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Why Ericsson's Stock Rallied Recently

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Ericsson published its Q3 2017 results on Friday, October 20, indicating that its core networking business – which accounts for over two-thirds of its revenue – was seeing some signs of improvement despite continued declines in the wireless infrastructure market. Ericsson’s stock rallied by over 8% in Friday’s trading, following the announcement. Below we take a look at some of the factors that impacted the business over the quarter.

Trefis has a $6.50 price estimate for Ericsson, which is in line with the current market price.

Ericsson’s Core Networking Business Showing Signs Of A Turnaround

Ericsson’s Network segment revenues stood at SEK 35.5 billion (about $4.35 billion), marking a decline of around 4% year-over-year. However, the company noted that sales actually increased adjusted for comparable units, currency and its move to revisit some of its managed services contracts. While Ericsson expects the radio access network market to contract by about 8% this year, as wireless providers wind down their spending on 4G networks, the company benefited from a more favorable product mix and higher software sales this quarter. For instance, the company’s new Ericsson Radio System – an end-to-end radio modular and scalable network portfolio – saw volumes to rise to 55% of total radio volumes this year, up from just about 15% in Q4’16.

Adjusted operating margins for the networking business were also stronger than expected at about 11% for the first nine months of the year, up from 9% in the year-ago period. While this was partly driven by higher software sales, the company is also cutting costs and focusing on improving the profitability of its existing services contracts. Ericsson is looking to cut annualized costs by over SEK 10 billion by mid-2018, with about 30% of the reduction coming from general and administrative expenses and 70% coming from its cost of sales. Ericsson also cut its headcount by a total net of about 3000 jobs this quarter. The company has been rescoping a number of contracts in its managed services division, reviewing its low-performing contracts in order to exit, renegotiation or transform them. The company said that it had addressed 13 out of a total of 42 contracts.

IT & Cloud Division Continues To Underperform

Ericsson’s IT & Cloud division continued to underperform, posting revenues of SEK 10.3 billion, marking a decline of about 12% year-over-year on account of the ongoing shift in the technology portfolio, as sales of the company’s legacy portfolio products continued to decline. The company expects to improve profitability over 2018, by addressing challenging contracts and executing on its future roadmap. The division remains important to the company in the long run, as wireless operators increasingly digitize their operations and move to invest in a network architecture that is based on software-defined logic.

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