Emboldened Ericsson Lifts Sales Target

Ericsson has raised its sales target for 2020 as it banks on market share gains, heavier spending on networks by telcos and a successful push into "adjacent" markets.

The Swedish equipment vendor maintained its target of a 10% operating margin across the entire business but said it would aim for sales of 210-220 billion Swedish kronor ($23.4-24.5 billion), up from an earlier target of SEK190-200 billion ($21.2-22.3 billion).

The update ahead of Ericsson's capital markets day in New York follows a recent turnaround at the business, which has recorded sales growth and returned to profitability in recent months.

Under CEO Börje Ekholm, who took charge of Ericsson in early 2017, Ericsson AB (Nasdaq: ERIC) has laid off nearly 20% of its workforce, sold parts of its media and cloud business and increased spending on research and development at the main radio access network division.

As major operators start preparing for the rollout of 5G, a next-generation mobile technology that is critical to Ericsson's fortunes, the Swedish vendor has seen an improvement in market conditions. It now expects its overall addressable market to grow at a compound annual growth rate (CAGR) of 1-3% between 2018 and 2022.

With an operating margin of 2.1% for the first nine months of the year, Ericsson is still some way off its profitability target for 2020, and analysts continue to harbor doubts about its struggling digital services division.

But Ekholm's performance so far has clearly satisfied investors, with Ericsson's share price up 50% since the start of this year. Today's new guidance seemed to have little impact on the stock, which was trading up just 0.1% this morning in Stockholm at the time of writing. (See Have We Reached Peak Ericsson?)

Ericsson's growth ambitions will clearly be difficult to realize amid fierce competition from Huawei Technologies Co. Ltd. and Nokia Corp. (NYSE: NOK), which are similarly targeting leadership in the 5G market. Moreover, in a challenge to Ericsson's business model, several of the world's biggest service providers are pushing for more open radio access networks based on lower-cost equipment.

Ericsson attributes about SEK5 billion ($560 million) of the increase in its sales ambition to expectations of favorable currency movements and said another SEK2 billion ($220 million) would come from Red Bee Media, a broadcasting and media services company that was not previously factored into the figures.

The rest of the growth is expected to come from an increase in network sales. Ericsson is now guiding for revenues of SEK141-145 billion ($15.7-16.2 billion), up from an earlier forecast of SEK128-134 billion ($14.3-14.9 billion).

The midpoint of that range would represent an increase of nearly 12% on network sales last year and imply a CAGR of roughly 3.8% between 2017 and 2020.

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Besides growing its market share, Ericsson also hopes to expand into "close adjacent markets." The company provided few details in its statement but the plan looks akin to the the enterprise strategy of Nokia, which sees a range of markets outside the telecom sector as the main growth opportunity for the next few years. (See Nokia's Enterprise Push Is Adding €180M in Annual Sales.)

Nokia, however, has a much broader product portfolio than Ericsson and most of its success appears to have come from sales of optical equipment to Internet players.

Ericsson's targeting of "adjacent" markets seems bound to attract questions from analysts at the capital markets day given the company's decision to scale back its enterprise ambitions in mid-2017. (See Ericsson Denies Ditching the Enterprise Market.)

At the time, Ericsson denied having "given up" on the enterprise market but said it would no longer target enterprise customers directly. "We will build our IoT business with service providers, addressing industries based on use cases," said a spokesperson then. "We will continue to address clients outside of the telecom industry through our service provider customers."

Ericsson also said today that it would aim for sales of SEK41-43 billion ($4.6-4.8 billion) from digital services and SEK23-25 billion ($2.6-2.8 billion) from managed services for the 2020 fiscal year.

The company recorded sales of SEK41 billion ($4.6 billion) at its digital services unit last year, but that figure was down sharply from SEK45.3 billion ($5.1 billion) in 2016. The new target will be difficult to achieve while Ericsson continues to renegotiate or scrap contracts it no longer deems profitable.

Ericsson's managed services business delivered revenues of SEK24.5 billion ($2.7 billion) for 2017.

— Iain Morris, International Editor, Light Reading