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Ericsson AB posted earnings that missed analyst estimates for the first time in six quarters and warned its rollout of 5G mobile networks in Asia would weigh on profits, in a rare setback to Chief Executive Officer Borje Ekholm’s turnaround efforts.
With Ericsson battling Finland’s Nokia Oyj and China’s Huawei Technologies Co. for pole position in 5G, Ericsson said the first big deployments in Asia will gradually pull down margins, although not enough to jeopardize profitability targets for 2020.
Wireless operators are preparing for heavy spending on the new networks that offer super-fast download speeds, minimal delay and capacity for more simultaneous connections. Their suppliers are likely to sacrifice short-term profits to win the first big contracts as that gives them a better chance of securing longer-term business.
With Huawei targeted by a U.S. campaign to have it blocked on security grounds, its Nordic rivals may be able to pick up more work. In an interview on Bloomberg TV, Ekholm said Ericsson is gaining market share, though it hasn’t won any contracts as a direct result of Huawei’s troubles.
“We’re trying to strengthen our footprint in front of the 5G rollout,” he said. “Of course that is going to impact the margins, but as you see on networks, we can really manage that within the guidance we have given.’’
Ericsson shares, which gained after the previous five quarterly reports, fell as much as 7.6%, the most since January 2018. The stock had risen 33% in the past year as Ekholm’s two-year effort to reverse a slump in profits begins to pay off.
New Street Research’s Pierre Ferragu said lower-margin 5G deployments could hold back Ericsson’s profitability in the near term and, while the company has seen brisk business with U.S. operators this year, those revenues may be challenging to maintain.
“We see Ericsson fully benefiting from the 5G cycle in 2021,” the analyst wrote. However, 2020 could be a “surprisingly painful” transition year, he added.
Ekholm has ended a run of disastrous results by cutting costs, dropping unprofitable business lines and investing more in research so Ericsson can ride the wave of 5G spending. He’s cautioned that the company may experience temporary setbacks as its focus is on building a stronger business in the longer run.
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The Swedish vendor’s adjusted operating profit rose to 3.9 billion kronor ($415 million) from 2.0 billion kronor a year earlier. That compared with the average estimate of 4.4 billion kronor in a Bloomberg survey of analysts.
All of Ericsson’s businesses units except its networks division posted results below estimates, showing Ekholm has more work to do after a successful turnaround of the company’s biggest unit. The CEO suggested that analysts may have been overestimating results in the digital services and managed services units.
“I sometimes like to say that maybe the analysts have missed,” Ekholm said. “We have said that improvements will not be linear and they will vary from quarter to quarter.”
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--With assistance from Kit Rees.
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