On November 8, Ericsson (NASDAQ: ERIC) will hold its Capital Markets Day 2018 in New York. The company will give an overview of its turnaround, strategy, and plans for future growth as well as details about its business segments and market trends.Over the past seven quarters, focus has been on simplifying and stabilizing the business, including stopping the topline decline. Accelerated cost reduction activities and contract reviews have been implemented. There is good traction in the ongoing portfolio review. Moreover, the company's increased investments in R&D for future growth combined with efficient cost control has proven successful with improved profitability as a result.
B rje Ekholm, President and CEO, says: With our focused strategy we have created a strong foundation of stability and profitability. Our strengthened portfolio and competitive cost structure have enabled us to grow in the third quarter 2018, for the first time since 2014, on a constant currency basis, despite headwind from exited contracts and businesses. As the industry moves to 5G and IoT we are now preparing to take the next step to generate profitable growth in a selective and disciplined way.
Group profitability target and net sales ambition 2020
The ambition for net sales is increased to SEK 210 220 (190-200) b. by 2020, mainly driven by Networks. Of the increase in the sales ambition, SEK 5 b. is explained by currency and SEK 2 b. is explained by the inclusion of Red Bee Media, previously not included in the sales ambition.
In Networks, increased investments in R&D for technology and cost leadership will continue. Growth is expected to come from a stronger market, selective market shares gains, and expansion of the product portfolio into close adjacent markets. In 2019, investments in 5G trials will continue. The operating margin target for 2020 is unchanged at 15% 17%.
In Digital Services, the top priority is returning to profitability. Continued cost reductions and efficiency improvements will contribute to reaching the target of a low single digit operating margin by 2020. Investments in a 5G-ready and cloud-native product portfolio continue. There is a strong market demand for the new portfolio driven by virtualization and 5G acceleration. At the same time, the legacy product sales decline faster than the new portfolio uptake. The lower net sales ambition for the segment is fully explained by the internal transfer of a business line to Managed Services.
In Managed Services, where a turnaround has been completed, focus is shifting to further improving profitability through investments in automation and Artificial Intelligence. Consequently, the operating margin target 2020 is increased to 5% 8%.
In Segment Emerging Business and Other focus is on establishing new businesses for organic growth. The strategy is to capture new revenues through rapid and disciplined innovation building on 5G and IoT. For the current business portfolio, the target of break-even by 2020 is unchanged. However, in case of attractive new business opportunities, we may decide to scale up investments. We will manage emerging business initiatives for growth, based on positive NPV case-by-case and within 2022 Group targets.
Long-term profitability
As previously communicated the long-term profitability target for the Group is an operating margin of more than 12% excluding restructuring. While the target level remains unchanged, the timing is now set to 2022 at the latest. Operating margin targets per segment for 2022 are found in the table below:
Financial targets and sales ambitions
(CMD 2017 numbers in brackets, when changed)
SEK b. Networks Digital Services Managed Services Emerging Business and Other Group
2020 Net sales ambition 141 145(128 - 134) 41 - 43 23 - 25 5 - 7 210 - 220
2020 Operating margins 15% - 17% Low single digit 5% - 8%(4% - 6%) Break-even(current business) >10%
Operating margin by 2022, at the latest 15% - 17% 10% - 12% 8% - 10% - >12%
Note: All financial targets are based on USD/SEK at 8.70. Operating margin targets are all excluding restructuring charges.
Market development
Ericsson's total addressable market is expected to grow between 2% 3% CAGR from 2018 to 2022, broken down as follows: Radio Access Network 1% 3%, Managed Services 2% - 4%, and Digital Services 1% 4%.
Planning assumptions for all key segments are based on external sources.
Planning assumptions Q4 2018
The planning assumptions as stated in the third quarter report for 2018 remain. However, following the announcement to accelerate edge computing through a partnership with Limelight, we plan to reset Ericsson EdgeGravity, formerly known as Ericsson UDN, allowing for a leaner set-up of content delivery. These actions are expected to generate annual cost savings of SEK 0.2 b. starting from 2019. Related to this, Q4 2018 will be negatively impacted by SEK -0.5 b., of which SEK -0.2 b. of restructuring charges impacts cashflow.
Speakers and details of the event
President and CEO B rje Ekholm and CFO Carl Mellander, will be joined by members of the companys Executive Team. The speakers include Erik Ekudden, CTO, Fredrik Jejdling, Executive Vice President and Head of Business Area Networks, Jan Karlsson, Head of Business Area Digital Services, Peter Laurin, Head of Business Area Managed Services, and sa Tamsons, Head of Business Area Technologies and New Businesses, Niklas Heuveldop, Head of Market Area North America, Arun Bansal, Head of Market Area Europe and Latin America, and Chris Houghton, Head of Market Area North East Asia.
Ericssons Capital Markets Day event can be accessed via the Ericsson website https://www.ericsson.com/en/investors/events-and-presentations/CMD2018. Presentation materials can also be downloaded from the website once the webcast has started.
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