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How Ericsson Aims to Expand Its Profit Margins

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Operating margin target of 10%

We have seen that Ericsson (ERIC) is focusing on improving its bottom line to offset falling revenue and maintain profitability. The company has a long-term operating margin target of 12%. In the near term (by 2020), it plans to achieve a gross margin of between 37% and 39% and an operating margin of 10%.

Ericsson expects continued improvements and upsides from emerging businesses to drive its operating margin higher post-2020. Ericsson has stated that its key priorities include a focus on the ramp-up of its 5G-driven (fifth-generation) networks, a software-based Digital Services business, and profitability improvements in Managed Services by leveraging automation and analytics.

Ericsson expects net sales of between 190 billion and 200 billion Swedish kronor in 2020 compared to sales of 201 billion kronor in 2017. This revenue fall will likely be driven by a fall in the radio access network market.

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Cost reduction program

Ericsson expects its gross margin expansion to be driven by its cost reduction program. Earlier, Ericsson outlined a cost reduction program of 10 billion kronor that was to be completed by mid-2018. About 70% of the cost reduction program was related to the cost of sales, service delivery efficiencies, and a reduction in IT, supply, and real estate costs.

The company aims to further improve its gross margin by concentrating on product-led solutions, leading to an improved sales mix and a higher proportion of software sales. Ericsson’s annual report states, “We aim to secure financial resilience, improve performance visibility, increase accountability and drive focus on profit and cash. The target is to improve collection and credit management, as well as sourcing and supply chain management.”

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