Ericsson Retains Core Business Focus Despite Spectrum Woes

On Aug 24, we issued an updated research report on Ericsson ERIC, one of the leading providers of communication networks, telecom services and support solutions in the United States.

Ericsson is actively pursuing three main areas, namely core business expansion, targeted growth and cost & efficiency to fuel growth. The company constantly seeks to seize business opportunities as operators shift toward 4G deployments and prepare grounds for the forthcoming 5G revolution. Ericsson also plans to focus more on software sales and recurring business that complements its thriving Professional Services business in terms of “targeted growth” investments. With such concerted efforts, Ericsson expects to be better-equipped to address the varied needs of its customer segments and capitalize on the market opportunities for faster growth.

With the emergence of the Smartphone market and subsequent usage of mobile broadband, user demand for coverage speed and quality has increased in the recent times. Further, to maintain superior performance as traffic increases, there is also a continuous need for network tuning and optimization. Ericsson, being one of the premier telecom services providers, is much in demand among operators to expand network coverage and upgrade networks for higher speed and capacity. Notably, Ericsson is the world’s largest supplier of LTE technology with a significant market share and has established a large number of LTE networks worldwide.
 
At the same time, Ericsson is focusing on 5G system development and has undertaken many notable endeavors to position itself for market leadership. The company believes that standardization of 5G is the cornerstone for digitization of industries and broadband. Moreover, Ericsson foresees mainstream 4G offerings to give way to 5G technology in the future. Meanwhile, the impending deployment of 5G networks in 2020 is expected to boost the adoption of IoT devices with technologies like network slicing gaining more prominence. The Ericsson Mobility report suggests that almost 90% of smartphone subscriptions, which are on 3G and 4G networks today, will be upgraded to 5G networks when it becomes commercially available in 2020. Ericsson has already introduced pre-standard 5G networks. 5G will accelerate the digital transformation in many industries, enabling new use cases in areas such as IoT, automation, transport and big data. The report also forecasts 550 million 5G subscriptions in 2022 with North America expected to lead the way. Such happenings are expected to boost the company’s long-term growth.

However, spectrum crunch has become a major issue in the U.S. telecom industry, which has a saturated wireless market. The situation has worsened with the growing popularity of iPhone and Android smartphones as well as rising online mobile video streaming, cloud computing and video conferencing services. In addition, the company’s cash flow could be materially hurt by market and customer project adjustments. Though the company is working diligently to improve the situation, tangible results are yet to materialize. Currently, it appears that the company’s savings plans and job reductions are not adequate to counter macroeconomic woes and swiftly declining product demand. This is a matter of concern for Ericsson as there is no assurance that its restructuring initiatives will be able to deliver any material improvements in the near future.

In addition, persistent low investments in mobile broadband in certain markets and lower managed services sales have harmed the sales of Networks segment while lower legacy product sales have hurt IT & Cloud revenues. Lower IPR licensing revenues and an unfavorable mix between coverage & capacity and services are adding to the company’s concerns. Moreover, Ericsson has been facing investment headwinds in network developments in Mediterranean, Northern Europe and Central Asia (especially Russia) regions as well as in Latin America and the Middle East. In second-quarter 2018, the company’s Digital Services revenues declined 11% year over year primary due to continued fall in legacy product sales and lower telecom core sales in North East Asia.

Nevertheless, the company has outperformed the industry in the past year with an average return of 38.6% compared with 21.3% rise for the latter.

We remain impressed with the inherent growth potential of this Zacks Rank #3 (Hold) stock. Some better-ranked stocks in the industry are Ribbon Communications Inc. RBBN, sporting a Zacks Rank #1 (Strong Buy) and Clearfield, Inc. CLFD and QUALCOMM Incorporated QCOM, both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Ribbon Communications has a long-term earnings growth expectation of 12%. It delivered an average positive earnings surprise of 168.1% in the trailing four quarters.

Clearfield delivered an average positive earnings surprise of 52.8% in the trailing four quarters.

QUALCOMM has a long-term earnings growth expectation of 10.9%. It delivered an average positive earnings surprise of 19.8% in the trailing four quarters.

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