Ericsson tops third-quarter forecasts as savings and 5G sales kick in

© Reuters. CEO of the Swedish telecom giant Ericsson Borje Ekholm presents the company's third quarter results during a news conference in Stockholm

By Helena Soderpalm and Olof Swahnberg

STOCKHOLM (Reuters) - Mobile telecom equipment maker Ericsson (BS:ERICAs) 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 toward its long-term financial goals.

Marking its third consecutive quarter of substantial progress toward 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 percent 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 percent 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 percent by 2020. It nearly got there in the third quarter, reaching a figure of 36.9 percent, excluding restructuring charges, topping analysts' forecast of 36.2 percent.

The quarterly operating margin rose to 6.0 percent from a negative 7.4 percent a year ago. Chief Executive Borje Ekholm said he was confident Ericsson could produce an operating margin of at least 12 percent beyond 2020.

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

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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 percent this year, buoyed by the progress toward 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 [HWT.UL] of China and Nokia (HE:NOKIA) of Finland.