Ericsson has scaled back its financial targets as the contraction in the mobile network market is not expected to relent until 2020 when 5G sales start. At its Capital Markets Day, the company said it will focus on profitability over growth in the near term.
The new target for the operating margin is over 10 percent in 2020, compared to a forecast earlier this year of 12 percent after 2018. In the company's latest results, the figure was 3 percent on a 12-month rolling basis, excluding restructuring charges and one-time items. The company also forecast a drop in revenues to just SEK 190-200 billion in 2020, compared to SEK 211 billion in the last 12 months.
Ericsson said in a statement that it "remains fully committed" to the higher targets first issued in March this year, but "the starting point has become more challenging and therefore it will take some additional time than originally planned for". The company blamed the weaker-than-expected market for radio access network equipment, the stronger Swedish currency versus the dollar and an even more challenging situation in its Digital Services business than originally anticipated.
Market decline to continue to 2020
The new targets are based on the assumption that the company will not book significant revenues from 5G before 2020. Ericsson expects the RAN market, its main business for the Networks division, will contract by 2 percent in 2018 and by 1 percent in 2019 and be flat in 2020. Earlier it forecast an 8 percent decline this year.
The company continues to target annual cost reductions of at least SEK 10 billion by mid-2018, of which 30 percent from general & administration and 70 percent from cost of sales. By the end of Q3 2017, it had achieved SEK 2 billion in savings, of which SEK 1.8 billion in cost of sales. The restructuring will lead to further charges of SEK 5-7 billion in 2018.
Ericsson said it's focusing initially on "simplifying and stabilizing the business". A simplified company structure and organization has been put in place, and the first results from accelerated cost reductions and contract reviews are already visible. It also sees "good traction in the ongoing portfolio review".
From Q4 this year, Ericsson will introduce a new financial reporting structure, with four segments: Networks, Digital Services, Managed Services and Other. 'Other' consists of Media Solutions, Broadcast & Media Services, and Emerging Business.
