Swedish kit maker downgraded to negative on concerns over turnaround strategy, market slowdown.
Fitch ratings late on Wednesday downgraded Ericsson’s outlook to negative from stable, on concerns about its turnaround strategy amid a slowdown in the market.
The Swedish kit maker’s financial performance has been hit hard by lower spending on LTE equipment in major developed markets, and economic headwinds in some developing countries. The company expects the addressable market for its networks division – which accounts for the bulk of its revenue – to see an annual CAGR of -2%-0% in 2016-2018.
To help offset the slowdown, Ericsson has implemented an aggressive cost-cutting programme that includes thousands of layoffs as well as the closure of production facilities in its home market.
Fitch on Wednesday said it expects Ericsson’s cash flow to be weak this year due to double-digit revenue declines, margin contraction, and large cash-consuming working capital movements during the first nine months of 2016.
Stabilising the margin and a subsequent return to positive, post-dividend free cash flow (FCF) "would likely require substantial restructuring efforts that will weigh on cash flow in 2017," Fitch said, in a statement.
Similarly to Ericsson’s own forecast, Fitch said it expects the infrastructure market to remain subdued in 2017 following the peak of LTE rollouts in large economies. It expects it will be supported slightly by LTE capacity upgrades in developed economies, and ongoing LTE network deployment in developing economies.
"The longer term market outlook remains uncertain, with low visibility on the timing and the extent of the next equipment upgrade cycle," Fitch continued. "Overall, 5G will likely lead to a moderate increase in operators’ expenditure on new infrastructure but the new wave of upgrades are unlikely until 2020-2021 when 5G equipment is expected to become commercially available."
Furthermore, "continuing network equipment commoditisation and proliferation of software-enabled functions could flatten capex peaks," Fitch warned.
With Ericsson’s incoming CEO Börje Ekholm due to start his new role imminently, all eyes will be on what he has planned in order to steady the ship.
"We project that the company may return to strong cash flow generation over the next two-to-three years, with pre-dividend FCF margin rebounding to 5% in 2018, on a par with 2013-2014 levels," Fitch predicted.
However, "a failure to demonstrate progress towards achieving this target and continuing cash burn will likely result in a downgrade," the company warned.