Five steps which will increase Ericsson’s profitability

Ericsson's plan is to implement cost savings with an annual run rate effect of at least SEK 10 billion by mid-2018, of which approximately half will be related to common costs

Ericsson is not satisfied with its quarterly performance of declining sales and increasing losses. The execution of its focused business strategy is gaining traction but results will take time. Keeping in view, the current market conditions, Ericsson is accelerating a series of planned actions to reduce costs.

DigiAnalysys is enumerating five steps which will help in reducing cost and increasing profitability for Ericsson

1. Refocusing Managed Services Business

Ericsson is refocusing on managed services business to improve profitability. The company has identified 42 contracts with sales of SEK 7 billion in 2016. For these projects, Ericsson is planning to either exit, renegotiate or transform and till date have done nine projects which has resulted in an annualised profit improvement of approximately SEK 140 million.

2. Strategic Importance on IT & Cloud

The company is preparing for 5G in a big way and therefore IT & cloud is of strategic importance to its customers as they are focusing on digitising their operations and invest in new software-defined architecture. The company is taking actions to improve its performance in IT & cloud by stabilising product roadmaps, addressing underperforming customer projects, improving new project delivery scoping and reducing costs, primarily in service delivery.

3. Reduction in Capitalization of Product Platform

Due to technology and portfolio shifts, Ericsson will reduce the capitalization of product platform, software release development expenses and hardware costs. Together this is estimated to result in a net negative impact on operating income of SEK -2.9 billion in the second half of 2017, with no impact on cash. This is to be compared with SEK -0.3 billion of total impact on operating income in the quarter.

4. Performance Improvements in Networks

The decline in the networks result in the quarter was mainly caused by lower software sales, driven by two key factors; unusually strong software sales in the second quarter last year and cautious mobile broadband investment levels. On the positive side, Ericsson was ranked number one in radio by a leading global operator.

Ericsson is planning to do performance improvements in networks through continued ramp-up of Ericsson Radio System (ERS) and cost reductions, mainly in service delivery. The ERS continues to prove its competitiveness and now represents 49% of radio unit deliveries in the quarter. To safeguard a future leading portfolio, Ericsson has started to increase R&D investments in Networks with a total increase of SEK 0.2 billion in the quarter. The company has also signed an agreement in the quarter to divest the power modules business.

Based on the development in the first half of the year, our current view of the Radio Access Network (RAN) equipment market outlook is in line with external estimates of a high single-digit percentage decline for the full year 2017 says Borje Ekholm, President and CEO, Ericsson.

5. Explore Opportunities in Media Business

The operating income in Media business of Ericsson has improved sequentially as a result of increased sales, improved business mix and reduced costs so Ericsson is looking at exploring strategic opportunities for the Media business.

“In light of current market environment and company performance, we are accelerating actions to reduce costs. Our focused business strategy is designed to take us back to technology and market leadership and improve company performance, also in a tough market. We see initial signs of traction in strategy execution including increased investments in R&D in networks and ramp up of deliveries of Ericsson Radio System, increasing our competitiveness in the market,” added Ekholm.

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