Ericsson has announced new financial targets ahead of its capital markets day on 08 November in New York. The outlook includes a higher sales target for 2020, as well as plans to reach its long-term operating margin target of 12 percent by 2022.
In the past two years, the company has been focused on simplifying and stabilizing the business, including stopping the top-line decline. Cost reductions and contract reviews have been implemented, and Ericsson said it's made good progress in its portfolio review and increased investment in R&D to prepare for future growth. This was reflected in improved growth in sales and margins in Q3, a first since 2014, according to CEO Borje Ekholm. As the industry moves to 5G and IoT, the company is now preparing to take the next step to profitable growth "in a selective and disciplined way", he said.
This includes a higher target for net sales in 2020, of SEK 210-220 billion versus an outlook of SEK 190-200 billion previously. This is mainly driven by the Networks division. Around SEK 5 billion of the improvement comes from currency effects and SEK 2 billion from the decision to hold on to Red Bee Media. This puts the company on track to reach its target for an operating margin of 10 percent in 2020 and the new deadline of 2022 for 12 percent.
Networks to drive sales, margin
In Networks, increased investments in R&D for technology and cost efficiencies will continue. Growth is expected to come from a stronger market, selective market share gains, and expansion of the product portfolio into adjacent markets. For 2020, Ericsson targets net sales of SEK 141-145 billion for Networks, up from its previous estimate of SEK 128-134 billion. The operating margin target for 2020 is unchanged at 15-17 percent.
In Digital Services, the top priority is returning to profitability, Ericsson said. Continued cost reductions and efficiency improvements will contribute to reaching the target of a low single-digit operating margin by 2020. Investments in a 5G-ready and cloud-native product portfolio are continuing, and the company sees strong market demand for the new portfolio, driven by virtualization and 5G acceleration. At the same time, the legacy product sales decline faster than the new portfolio uptake, and the internal transfer of a business line to Managed Services leads to a lower sales target for the segment.
In Managed Services, where the turnaround has been completed, the focus is shifting to further improving profitability through investments in automation and artificial intelligence. Consequently, the operating margin target for 2020 is increased to 5-8 percent from 4-6 percent previously, and the result should reach 10-12 percent by 2022.
In the segment Emerging Business and Other, the focus is on establishing new businesses for organic growth. The strategy is to capture new revenues through innovation, building on 5G and IoT. For the current business portfolio, the target of break-even by 2020 is unchanged. However, if new business opportunities develop, Ericsson said it may decide to scale up investments. The emerging business initiatives will be managed for growth, based on positive NPV case-by-case and within the 2022 group targets.
