Ericsson (NASDAQ:ERIC) is today holding its Capital Markets Day. The company is giving an overview of its focused business strategy and deep dives in execution in all business segments.
Börje Ekholm, President and CEO, says: “Our job and commitment is to rebuild Ericsson to be successful long-term. Near term we will prioritize profitability over growth. Healthy profitability is the base for long-term success and will give us the freedom and resources to invest for the long term.”
The company mission is to enable the full value of connectivity for its service provider customers. In the work to turn around performance, each portfolio area has a clear focus. In Networks, the company is increasing R&D for technology and cost leadership. In Digital Services, focus is on reaching break even by shifting to software-led solutions and adjusting the cost base. In Managed Services, a contract review is ongoing and investments in automation have started. Finally, a structured approach to technology and business innovations will over time drive new growth in Emerging Businesses.
In this first phase of strategy execution, focus is on simplifying and stabilizing the business. A simplified company structure and organization has been put in place. The first results from accelerated cost reduction activities and contract reviews are already visible and there is good traction in the ongoing portfolio review. At the same time, the company is taking steps to invest into future growth as the industry transitions into 5G.
Börje Ekholm, President and CEO, Ericsson says: “5G is not just another G. Even though we are not planning for significant 5G sales before 2020, we are convinced it will create value for our customers in their mobile broadband business, enabling them to manage very high traffic growth. But even more important, it has the potential to create new businesses and revenue streams for service providers based on use cases such as industrial applications. With the combination of products and capabilities that we have in Networks and Digital Services combined, we are well positioned to support our customers’ network evolution to 5G.”
Group financial targets and profitability
The target for net sales is SEK 190 – 200 b. by 2020.
The focused business strategy presented in March this year, stated the ambition to improve returns to shareholders, including the potential of more than 12 % operating margin on a sustainable basis beyond 2018, excluding restructuring costs.
Ericsson remains fully committed to this ambition but the starting point has become more challenging and therefore it will take some additional time than originally planned for. This is due to a weaker than expected Radio Access Network equipment market that will have significant compound effect over the coming years, FX movements with our reporting currency SEK strengthening against the USD and an even more challenging situation in Digital Services than the original assessment indicated.
However, there are robust plans in place which will take us to a gross margin of 37 – 39% and an operating margin of at least 10% for the Group in 2020, excluding restructuring charges. This target does not factor in any significant 5G sales during this time period.
Börje Ekholm continues: “We have plans in place for all segments that combined sum up to an operating margin of between 10 – 12% by 2020, but since there are execution risks in all plans and we start from a weaker starting point than originally planned for, we prefer to be cautious and commit to the lower end of the range. Beyond 2020, we will drive continued improvements and capture upsides from innovation and emerging business to reach our ambition of at least 12% operating margin for the Group.”
2020 targets and planning assumptions
(see below under heading New financial reporting structure for details on new segment structure)
|SEK b.||Networks||Digital Services||Managed Services||Other||Total|
|Target 2020||Net sales||128 – 134||42 – 44||20 – 22||3 – 5||190 – 200|
|Operating margin 1)||15 – 17%||Low single digit||4 – 6%||Breakeven||>10%|
|Baseline 2017 Q3 rolling 4Q unaudited and preliminary||Net sales||133 – 135||41 – 43||24 – 26||7 – 9 3)||211|
|Operating margin 2)||13 – 14%||-15 to -17%||-4 to -6%||-57% to -62%
1) Excluding restructuring charges
2) Numbers are excluding restructuring charges and extraordinary items
3) Including Media Solutions and Broadcast & Media Services
Note: All financial targets are based on USD/SEK at 8.20. USD to SEK movements has a direct impact on reported sales and income. If the USD to SEK weakens by -10% it has approximately 5% negative impact on topline and 1 percentage point on operating margin.
In line with external analysts’ market size estimates, Ericsson expects that the Radio Access Network equipment market addressed by segment Networks will decline by -2% during 2018, and by -1% during 2019. In 2020, the market is expected to remain flat with no further decline.
Planning assumptions for all other key segments are based on external sources and indicate slightly positive growth across all segments during the same time period.
Progress on cost savings
As announced in the report for the second quarter 2017, cost reduction activities are accelerated to achieve an annual run rate reduction of at least SEK 10 b. by mid-2018, split between General & Administration (30%) and Cost of Sales (70%). At the end of Q317 a SEK 2 b. run rate reduction had been achieved, of which SEK 1.8 b. in cost of sales.
Restructuring charges for full year 2018 are estimated to SEK 5 – 7 b.
New financial reporting structure
Ericsson will introduce a new financial reporting structure as of Q4 2017, based on the new company structure. Results will be reported in four segments: Networks, Digital Services, Managed Services and Other. Each segment includes the combined sales from products and services except for segment Managed Services that consists of services only.
IPR revenues will be split 82% in Networks and 18% in Digital Services.
Segment Other will consist of Media Solutions, Broadcast & Media Services, and Emerging Business.
The restated numbers for 2016 and 2017 will be disclosed on December 8, 2017, ahead of the fourth quarter and full year 2017 report.
Details of the event
President and CEO Börje Ekholm and CFO Carl Mellander will be joined by members of the company's Executive Team. The speakers include Fredrik Jejdling, Head of Business Area Networks, Ulf Ewaldsson, Head of Business Area Digital Services, and Peter Laurin, Head of Business Area Managed Services as well as CTO Erik Ekudden and Nishant Batra, Head of Network infrastructure.
Ericsson's Capital Markets Day event can be accessed via the Ericsson website https://www.ericsson.com/en/investors/events-and-presentations/CMD2017. Presentation materials can also be downloaded from the website once the webcast has started.
NOTES TO EDITORS
For media kits, backgrounders and high-resolution photos, please visit www.ericsson.com/press
MORE INFORMATION AT:
Peter Nyquist, Head of Investor Relations
Phone: +46 10 714 64 99
Ericsson Investor Relations
Phone: +46 10 719 00 00
Ericsson Corporate Communications
Phone: +46 10 719 69 92
Ericsson is a world leader in communications technology and services with headquarters in Stockholm, Sweden. Our organization consists of more than 111,000 experts who provide customers in 180 countries with innovative solutions and services. Together we are building a more connected future where anyone and any industry is empowered to reach their full potential. Net sales in 2016 were SEK 222.6 billion (USD 24.5 billion). The Ericsson stock is listed on Nasdaq Stockholm and on NASDAQ in New York. Read more on www.ericsson.com.
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