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How Ericsson Intends to Improve Its Profit Margins

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Savings of 9 billion krona in fiscal 2017

In November 2014, Ericsson (ERIC) launched a Global Cost and Efficiency Program in order to cut costs and save ~9 billion krona in 2017. Ericsson expects its operating expenses to fall 4.5 billion krona and cut its cost of sales by 4.5 billion krona. In July 2016, Ericsson aimed to reduce its operating expenses by 53 billion krona in the second half of 2017.

Ericsson has been looking to improve its profit margins to offset falling revenues. In October 2016, it announced a round of job cuts that affected 3,000 employees.

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What impacted Ericsson’s gross margins?

One of the key focus areas for Ericsson in 2016 was improving profitability in its targeted growth areas. The company plans to focus on software sales and recurring business to increase profitability. It also wants to improve its cost efficiency to stay competitive in the broader industry.

Ericsson’s gross margin contracted YoY (year-over-year) in 4Q16, driven by lower capacity sales, which could not be offset by its cost reduction activities. Ericsson aims to reduce its cost of sales in delivery and supply, which could positively impact its gross margins in 2017.

Weak broadband demand could negatively impact Ericsson’s revenues over the next few quarters. In our view, telecommunications equipment companies such as Ericsson, Nokia (NOK), and Cisco Systems (CSCO) should focus on improving their operational efficiencies and profitability.

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