Ericsson Boosts China Footprint, to Record Asset Write-Down
Reinforcing its position as a leading player in the 5G ecosystem, Ericsson ERIC has significantly increased presence in China – arguably the largest 5G market in the world. The company has secured 5G contracts from the three major operators in the communist nation and expects to ride on this momentum to fend off stiff competition from rivals like Nokia Corp. NOK and Huawei.
Ericsson is focusing on 5G system development and has undertaken many notable endeavors to position itself for market leadership in 5G. The company has already introduced pre-standard 5G networks and inked 5G deals with various operators across the globe. Notably, Ericsson has 93 commercial 5G agreements with operators (of which 51 are publicly stated) and includes 40 live 5G networks in four continents.
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.
China's three largest telecom operators — China Mobile, China Telecom and China Unicom — have awarded 5G contracts to Ericsson, thereby strengthening its overall 5G business in the country. 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 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.
In addition, 5G is expected to 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 positive industry trends are expected to boost the company’s long-term growth. Ericsson plans to accelerate its planned cost cuts and efficiency measures, and focus on its core business of selling networking equipment.
However, the company is likely to record lower margins in the second quarter due to asset write-downs to the tune of SEK 1 billion (approximately $109 million). Much of these charges are attributable to pre-commercial product inventory related to free products given to the Chinese telecom firms and will be recorded in the Networks segment. This is likely to dent its overall profitability during the quarter. Nevertheless, with current visibility, it maintains the financial targets for 2020 and 2022.
Moving forward, Ericsson continues to focus on its restructuring plan to cut costs, streamline focus areas and explore options for the media business. Ericsson’s “cost and efficiency program” has been devised to generate higher cost savings.
The company is focusing on structural changes that will help generate lasting efficiency gains and boost cost competitiveness. It intends to increase investments in certain core areas to develop the product portfolio. Ericsson is also focusing on stabilizing its IT, cloud and project portfolio, and re-establishing profitability in managed services by managing its existing contracts and investing in automation.
We remain impressed with the inherent growth potential of this Zacks Rank #2 (Buy) stock. Some other similar-ranked stocks in the industry are InterDigital, Inc. IDCC and PCTEL, Inc. PCTI. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
InterDigital has a long-term earnings growth expectation of 15%. It delivered a positive earnings surprise of 99.5%, on average, in the trailing four quarters.
PCTEL delivered a positive earnings surprise of 33.9%, on average, in the trailing four quarters.
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