By Geoffrey Smith
Investing.com -- It’s not enough for President Donald Trump to throw wrenches in the machinery of your biggest competitor: success still has to be earned.
That appears to be the big takeaway from Ericsson's (ST:ERICb) latest quarterly numbers.
The Swedish maker of telecom networks gear has been one of the chief beneficiaries of the U.S. administration’s targeting of Huawei as part of its broader attempts to contain growing Chinese influence in world trade and technology. Its shares rose 80% in the 12 months to April as its Chinese rival’s problems with Washington intensified.
However, they were down 5.9% by mid-morning in Stockholm after Ericsson (BS:ERICAs) warned that it would take a sizable hit to gross margins in order to claw back market share – even though it again struck an upbeat note on a long-term outlook that’s dominated by the global rollout of 5G technology.
For comparison, the local benchmark index was down 0.4%, while the Stoxx 600 was down less than 0.1%, consolidating gains made in the first half of the week. The FTSE 100 was down 0.2% on largely political concerns, while the German Dax was down 0.1%
“Strategic contracts in Networks, with initially low margins, taken to strengthen the market position, will have a negative impact on gross margin,” the company said. It added that “the negative impact is expected to increase in 2H 2019” but would not jeopardize its margin target for 2020, the year when it expects its investments in 5G to start paying off more markedly.
Ericsson also warned that the shift to more service-based sales in North America will add further pressure to margins, albeit gradually.
The warnings appeared to hit its biggest European rival too. Shares in Nokia (HE:NOKIA) – which have not recovered from the ravages of Huawei to anywhere near the same extent as Ericsson’s have, fell 1.4%
Ericsson was still able to report a big swing to profit, with net income of 1.8 billion kronor ($192 million), as the cost of previous restructurings faded into the past. It also cut its guidance for future restructuring costs by 1 billion kronor.