Ericsson has lifted its sales target for 2020 on a faster-than-expected expansion of the 5G market and said it also targets a higher margin from 2022 thanks to investments in growth. The new forecasts came alongside third-quarter results showing a small slowdown in organic growth and losses due to its legal troubles with US authorities.
In Q3, revenues rose 6 percent to SEK 57.1 billion, while organic growth slowed to 3 percent from 7 percent in the first half of the year. Ericsson said sales growth was driven by early adoption of 5G in North America and northeast Asia. The adjusted gross margin improved to 37.8 percent from 36.9 percent a year earlier.
The operating result was still a loss of SEK 4.2 billion versus a profit of SEK 3.2 billion a year ago. This was hurt by the earlier announced provision of SEK 11.5 billion to cover the investigations by the US Department of Justice and SEC and also includes a refund of SEK 0.9 billion in social security costs. Excluding the one-time items, operating profit rose 71 percent to SEK 6.5 billion, and the margin increased to 11.7 percent from 7.0 percent.
New targets for 2020-22
The latest results bring Ericsson close to its 2022 target for an adjusted operating margin of 12 percent. At its investors day, the company will outline how it plans to reach a new range of 12-14 percent in 2022, based on an ambition to grow faster than the market in combination with leverage from investments in market position and R&D.
Ericsson still expects an operating margin, excluding restructuring costs, of at least 10 percent in 2020. This includes the expected dilutive impact of new strategic contracts, which often carry extra costs for operators changing vendor, an initially higher cost level for newly introduced 5G products and an expected loss of SEK 1.5-2.0 billion for the segment Emerging Business and Other (compared to a previous target of break-even).
The sales target for 2020 was raised to SEK 230-240 billion from a previous estimate of SEK 210-220 billion. This is based on the latest exchange rates as well as a faster than expected roll-out of 5G networks.
For the near term, Ericsson said it expects some negative impact in Q4 from the planned merger of Sprint and T-Mobile US. It's also investing to capture its share of the 5G market in China, but said it's too early to assess possible volumes and price levels. "Challenging" margins are expected initially in China, turning positive over the lifespan of the contract.
Overall, the global RAN market is expected to grow around 5 percent in 2019 and average 2 percent growth in the period 2018-23.
