What To Watch For In Ericsson’s Q2

Networking equipment major Ericsson (NASDAQ:ERIC) is expected to publish its Q2 2018 results on July 18, reporting on a quarter that could see the company’s performance look up, driven by progress in its cost-cutting program and some traction in the core Networks business. Below, we take a look at what to expect when the company reports earnings next week.

We have created an interactive dashboard analysis which outlines our expectations for Ericsson over 2018. You can modify the key drivers to arrive at your own price estimate for the company.

Networks Business Could See Some Improvement

The market for telecom equipment is expected to see a recovery going forward, as the commercial roll-out of 5G networks starts in North America later this year, with other markets including South Korea, China, Japan and the Middle East beginning their build-outs from 2019. While Ericsson has indicated that the RAN equipment market could decline by about 2% in FY’18, it expects to see a CAGR of roughly 2% between 2018 and 2022. Over Q2, it’s possible that the company saw some traction in the United States as well as the Middle East & Africa, where ongoing network modernization could drive sales, although this could be offset by weaker demand from China. Ericsson could also see a more favorable product mix, with sales of its end-to-end radio modular and scalable network portfolio – Ericsson Radio System (ERS) – accounting for a greater mix of the company’s sales. For reference, it accounted for 84% of radio sales volumes in the first quarter, up from about 55% in 2017.

Progress With Cost Cutting

Ericsson has been aggressively cutting costs through the downturn. The company’s operating margins turned positive during Q1 2018, 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.  Ericsson reached an annual run-rate cost reduction to the tune of about SEK 2.5 billion at the end of Q1, and noted that it intends to achieve cost savings of SEK 10 billion by the end of Q2. Ericsson has also reduced its total workforce by over 15% since the last year. Further, the company is revisiting its managed services contracts to identify contracts to be exited, renegotiated or transformed, in a move to improve the profitability of the segment. Ericsson is targeting operating margins of at least 10% by 2020, with the number projected to increase to over 12% in the longer term.

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