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What Will Drive Revenues for Ericsson’s Managed Services Business?

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Managed Services revenue growth

Ericsson (ERIC) has estimated that its Managed Services segment revenues will rise at a CAGR (compound annual growth rate) of 2%–4% between 2016 and 2020. The segment has generated revenues of ~25 billion Swedish kronor this year and is vital to Ericsson, as it is an integral part of the firm’s current and future product portfolio.

Ericsson aims to secure long-term (three- to seven-year) customer contracts with high renewal rates in order to drive recurring revenues as well. As seen in the chart below, Ericsson has several contracts with service operators, including India’s (INDA) Bharti Airtel, Vodafone (VOD), Sprint (S), France Telecom, and T-Mobile (TMUS).

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Strategic priorities

As we discussed in previous parts of this series, Ericsson will be reviewing several contracts and will make decisions based on the viability of each project. The firm aims to limit operations in certain markets and to stop offering stand-alone services.

At the end of 3Q17, Ericsson had reportedly identified 42 contracts to exit, renegotiate, or transform by 2019. It has reviewed 13 contracts to date that have positively impacted profits by 400 million kronor on an annualized basis.

Ericsson has also stated that it wants to offer new sales directives to employees. To reduce costs and drive profit margins upwards, Ericsson aims to streamline delivery and looks to improve the delivery process and sourcing. Ericsson has targeted an operating margin of 4%–6% in 2020, up from its current -5%.

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