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What To Expect From Ericsson In 2019

Ericsson AB radio systems are displayed at the company’s booth during the Mobile World Congress Americas event in Los Angeles, California, U.S., on Friday, Sept. 14, 2018. Photographer: Patrick T. Fallon/Bloomberg© 2018 Bloomberg Finance LP

Ericsson, one of the largest network equipment vendors, had a relatively strong 2018. While the broader radio access network market continued to contract over the year, Ericsson returned to profitability over the first nine months of the year, driven by its cost-cutting initiatives, stronger demand from the U.S. market and a more favorable product mix. In this note, we review the year that was for Ericsson and what lies ahead for the company in 2019.

View our interactive dashboard analysis on what to expect from Ericsson over 2018 and 2019.

Ericsson Saw Meaningful Margin Expansion In 2018

While Ericsson’s net sales remained about flat at SEK 147.0 billion ($16 billion) for the first nine months of this year, gross margins rose to around 35% from 24% in the year-ago period, while operating margins came in at 2.1% compared to (10.5%) in the year-ago quarter. 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 expenses at the end of Q2. The company has also been seeing a more favorable sales mix in its Networking division, aiding its margins. 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. Ericsson is also focusing on improving the profitability of its smaller businesses, carrying out contract rationalization at its managed services business by identifying contracts to be exited, renegotiated or transformed.

5G Will Be The Key Theme For 2019

The deployment of 5G is expected to be the next big driver of network spending globally, and Ericsson is betting heavily on the technology to achieve its 2020 target of networking revenues of SEK 128 to 134 billion ($14 – 14.7 billion) and operating margins of 15% to 17%. Ericsson has been making good progress on the 5G front, scoring early contract wins in key markets. For instance, the company has been gaining market share in North America – which is at the forefront of the 5G upgrade cycle, winning a contract with Verizon to supply equipment for its 5G launch. Ericsson is also looking to make a dent in China, working with all three Chinese carriers on 5G field trials. 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. The company’s increasing mix of Ericsson Radio System deployments could also bode well for its 5G initiatives, as the system supports 5G capabilities through remote software installation, making it 5G-ready.

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