Will 5G Roll-Out Revive Ericsson’s Fortunes In 2020?

Ericsson (NASDAQ: ERIC) is undergoing a significant transformation to focus on its core Networks and Digital Services business to achieve sustainable growth. After a couple of years of turmoil, the telecom technology company is on track to revive its fortunes primarily due to the roll-out of commercial 5G operations in North America and Northeast Asia. Ericsson’s networks division, which delivers products and services that are needed for mobile and fixed communication, several generations of radio networks and transmission networks, is expected to contribute $16.1 billion to Ericsson’s 2019 revenues, making up 67% of the company’s $24.2 billion in revenues for the year. The Networks segment is nearly 4 times larger than the Digital Services segment, which provides solutions that primarily consist of software and services in the areas of monetization and management systems. The Digital Services business has been struggling of late and is expected to see revenues shrink $400 million over 2019-2020. Trefis highlights trends in Ericsson’s Revenues over the years along with our expectations for 2020 in an interactive dashboard, key elements of which are discussed below.

How Has Ericsson’s Historical Revenue Trended?

• Ericsson has lost $1.7 billion in total revenue since 2016 at an average annual rate of 3.3% mainly due to losses across its core segments.
• Digital Services segment has been the worst-performing segment, losing more than $900 million over 2016-2018.
• Going forward, we expect Ericsson’s revenues to increase by 1.6% over 2019-2020 to reach $24.7 billion in 2020.

A Detailed Look At Ericsson’s segment performance and revenue change over the years:

(1) Networks Division Will Continue To Benefit From 5G Rollout

• Network division is the company’s largest segment with an average revenue share of 64% over the last three years.
• The division’s revenue has declined by 2% over 2016-2018, shedding $500 million in total revenues. Notably, this decline came in 2017 when the division’s revenues fell 9% due to lower operator investment in mobile broadband as well as lower demand for radio access network equipment.
• Going forward, we expect this division’s revenues to achieve steady growth and add over $800 million to total revenues over 2019-20 thanks to growing sales of 5G equipment in North America and South Korea.
• Moreover, as telecom operators continue to invest in network upgrades to cope with increased traffic volume, the demand for Ericsson’s  network products and services is expected to increase.

(2) Digital Services Business Will Continue To Tumble

• The company’s digital services business has been struggling of late, with the division’s shrinking by more than $900 million since 2016 at an average annual rate of 8.9%.
• This has led to the division’s contribution to Ericsson’s top line falling 18% points over this period.
• This decline can be attributed to lower sales in legacy products partially offset by growth in 5G and cloud products.
• We expect this declining trend to continue, with the division’s revenues declining at an average annual rate of 5%, losing nearly $425 million in total revenues over 2019-2020.
• This decline is likely to be driven by lower sales in legacy products across major geographic regions.

(3) Revenue from Managed Services is expected to remain flat at $3.9 billion over 2019-2020, with its share of Total Revenue remaining stable at 16%

Additional details about how revenues for Ericsson’s Managed Services and Other segment have changed over recent years are available in our interactive dashboard.

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