Ericsson up on bullish views
Swedish group raises sales target on rising 5G spending
STOCKHOLM: Ericsson AB rose the most in a year after it raised its sales target for 2020 on signs that spending on new 5G networks is speeding up, and it reported third-quarter results that beat analysts’ expectations.
The Swedish equipment vendor is now targeting sales of 230 billion Swedish kronor (Us$23.5bil) to 240 billion Swedish kronor (Us$24.5bil) next year, buoyed by currency effects and a stronger market for 5G, compared with a previous aim of 210 billion kronor to 220 billion kronor.
Shares rose as much as 7.4% and were trading 6.4% higher at 89.14 kronor as of 9:10 am in Stockholm. Nokia Oyj also gained as much as 4.5% as Ericsson’s update boosted optimism ahead of the Finnish rival’s third quarter report, which is due next week.
Chief executive officer Borje Ekholm is focused on taking a bigger piece of the market for telecom networks as part of his turnaround of the Stockholm-based company, and winning contracts from phone carriers upgrading to fifth-generation mobile services will be critical. Ericsson now expects the radio-access network market will grow by 5% in 2019, citing an estimate by consultant Dell’oro, and highlighted China as the largest market for 5G infrastructure.
“Our strategy is to strengthen our market position,” Ekholm said in a phone interview. “5G is happening faster than we had expected,” he said.
The more robust sales target and better-than-expected third-quarter results are a dose of good news for shareholders after Ericsson took a Us$1bil provision this month in anticipation of a fine by US authorities investigating business ethics breaches. The provision erased Ericsson’s quarterly profit, and the company posted a 6.9 billion kronor net loss.
Third-quarter sales were 57.1 billion kronor, beating the average analyst estimate of 56.5 billion kronor, and Ericsson’s adjusted gross margin – the share of sales left after production costs – rose to 37.8%, compared with the 36.6% expected by analysts.
The successful turnaround of the main networks business that Ekholm has overseen since becoming CEO in 2017 has given Ericsson the confidence to be more aggressive, sacrificing profitability on some contracts to expand market share.
“Some of these contracts have a dilutive effect on the margin,” Ekholm said. “We will continue to take contracts like that and that has had a limited effect in the quarter. We are talking about an 80 basis point effect on the networks margin, so we are managing that.”
As US authorities seek to limit Huawei Technologies Co’s influence over global 5G infrastructure, the Swedish company has picked up contracts from operators who had previously been supplied by the Chinese company, including Telia Co. in Norway and TDC A/S in Denmark.
To complete Ericsson’s turnaround, Ekholm needs to address the company’s ailing Digital Services unit, which provides business management software for operators. The company said the division is on track for low single digit margins in 2020, after its losses narrowed in the third quarter.
Ericsson will continue to invest heavily in research and development to expand its footprint in 5G, Ekholm said, warning that costs are usually higher in the early phase of a rollout – though he’s confident Ericsson can manage them.
In China, Ericsson wants to have a stronger position with 5G than what it has with 4G, which was less than 10% of the market, he said.
“We are trying to invest to position ourselves to strengthen our footprint in China.” — Bloomberg