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Morningstar | We foresee sluggish revenue for Ericsson until 5G rollouts begin en masse.

Ericsson is a top supplier of network equipment, software, and services to telecommunication service providers, but it has been struggling to deliver meaningful bottom-line growth. We like that the company is undergoing another restructuring effort to address its cost structure, but we don’t expect exponential operating leverage, given intense competition and strong buying power within the telecom equipment industry.At its core, Ericsson is a leading provider of wireless communication equipment and services to carriers around the world. As waves of consolidation sweep across this industry, carriers are increasingly expanding, leaving vendors like Ericsson to compete for a handful of contracts. Meanwhile, low-cost Chinese vendors like Huawei and ZTE have been aggressive on pricing in order to win these contracts. These dynamics are well reflected in the industry’s low gross margins. The mobile infrastructure marketplace is notoriously cyclical and lumpy, depending on the timing of network rollouts. As the demand for higher data throughput pushes the industry to adopt faster data transmission standards, carriers periodically embark on massive wireless network upgrade projects. Despite Ericsson’s attempts to diversify its revenue stream by selling various software solutions, the company’s top line is still largely dependent on the size and timing of network rollouts and upgrades.Overall, we think Ericsson’s top line is unlikely to return to growth until around 2020, given the company’s plans to exit unprofitable contracts and businesses, while a recovery in mobile broadband spending is unlikely in the near term. Ericsson strived to offset these declines by entering faster-growing areas, but conceded that it spread itself too thin in searching for the next great revenue growth driver. Thus, we look ahead to the rollout of 5G networks in developed markets in 2020 and beyond as the next revenue growth catalyst for the firm.