Key Takeaways From Ericsson’s Q4 Results

Ericsson (NASDAQ:ERIC) published its Q4 2018 results on Friday, beating market expectations on earnings, driven by stronger spending on 5G networks. In this note, we provide a brief overview of the results and take a look at what lies ahead for the company.

View our interactive dashboard analysis on what to expect from Ericsson over 2018 and 2019. You can modify any of our key drivers and forecasts to gauge the impact of changes on the company’s results and valuation.

Strong Network Sales In North America Drives Results 

Ericsson’s net sales grew by about 12% year-over-year to SEK 63.8 billion ($7.05 billion), driven primarily by the North American market, where major carriers have commenced their 5G rollouts. Ericsson has been looking to gain early market share in this market via aggressive pricing for its 5G equipment, while also focusing on doing more R&D and manufacturing in the United States (related: Why Ericsson Is Doubling Down On The U.S. Market). However, Ericsson appears to be playing the pricing card without hurting margins, with operating margins coming in at 4.0%, up from negative levels in the year-ago period, driven by its recent cost-cutting program. The company’s product mix has also been improving, with deliveries of the 5G-ready Ericsson Radio system accounting for 93% of total deliveries in Q4. The company says that it is on track to achieve its 2020 target of over 10% operating margins and its 2022 target of 12% margins.

Will Ericsson Gain Market Share As Key Rival Huawei Faces Headwinds?

Ericsson’s Chinese rival Huawei faces mounting scrutiny from governments and regulators in Western markets about whether it gives the Chinese government backdoors into its communications infrastructure, and there is a possibility that it could face a ban on its equipment in some markets. However, it remains to be seen whether Ericsson can benefit from this pressure and pull ahead of Huawei in the 5G race. Huawei has been significantly outspending its western rivals on 5G related research and development over the last few years. For instance, Huawei spent about $13.8 billion in 2017  on R&D over 2017, while Ericsson spent just about $4.5 billion. Moreover, major European carriers have indicated that Nokia and Ericsson have been slow to release equipment that is as sophisticated as Huawei’s. While Ericsson has indicated that it would continue to invest in R&D to strengthen its 5G portfolio, its R&D spending is expected to flatten out in 2019. Additionally, as China itself is likely to be a huge driver of 5G spending – the country is expected to account for over half the global subscribers on these next-generation networks by 2023 – it’s possible that the Chinese government could limit the access of global players to its market.