Ericsson’s Turnaround Gathers Momentum

Telecom equipment behemoth Ericsson (NASDAQ:ERIC) published a stronger than expected set of Q2 2018 results early Wednesday, driven by strong demand from North America, a more favorable product mix, and aggressive cost-cutting. Below, we take a look at some of the key takeaways from the company’s results.

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.

Strong Network Sales In North America 

Ericsson’s sales – adjusted for FX changes – declined by 1% year-over-year to SEK 49.8 billion ($5.62 billion). The company’s bread-and-butter networking division grew by about 2% year-over-year (FX adjusted) to SEK 32.4 billion ($3.65 billion), driven primarily by sales in North America (up by 12%) where higher network spending by operators preparing for the launch of 5G services is driving demand. However, this was partially offset by reduced LTE investments in Mainland China. Ericsson’s Networks product mix has also been more favorable, with the Ericsson Radio System – an end-to-end radio modular and scalable network portfolio – accounting for 84% of the company’s radio sales year-to-date. That said, the Digital Services and Managed Services divisions continued to post declines, due to lower legacy product sales and the company’s decision to exit certain contracts which were less profitable.

Cost Cutting Drives Margin Improvement

Ericsson has been aggressively cutting costs through the downturn, and the company noted that it had achieved its target of cutting SEK 10 billion (~$1.1 billion) in run-rate costs as of the end of Q2. The company’s gross margins improved by 6% year-over-year to 36.7%, driven by cost-cutting and a more favorable sales mix, while operating margins rose to 4.1%, up from around 2% last year, excluding restructuring charges. Ericsson has also reduced its total workforce by over 15% since the last year. Further, the company has been revisiting its managed services contracts to identify contracts to be exited, renegotiated or transformed, in a move that should continue to aid profitability. Ericsson is targeting gross margins of between 37-39% by 2020, with operating margins projected to come in at over 10%.

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