Ericsson reported sales growth of 6% during its third quarter 2019 compared to the same quarter in 2018, driven by strong growth in North America and Northeast Asia. Its total sales for the quarter were $5.8 billion.
The company took a hit on operating income and net income from the $1.23 billion fine it previously guided for, related to settling a corruption charge from the U.S. Securities and Exchange Commission and the U.S. Department of Justice. Ericsson reported an operating margin of -7.3% for the third quarter compared to 6% for the same quarter in 2018. And it reported Q3 net income of -$710 million for the quarter compared to $280 million for Q3 2018.
Despite these losses, Ericsson’s stock was up about 4% this morning based on its sales target of between $23.5-$24.6 billion for 2020, which would be an increase of more than 9% compared to its 2018 total revenue.
“The largest market for 5G infrastructure will be China where deployments are expected to start near term,” said Ericsson CEO Börje Ekholm in a prepared statement. “We have invested to increase our market share, however it is still too early to assess possible volumes and price levels. Based on historic experience we expect to have challenging margins initially but positive margins over the lifespan of a contract.”
Ekholm also said, “5G is taking off faster than earlier anticipated, and we see initial 5G buildout as a capacity enhancer in metropolitan areas.”
On a call with investors today, Ericsson CFO Carl Mellander said, “All our radios shipped since 2015 are upgradable to 5G with software, remotely, which is a good competitive advantage. We will try to capture all of that opportunity as we move into 5G, and all that infrastructure will need to be upgraded to software.”
Even though the equipment is software upgradeable, Mellander pointed out that “with 5G you still will need new hardware for new frequency bands and new hardware to densify the network.”
An investor asked about non-standalone versus standalone, and Ekholm said, “So far you see non-standalone networks. Standalone is likely to happen first in a market like China where we can get a fairly sizeable buildout upfront.”
But he added that the overall timeline on 5G has accelerated by at least 12 months from 2017 forecasts, and that is also accelerating standalone. "So far, we don’t really have any operator launching a standalone network," he said. "The reality is, 4G footprint will matter in non-standalone as you use the 4G network for signaling. In standalone you could argue the footprint doesn’t matter. Today, to get the coverage, you really need non-standalone."
Asked about its dynamic spectrum sharing (DSS) technology, Ekholm said a big benefit of the technology was that operators could use existing spectrum and very rapidly “get big coverage.” He cited Swisscom in Switzerland as an example of an operator using its DSS. Swisscom “is leveraging our spectrum sharing in order to get 90% population coverage by year end,” said Ekholm. “That is not achievable unless you do dynamic spectrum sharing.”
Placing bets on IoT
Ericsson has been leading on industrial IoT for several years, even when others have lost some of their enthusiasm for the technology. Ericsson was very bullish on IoT during its Q&A with investors today. Mellander said, “We have decided to really double down on IoT. IoT is showing very promising signs.”
The company said its IoT business is growing almost twice as fast as the estimated market growth of 20-25% per year. It has more than 4,500 enterprises on its IoT platform and the number of connected devices on the platform has more than doubled year to date. To fully leverage its position, the company is increasing its investments in IoT within its Emerging Business group, even though the segment is currently incurring losses.