What Drove Ericsson’s Earnings Beat?

by Trefis Team
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Ericsson (NASDAQ:ERIC) published its Q1 2018 results on Friday, reporting a smaller than expected loss, driven by progress in its cost-cutting program and some traction in its core Networks business. Below, we provide a brief overview of the company’s results and what lies ahead.

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While the company’s reported revenues continued to trend lower, falling by about 9% to SEK 43.4 billion ($5.16 billion), the decline adjusted for foreign currency impacts stood at just 2%, as network modernization in the Middle East & Africa partially helped to offset weakness in China, where LTE deployments have slowed down meaningfully. The company also noted that it was seeing some traction in the United States, where carriers have been expanding their networks and preparing for commercial 5G deployments. Ericsson’s product mix for its Networks division was also more favorable. For instance, sales of the Ericsson Radio System (ERS), its end-to-end radio modular and scalable network portfolio, accounted for 84% of radio sales volumes, up from about 55% in 2017. While Ericsson expects the RAN equipment market to decline by about 2% FY18, it expects to see a CAGR of about 2% between 2018 and 2022.

Cost Cutting Drives Operating Margins

Notably, Ericsson’s operating margins turned positive during the quarter, coming in at 2%, driven by cost reductions, a more favorable product mix in its networking division and contract rationalization at its managed services business.  The company indicated that it had reached an annual run-rate cost reduction to the tune of about SEK 2.5 billion at the end of the first quarter, with a target of cost savings of over SEK 10 billion by mid-2018. Ericsson has also reduced its total workforce by over 15% since the last year. Ericcson has also been relooking its managed services contracts to identify contracts to be exited, renegotiated or transformed. The company noted that it had addressed 31 of 42 contracts in total. This helped gross margins for the segment to increase to 8.8%, from (6.5%) in Q4 2017.

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