What Drove Ericsson’s Q3 Earnings Beat?

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Swedish network equipment major Ericsson (NASDAQ:ERIC) published a stronger than expected set of Q3 2018 results on Thursday, driven by higher network spending in the North American market and continued reductions in the company’s operating costs. While overall net revenues rose by about 9% year-over-year to SEK 53.8 billion ($6.5 billion), revenues grew by 1% on an organic basis, marking the company’s first increase in over three years. Ericsson also posted its first quarter of positive net income in almost two years. Below, we provide some of the key takeaways from the performance of the company’s bread-and-butter networking business over the quarter.

View our interactive dashboard analysis on what to expect from Ericsson over 2018. We will be updating the model to account for the recent earnings release.

Cost Cutting And R&D Investments Begin To Pay Off

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Ericsson’s Network segment had a good quarter, with revenues rising by 12.5% year-over-year, driven primarily by strong growth in North America, where carriers have begun commercial 5G deployments, and also by some expansion in Europe and Latin America. Gross margins also expanded, rising by 670 bps to 41.5%, driven by the company’s recent cost-cutting initiatives and a more favorable sales mix. For instance, the Ericsson Radio System – an end-to-end radio modular and scalable network portfolio – has accounted for 86% of the company’s radio sales year-to-date. The company’s decision to bolster R&D spending, despite cutting back on larger operating expenses, also appears to be having a positive impact on margins.

Much of Ericsson’s future growth in the networking space will be driven by 5G, and the company has indicated that it would further invest in 5G-related R&D and field trials. Unlike some of its rivals, Ericsson provides solutions for all frequency bands for 5G, which should make the company more competitive globally. The company has also been introducing a slew of new 5G products. For instance, over the last month, Ericsson introduced software for sharing spectrum between 4G and 5G bands, street macro transport solutions, which help to increase data capacity in urban areas across millimeter wave spectrum bands, and a radio access network (RAN) compute solution.

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