Ericsson thanks 5G sales for a greater than expected Q3

ericsson 5G
REUTERS/Eric Gaillard/File Photo

STOCKHOLM (Reuters) – Mobile telecom equipment maker Ericsson beat third-quarter operating profit forecasts on Thursday, boosted by sales of next-generation 5G gear in North America, and said it was making solid progress towards its long-term financial goals.

Marking its third consecutive quarter of substantial progress towards its 2020 financial targets, the company reported net sales rose 9 percent to 53.8 billion Swedish crowns ($6 billion) thanks to strong growth in its networks business.

That was led by early 5G sales in North America and 4G upgrades in Europe and Latin America, and helped to drive its shares 5% higher in early Thursday trading.

However, finance chief Carl Mellander told Reuters that, as a result of this strong performance, fourth quarter sales growth would be “a few percentage points lower” than typical 17-18% growth versus the third quarter, adding North American network sales would be roughly flat quarter-on-quarter.

Ericsson has pledged to deliver a gross margin of 37-39% by 2020. It nearly got there in the third quarter, reaching a figure of 36.9%, excluding restructuring charges, topping analysts’ forecast of 36.2%.

The quarterly operating margin rose to 6% from a negative 7.4% a year ago. Chief executive Borje Ekholm said he was confident Ericsson could produce an operating margin of at least 12% beyond 2020.

“There is strong momentum in the global 5G market with lead markets moving forward,” Ekholm said in a statement. “More work remains, however, to get all parts of the business to a satisfactory performance level.

More to do

Ericsson has responded to an industry-wide downturn and heavy losses since 4G network sales peaked in the middle of the decade with a strategy to focus on profitability over growth, replacing most of its management and making sweeping cost cuts.

Operating profit for the latest quarter swung to 3.2 billion crowns ($356.5 million) from a 3.7 billion loss in the same period last year, outpacing a mean forecast for an 800 million crown profit in a Reuters poll of analysts.

Shares in Ericsson have risen nearly 50% this year, buoyed by the progress towards its financial targets after three years of steep revenue declines.

Ericsson now sits on the cusp of a potential new cycle of network upgrades as demand for 5G gear has started to kick in in the United States and is expected to be followed by upgrades in North Asian markets in early 2019.

Net sales in North America, Ericsson’s biggest regional market, rose 10 percent in currency-adjusted terms, while Europe rose 4 percent, offsetting weakness in its Middle East and North Asian markets.

However, the company said it continued to invest heavily in 5G research and development, closely manage underperforming services businesses while keeping a tight rein on costs after completing a restructuring plan that will results in 5-7 billion crowns of restructuring charges this year.

As a result, many investors want to see more proof of progress before betting on a sustained 5G recovery. Ten out of 15 analysts polled by Reuters rate the stock as “neutral” in terms of share price appreciation.

Once the world’s biggest supplier of mobile communications gear, Ericsson is facing falling spending by telecom operators, weakness in formerly fast-growing emerging markets and stiff competition from bigger rivals Huawei of China and Nokia of Finland.

($1 = 8.9772 Swedish crowns)

(By Helena Soderpalm and Olof Swahnberg; Reporting by Helena Soderpalm and Olof Swahnberg; Writing by Eric Auchard; Editing by Jason Neely and Mark Potter)

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