Key Trends To Watch As Ericsson Publishes Q4 Earnings

Ericsson (NASDAQ:ERIC) is expected to publish its Q4 2018 results on January 25, reporting on a quarter that could see the company continue the turnaround of its bread-and-butter Networks business. Below we take a look at some of the key trends that we will be watching when the company publishes results.

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Networks Business: Updates On 5G

The turnaround of Ericsson’s Networks segment has been gathering pace, with revenue growth accelerating to 12.5% year-over-year during Q3 2018, up from a growth rate of about 2% in Q2. The business has benefitted from higher sales to the North American market, where carriers have started to deploy 5G commercially, and also by some expansion in Europe and Latin America. 5G is expected to drive the next big wave of growth for networking companies, and Ericsson has been scoring early contract wins in key markets. For instance, the company won a contract with Verizon to supply equipment for its 5G launch. Ericsson has also been bolstering its R&D spending, despite cutting back on broader operating expenses, as it looks to gain an edge in 5G technology. We will be looking for updates on how its 5G business is faring when the company publishes results.

Margins In Focus 

The company’s gross margins have also been expanding, rising by 670 bps to 41.5% in Q3. While the company has been benefiting from its recent cost-cutting program – it achieved a SEK 10 billion (~$1.1 billion) reduction in run-rate expenses at the end of Q2 – it also been benefiting from a more favorable sales mix. For instance, the Ericsson Radio System – an end-to-end radio modular and scalable network portfolio – accounted for 86% of the company’s radio sales over the first nine months of 2018. The company has set a target of achieving 10% operating margins by 2020, up from about 6% in Q3, and we will be watching the company’s progress on this front.

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