Ericsson hit by higher 5G costs and Temporary Slowdown in its U.S. market

Sweden’s Ericsson (ERICb.ST) warned it faced higher costs this year as it rolls out new 5G networks and was also hit by a temporary slowdown in its U.S. market, sending its shares 7% lower on Friday. After a number of lean years, Ericsson has been boosted by the roll-out of 5G, particularly in the United States, and analysts hope it can benefit from a U.S. campaign to shut out Chinese rival Huawei [HWT.UL] from supplying 5G equipment.

But while the new technology has helped sales, it has increased costs. Ericsson has also opted to take on major new clients to gain market share, betting a hit on margins in the short term will help to deliver longer-term profitability.

It recently bought the antenna and filter business of Germany’s Kathrein to boost its 5G portfolio and said costs and investments related to the deal would weigh on margins in 2020.

Increased investments in digitalization and more spending on compliance - after a $1 billion payment to resolve probes by U.S. authorities into corruption - are also expected to mean somewhat higher operating costs in 2020.

In October, rival Nokia (NOKIA.HE) shocked investors by slashing its profit outlook for 2019 and 2020 and pausing dividend payments to allow for heavier investments in 5G, leading its shares to drop by a fifth.

However, Ericsson CEO Borje Ekholm said the Swedish firm was on track to deliver its 2020 targets of an adjusted operating margin of over 10% and sales of 230-240 billion Swedish crowns.

The company also hiked its dividend by 50% to 1.50 crowns per share, which Christer Gardell, managing partner at Ericsson’s top shareholder Cevian Capital, said showed its confidence in the future.

“We are convinced that Borje Ekholm will surpass the targets and show the doubters that they are wrong”, Gardell told Reuters.

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