Opex savings yet to crystallise but gross margins and market outlook positive; remain Buy
Ericsson reported 4Q17 revenues broadly in-line with SME consensus, with gross margins ahead, which we view favourably in light of its plan to improve these via product quality enhancement. Further, ERIC maintained its wireless market outlook for 2% declines, which we see as positive given Nokia’s prior more conservative commentary, and constructive statements about dynamics in the US. While 4Q EBIT missed, this was primarily due to increased opex (as ERIC continues to invest in its products), which we view as temporary (albeit we look for meaningful improvements in coming quarters). Overall, we see commentary on product traction and certain self help actions (e.g. Services contract
rationalisation and headcount reductions) as representing progress.
Moreover, FY17 cash flow increased significantly yoy, despite significantly higher restructuring cash charges last year. While current FX rates imply a drag on FY18 estimates (and 4Q opex was above our forecast) we believe to some degree cost actions have not yet been fully reflected in P&L metrics and should progressively become visible. Of particular note, ERIC has achieved SKr6bn of its SKr10bn target (15k net employee reduction in 2H). We continue to see significant potential for self help actions to drive margin improvement on a long term view, specifically if the Wireless infrastructure market stabilises in coming periods. Moreover, we note that while the company has announced it is not divesting the whole Media business, it is deconsolidating the most heavily loss-making part. That said, we look for evidence of sustained operational execution and of this being clearly translated into P&L KPIs - not only driven by Services contract improvement, but as a result of turning around the Digital Services business. We would
become incrementally less positive on our view were these actions not to be forthcoming.