Operating margin target of 12% beyond 2020
In the third quarter, Ericsson’s (ERIC) sales rose 1% year-over-year to $5.97 billion. This marked the first quarter of revenue growth for Ericsson since the third quarter of 2014. Ericsson reported a positive net income in the quarter for the first time since the second quarter of 2016.
Ericsson’s sales are expected to be stable over the next few years, and the company is now looking to expand its profit margins through cost-saving efforts and efficiencies. Ericsson aims to achieve an operating margin of 10% by 2020 and over 12% beyond this timeline. Analysts expect Ericsson’s operating margin to expand from 0.9% in 2017 to 4.8% in 2018, 7.8% in 2019, and 10.3% in 2020.
High operating leverage
Ericsson has high operating leverage. Its EBITDA is expected to rise from $1.90 billion in 2018 to $3.27 billion in 2020.
Its operating income might also rise from $1.12 billion in 2018 to $2.5 billion in 2020. The robust growth in the company’s EBITDA and operating margin will likely be driven purely by cost savings, as its revenue is expected to be flat.
Ericsson expects continued improvement and upsides from its emerging businesses to drive its operating margin higher after 2020.