Cost Reductions And U.S. Business Could Drive Ericsson’s Q3 Results

by Trefis Team
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Telecom equipment major Ericsson (NASDAQ:ERIC) is expected to publish its Q3 2018 results on Thursday, October 18. We expect the company’s results to be driven by its recent cost-cutting initiatives, potentially stronger demand from the U.S. market and a more favorable product mix. Below is a quick overview of what to watch when the company publishes earnings.

We have also created an interactive dashboard analysis on what to expect from Ericsson over 2018. You can modify the key drivers to arrive at your own estimates for the company’s revenues and EPS.

U.S. Business Should Remain Robust

North America could continue to be a big driver of Ericsson’s business on account of strong capital spending by major U.S. wireless carriers. Moreover, the market is at the forefront of the 5G upgrade cycle, with major U.S. carriers commencing their commercial roll-outs of the technology this year. Ericsson’s exposure to the North American market has been increasing, with sales to the region accounting for about 31.2% of total sales in Q2. The company is also expanding its market share over rival Nokia. The company is looking to capitalize on the growing market, noting that it would double down on its R&D efforts in the U.S., hiring about 400 engineers, while also beginning to carry out some manufacturing in the country.

Cost Cutting And Product Mix 

Ericsson has cut costs significantly over the last few years, noting that it had achieved its target of cutting SEK 10 billion (~$1.1 billion) in run-rate costs as of the end of the second quarter. Over Q2, the company also improved its gross margins to 36.7% year-over-year, driven by its cost reduction initiatives, and it is possible that this could continue into Q3. The company has also been revisiting its managed services contracts to identify contracts to be exited, renegotiated or transformed. Although this is impacting revenues of the business, it could aid longer-term profitability. Ericsson’s Networks product mix has also been more favorable this year, 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. This could also help boost the company’s margins.

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