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How Ericsson Views Growth in Its Networks

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Mar. 9 2018, Updated 7:32 a.m. ET

Expected revenue by 2020

Ericsson (ERIC) has four business segments: Networks, Digital Services, Managed Services, and Other. It has targeted total revenue of 190 billion–200 billion Swedish kroner in fiscal 2020. The Networks segment is expected to post revenue of 128 billion–134 billion Swedish kroner in 2020 and account for approximately 65% of total revenue.

The Networks segment provides solution support across radio access technologies and offers hardware as well as software services, focusing primarily on service providers such as Verizon (VZ), T-Mobile (TMUS), and AT&T (T). The segment has product-related services that include network rollout and support. These contracts are based on a transactional approach in which Ericsson develops, sells, and licenses services purchased by customers.

This segment also has recurring revenue streams from customer support and software.

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Network revenue fell in 2017

Ericsson’s Networks segment’s revenue declined 13.8% YoY (year-over-year) in 4Q17 to 36.3 billion Swedish kroner, driven by a decline in the overall RAN (Radio Access Network) market and Ericsson’s market share. Ericsson has estimated the RAN market to decline 2% in 2018 and 1% in 2019 and then increase 1% in 2020. RAN revenue accounts for more than 50% of the Networks segment’s total revenue. Profitability has also been impacted by competition and pricing pressures.

Ericsson is one of the largest suppliers in the mobile equipment space and is struggling to compete with technology giants such as Nokia (NOK), Samsung (SSNLF), ZTE, and Huawei. In its annual report, Ericsson stated, “The expected market development for 2018 and 2019 as well as the contraction of the network rollout business, as we focus on our own products, will have a negative impact on sales.”

Ericsson is eyeing expansion in selective markets to drive long-term revenue. It launched the ERS (Ericsson Radio System) in 2016 that has not added capabilities and competitiveness but helped in cost reductions and service delivery efficiency. Approximately 61% of radio deliveries were based on ERS, and Ericsson expects that to reach 100% by the end of fiscal 2018.

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