Ericsson tops forecast on margin gains and 5G in China

Telecoms equipment supplier Ericsson beat quarterly core earnings forecasts on Wednesday, helped by higher margins and China's 5G rollout, and said it was "more confident" about meeting its 2020 targets.

Ericsson shares jumped as much as 9% to a five year high as gross margins reached their best level since 2006 and revenues rose at the Swedish company’s mainstay networks business despite disruptions caused by the COVID-19 pandemic.

But relations with China could become more fraught after Swedish authorities shut China's Huawei and ZTE out of its 5G network, citing security concerns.

Unlike Nordic rival Nokia, Ericsson has won contracts from all three major operators in China to supply radio equipment for 5G networks.

"The 5G roll out in China was the big driver in this quarter," Ericsson finance chief Carl Mellander told Reuters.

China's foreign ministry said on Wednesday Sweden should address its incorrect decision to ban Huawei and ZTE to avoid a negative impact on Swedish companies in China.

"We don't comment on different countries' decisions but in general we believe in free competition," Mellander said.

MARGINS LEAP

Ericsson's gross margin, excluding restructuring charges, rose to 43.2% in the third quarter from 37.8% a year earlier, reaching a level last seen in 2006.

"While the pandemic has hurt revenues for several of our customers, and in some cases this has led to a reduction of capex (capital spending), we have not seen any negative impact on our business, largely due to footprint gains," Chief Executive Borje Ekholm said in a statement.

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Ekholm has driven a turnaround at Ericsson during his three years at the helm, improving margins amid growing demand for 5G equipment.

Third-quarter gains came mainly from the Networks division, which reported an adjusted operating margin of 22.7%, well above the forecast of 17.8%, Liberum analyst Janardan Menon said.

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Adjusted operating earnings rose to 9.0 billion Swedish crowns ($1.0 billion) from 6.5 billion a year earlier, beating analysts' mean forecast of 6.98 billion crowns, according to Refinitiv estimates.

Total revenue rose 1% to 57.5 billion crowns.

The adjusted operating margin now stands at 11.1% for January-September, compared with Ericsson's 2020 target of more than 10% and its goal of 12-14% for 2022.

Separately, the company announced a five-year, multibillion-crowns deal with Telia to upgrade its 4G networks across Sweden and Estonia.