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Ericsson to Reshape Digital Services Strategy to Stem Losses

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Over the past few quarters, Ericsson (ERIC - Free Report) has been diligently focusing on simplifying and stabilizing its businesses to generate a steady revenue stream and improve margins. Despite some definite improvements across most segments, the company has faced roadblocks in the Digital Services segment within the Business Support System (BSS) area. Ericsson now intends to reshape its BSS strategy and fine tune its business model to stem the losses in order to attain its profitability target for 2020.

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. Ericsson has also increased investments in certain core areas while stabilizing its IT, cloud and project portfolio.

Although the company was able to generate lasting efficiency improvement in Digital Services by addressing half of the identified 45 critical and non-strategic projects and implementing strategic cost cuts, it failed to script a complete turnaround. This affected its segment margin and forced management to revert to the tried and tested business model within the BSS division.

Notably, BSS failed to generate any revenues by pursuing large transformation projects based on pre-integrated solutions and below-par performance of next-generation BSS platform — the full-stack Revenue Manager. Listless customer demand for a full-stack pre-integrated BSS solution and holdup in product and feature development rendered the Revenue Manager less competitive. As Revenue Manager gained in precedence, product releases in the established platform got hampered, leading to cost overruns and soft margins.

Consequently, management decided to stoke up investments in the established platform —  Ericsson Digital BSS — while refocusing the full-stack Revenue Manager to fulfill existing customer commitments only. These include focus on competitive billing, charging, mediation, order management and catalog portfolio, while applying a selective approach to large transformation projects.  

The restructuring exercise is likely to impact fourth-quarter 2018 operating income to the tune of SEK 6.1 billion. Ericsson anticipates that the reshaped BSS strategy would enable Digital Services to record recovery and stem the losses in 2019. It further expects to achieve segment operating margin (excluding restructuring) of low single-digit in 2020 and 10-12% in 2022.

This Zacks Rank #2 (Buy) stock has recorded an average return of 25.6% in the past year while the industry fell 4.3%.


 

Other players in the industry worth mentioning include Ubiquiti Networks, Inc. (UBNT - Free Report) , sporting a Zacks Rank #1 (Strong Buy), and PCTEL, Inc. (PCTI - Free Report) and Comtech Telecommunications Corp. (CMTL - Free Report) , carrying a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Ubiquiti has long-term earnings growth expectation of 14%. It surpassed earnings estimates thrice in the trailing four quarters, the average positive surprise being 11.3%.

PCTEL is currently trading at a forward P/E (F1) of 57.9x.

Comtech has long-term earnings growth expectation of 5%. It surpassed earnings estimates in each of the trailing four quarters, the average positive surprise being 252.3%.

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