Ericsson Q3 Preview: Cost Cutting In Focus As Market Headwinds Persist

by Trefis Team
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Network infrastructure giant Ericsson (NASDAQ:ERIC) is expected to publish its third quarter results on October 20, reporting on a quarter that is likely to have seen the company cut operating costs, as the wireless infrastructure market continues to contract. Below we take a look at some of the key trends to watch.

Trefis has a $6.50 price estimate for Ericsson, which is about 15% ahead of the current market price.

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Market Headwinds Will Continue To Impact Top Line

Ericsson’s networks division, which accounts for over two-thirds of its total revenue, has been facing headwinds as operators scale down their investment in 4G technologies, which appear to be approaching saturation in most markets.  IHS projects that the LTE market will decline at a CAGR of (12.4%) from 2016 to 2021, with LTE-based revenues declining from a peak of around $26 billion in 2015 to around $12 billion by 2021. Competition for increasingly limited CapEx dollars from telcos is also mounting, with Chinese players like Huawei putting pressure on Ericsson in emerging markets and the Nokia-Alcatel Lucent merger creating a networking behemoth that is leading to stiffer competition in markets like the U.S. While the company initially projected that the wireless equipment market would contract by 2% to 6% this year, it indicated that the declines could actually approach the high-single digits.

Cost Cutting In Focus 

During Q2 2017, Ericsson swung to a net loss on account of lower sales volumes (13% down in comparable currency terms), high overhead costs as well as a less favorable sales mix, with lower software sales. As the company expects the near-term outlook to remain challenging, amid an increased risk of customer project adjustments, it expects a negative impact on operating income to the tune of SEK 3 to 5 billion ($370 million to $620 million) over the next 12 months. That said, the company is looking to cut costs significantly, targeting run-rate cost savings of roughly $1.23  billion (SEK 10 billion) by mid-2018, versus its annualized Q2 2017 costs. While a bulk of the savings are likely to come from closing manufacturing sites, Ericsson also expects to see some rightsizing, on account of lower business volumes. We will be interested to hear about how the cost-cutting program is progressing.

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