Morningstar | Ericsson Announces SEK 6.1 Billion Provisions for 4Q; Lowering FVE to SEK 62. See Updated Analyst Note from 10 Jan 2019
No-moat Ericsson announced SEK 6.1 billion worth of provisions to its business support systems, or BSS, division for the fourth quarter of 2018. These provisions will impact fourth-quarter operating income results for the aforementioned amount and the majority of the impact will be seen through a gross margin decrease. SEK 3.1 billion are related to restructuring charges, and Ericsson expects an additional SEK 1.5 billion of restructuring charges in 2019. After accounting for these impacts and lowering our forecast operating margin expansion in subsequent years, we are lowering our fair value estimate to SEK 62 from SEK 66 ($7.00 from $7.30). With shares in 2-star territory, we do not currently recommend new investments in this security.Ericsson admitted that its previous BSS strategy has not been successful, and its full-stack revenue manager did not generate any income. The provisions are mostly related to customer compensation, project delay payments, and intangible asset write downs. With today's announcement, the company is aiming to speed up its turnaround efforts within its digital services segment (of which BSS resides), and we still expect Ericsson to achieve its stated goal of 10%-12% non-IFRS operating margin by 2022. However, we model IFRS operating margin to experience a slower expansion over our explicit forecast as Ericsson works through these additional restructuring efforts. Ericsson will provide additional details upon reporting its 2018 fiscal close on Jan. 25.
Ericsson provides communications technology and services. Co.'s services, software and infrastructure – especially in mobility, broadband and the cloud – enable the telecom industry and other sectors to do business, increase efficiency, improve the user experience and capture new opportunities. Co. has more than 110,000 professionals and customers in more than 180 countries. Co. provides support for networks with more than 2.5 billion subscribers. Co.'s core business areas are called Radio, Core and Transmission and Telecom Services. Co. divides its operations into three business segments: Networks, Global Services and Support Solutions.
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