U.S. Markets

Ericsson swings to profit as savings kick in; shares jump

STOCKHOLM (Reuters) - Mobile telecom equipment maker Ericsson ERICb.ST unexpectedly swung to a modest operating profit in the second quarter, boosted by growing sales in North America and said it was increasingly confident of meeting its longer-term targets.

FILE PHOTO: The exterior of an Ericsson building is seen in Stockholm April 30, 2009. REUTERS/Bob Strong/File Photo

The Swedish mobile telecom gear maker has met an industry-wide downturn and mounting losses by sweeping cost cuts, clearing out most of its top management and setting a strategy to focus on profitability over growth.

It had been in the red since the third quarter of 2016 and its return to profit sent its shares up 10 percent by 0816 GMT. “A trend of good execution (is) starting to emerge,” UBS analysts said of the latest results.

Bolstering investor optimism are expectations that Ericsson is on the cusp of a new cycle of network upgrades as demand for next-generation 5G gear kicks in later this year or early in 2019, starting in the United States.

Its shares have gained more than 36 percent in the year to date, buoyed by progress toward meeting its 2020 financial targets and hopes for a 5G-led industry growth cycle.

Marking its second consecutive quarter of substantial progress toward hitting its 2020 financial goals, the Swedish firm reported an operating profit of 0.2 billion crowns ($23 million), excluding restructuring charges of 2.0 billion crowns.

The operating profit compared to a 0.5 billion loss in the year earlier quarter. Analysts, on average, had forecast an 0.1 billion loss for the second quarter in a Reuters poll.

“We have good market traction in Networks, with a sales growth of 2 percent, particularly in North America where all major operators are preparing for 5G,” CEO Borje Ekholm said in a statement.

Networks, which accounts for two-thirds of Ericsson sales, rose 2 percent, year on year, buoyed by 15 percent growth in North America, Ericsson’s largest market. But they fell around 5 percent in South and Southeast Asia, North East Asia and the Middle East and Africa. Europe grew just 1 percent.

Ericsson appears to be benefiting from rising competition among the four top U.S. carriers, which are all racing to be the first to deliver 5G in dozens of American cities. 5G has become a test of U.S. technology leadership in the country’s growing stand-off with China over trade and national security.

Overall, Ericsson’s net sales dipped 1 percent in the second quarter compared to a year ago, reflecting the bottoming out of sharp declines for the mobile equipment industry since 4G sales peaked in 2015 and the expectation of a return to growth in 2020.

Ericsson Chief Financial Officer Carl Mellander said the company was focused on meeting its 2020 profitability targets but warned that quarterly results may still be up and down.

The CFO said that while the first commercial use of 5G would kick off later this year, the business was largely being driven by North America. “But material volumes... we maintain that will be in 2020,” he cautioned.

Ericsson, once the world's biggest supplier of mobile communications gear, is facing falling spending by telecom operators, weakness in formerly fast-growing emerging markets and stiff competition from bigger telecom equipment players Huawei HWT.UL of China and Nokia NOKIA.HE of Finland.

The company said it had recently finished an annual cost-cutting program that saved more than 10 billion crowns, which would increasingly result in higher earnings.

Its second quarter gross margin, excluding restructuring charges, was 36.7 percent, versus 35.9 in the first quarter, driven mainly by cost reductions across its business divisions and the ramp-up in sales of its flagship 5G-ready radio gear.

The company has pledged to deliver a gross margin of 37-39 percent and an operating margin of at least 10 percent by 2020 and better than 12 percent heading into the next decade.

($1 = 8.8602 Swedish crowns)

Writing by Eric Auchard; Editing by Anna Ringstrom and Susan Fenton