beneficial – Here Is Why
The company has announced that it will further cut costs by SEK 10 billion over the coming year. While this should slightly lift the burden off the dwindling bottom-line, but it can have its repercussions as well in the form of a slowdown in new innovations amidst high competition from Nokia and Huawei.
In addition the company has hinted that its operating income will incur an additional headwind of SEK 3-5 billion in the coming year because of renegotiation of some customer contracts. This can offset the benefits of cost cutting, and also due to this, Ericsson is likely to continue to report losses over the next few quarters until the market conditions improve.
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