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Ericsson Q4 Earnings Review: Both Top Line And Bottom Line Take A Hit But R&D Investments Might Be A Key To Growth

The world's leading network infrastructure company, Ericsson ( ERIC ) released its Q4 and full year 2016 earnings on January 26th. The company reported over 10% decline both in quarterly and annual sales. The lower sales were because of a hit to the intellectual property rights (IPR) licensing sales in Q4 and continuing weak broadband investments in the Middle East and Latin America, the effect of which could not be offset by the benefits of prepositioned hardware sales which were supposed to be delivered in Q1'17.

The margins and profits also took a dip due to the lower sales volumes and high restructuring costs, which exceeded the guided range by SEK 1 billion as the company claims to have accelerated its restructuring operations. In addition, an unfavorable product mix, which included higher share of sales from global services, further impacted Ericsson's gross and operating margins. This led to the company reporting an operating and net loss in the quarter, making Q4 the second consecutive loss-making quarter in 2016.

Going forward, Ericsson has guided for slow market conditions in 2017. Though the company is planning to focus its investments in its key forte areas, it is ready to forego growth to prioritize profitability to curtail the huge decline in profitability. Ericsson has reduced its restructuring expense estimate for 2017 to SEK 1 billion, which will help in improving the profitability in the coming quarter. The key takeaway is that the company is still betting strong on innovation and new technology which might turn out to be one of the most important factor in recovering from the current declining phase, especially because it is operating in the fast changing tech dominated domain.


See our complete analysis for Ericsson

Innovations In Technology - The Only Hope Visible For Ericsson

  • On the innovation front, Ericsson has launched the Ericsson Radio System, which is an end-to-end radio modular and scalable network portfolio of hardware and software which has been designed to cope with the ever increasing network traffic in lieu of boom in IoT and the future introduction of 5G.
  • As of Q4, only 15% radio volumes comprised of new Ericsson Radio System. The company is estimating this volume to go up to 50% in 2017.
  • Moreover, even amidst bleak profitability, Ericsson kept its R&D expenses unchanged on sequential basis. Also, on full year basis, reduction in R&D was under 10% whereas the operating income fell by over 70%.
  • We believe, given that Ericsson is a leader in the telecom hardware industry, the critical investments in technology can help it to recover its top line and bottom line once the overall market conditions improve.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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