Ericsson reported a small acceleration in underlying sales growth to 7 percent in the third quarter, supported by the expanding Chinese 5G market. Margins also continued to improve at the company, giving confidence it will meet its full-year outlook and targets for 2022, Ericsson said.
Total reported revenues rose 1 percent year-on-year to SEK 57.5 billion, as currency effects offset the growth in China and North America. The adjusted gross margin improved to 43.2 percent from 37.8 a year ago, the highest level since 2006, and the adjusted operating margin reached 9.0 percent versus 6.5 percent in Q3 2019.
Net profit improved to SEK 5.6 billion from a loss of SEK 6.9 billion when the company took a charge for fines in the US. Free cash flow was down 12 percent year-on-year to SEK 3.9 billion following a SEK 2 billion payment to the Swedish pension fund in the quarter.
The main networks business grew sales 13 percent on an organic basis, with an improved gross margin of 46.7 percent. Ericsson said this reflects high activity levels in North East Asia and North America as operators build out their 5G networks and take up new spectrum. The 5G contracts in China developed according to plan, contributing positively to profits in Q3 and are expected to improve further, the company said. Footprint gains in Europe have helped offset reduced or slower capex at some customers in Europe affected by the pandemic, but the main impact from the coronavirus was felt on sales in Latin America and Africa.
The Digital Services division continued to make progress on the execution of its turnaround plan, with the gross margin up to 43.5 percent thanks to increased software sales and improvements in the underlying business. The cloud-native 5G core portfolio shows very positive momentum with a high win-ratio and a significant number of new customer contracts, Ericsson said. However, sales in the legacy portfolio are declining faster than earlier predicted and not yet fully compensated by new products. Along with higher R&D investments, this may mean the company misses its 2020 operating margin target for Digital Services.
The company otherwise expects to meet its targets for 2020. The acquisition of Cradlepoint is expected to close in Q4.
