Ericsson shares soar after better-than-expected Q2 results

Shares in Swedish telecoms giant Ericsson soared on Wednesday after the company posted an unexpected small operating profit in the second quarter.

The losses have remained under analysts’ estimates. Digital Services operating income (loss) excluding restructuring charges improved in this quarter due to improved gross margin to 42.6% (35.7%), mainly driven by cost reductions.

Sales fell 1% to SEK 49bn but still higher than consensus, which predicted SEK 48bn or less.

Ericsson reported an operating profit of SEK 0.2bn, excluding restructuring charges of SEK 2.0bn, compared with a SEK 0.5bn loss year-on-year.

Gross margin was 34.8% (29.1%). Gross margin excluding restructuring charges improved to 36.7% (30.9%), driven by cost reductions and the continued ramp-up of Ericsson Radio System (ERS).

“We continue to execute on our focused business strategy and are tracking well towards our 2020 target of an operating margin of at least 10%”, said CEO Börje Ekholm.

Despite continuing to increase investments in its network unit as it prepares to shift the industry to fifth generation-5G networks, margins on the unit improved during the year. Network sales grew 2% year-on-year after strong growth in North America, driven by investments in preparation for 5G. All the major operators in the region are preparing for 5G, Ericsson said.

However, strength in North America was partially offset by lower sales in Southeast Asia, Oceania and India, and in the Middle East and Northeast Asia, the company added.

During the quarter, Ericsson said it cut more than 2,000 jobs, bringing the total number of layoffs since the launch of its staff reduction plan in the second quarter of last year to 20,500.

The company indicated that it has completed its cost reduction program of SEK 10bn and that the effects are beginning to be reflected in the benefits, mainly through the reduction of the costs of providing services and common costs.

For the rest of 2018, Ericsson expects the Radio Access Network equipment market to decline by 2%. It also predicts a negative impact of 5% on net sales and 1% on operating margin due to the weakening of USD to SEK by 10%: