Stabilize business and simplify organization structure
Ericsson (ERIC) aims to cut costs and improve profit margins over the next two fiscal years to achieve an operating margin of 10% by fiscal 2020 and 12% post-2020. The company’s management has outlined its efforts to achieve financial targets in the first phase of the cost savings program.
Ericsson has identified 42 non-strategic contracts in its Managed Services business segment. Of these contracts, the company either exited or renegotiated 23 contracts in 2017. In the Digital Services business, Ericsson’s product roadmaps and project delivery have stabilized. Further, the company has again identified 45 non-strategic or unprofitable contracts and is expected to exit 50% of them in 2018.
In the above chart, you can see that analysts have estimated Ericsson’s operating margin to be below 5% in fiscal 2018. Comparatively, operating margins for Nokia (NOK), Cisco (CSCO), and Verizon (VZ) are estimated at 10%, 31%, and 24%, respectively, in fiscal 2018.
Cost savings in the Media business
Earlier this year, Ericsson announced that it has divested 51% of its Media Solutions business to an external partner. The company’s Red Bee Media would now be developed as an independent in-house media service business. These decisions are expected to improve profit margins for the company.
We also know that Ericsson wants to reduce costs by 10 billion Swedish kronor by mid-2018, and it achieved cost savings of 6 billion kronor by the end of 2017.