Ericsson, Operating Profit Margin Improves as 5G Revenue Share Increases

[Asia Economy Reporter Eunmo Koo] Ericsson achieved an improvement in operating profit margin as the proportion of 5G sales increased in the fourth quarter of last year.

Ericsson's sales in the fourth quarter of last year increased by 6% compared to the same period the previous year, aligning with Bloomberg consensus. Operating profit during the same period also rose by 80%, exceeding consensus by 29%. The increase in operating profit margin in the network division and the turnaround to profitability in the digital services division led to operating profits surpassing market expectations.

Seonghun Lee, a researcher at Shin Young Securities, explained in a report on the 13th, "The proportion of sales from new 5G contracts that began in 2018 is increasing, leading to an improvement in profit margins." He added, "This is because Ericsson holds an advantage over competitors in 5G contract wins, allowing it to sign contracts with global telecom companies under more favorable conditions compared to 4G contracts." The researcher further noted, "Considering the global 5G user penetration rate is about 2%, the upward trend in operating profit is expected to continue."

The digital services division recorded its first profit since the business restructuring in 2017. The main reasons for the turnaround to profitability in the fourth quarter of last year were summarized as an increase in the software proportion, a decrease in restructuring costs, and an increase in new 5G contracts. The researcher stated, "Out of the 45 major contracts identified in 2017, 35 were revised, and losses from major contracts last year were minimal." He forecasted, "Although operating losses in the first quarter of this year are inevitable, new 5G contracts are expected to increase, making Ericsson's target operating profit margin of 10% for 2022 achievable."

Europe is evaluated as the region expected to benefit the most this year. Last year, due to the cost burden of replacing Chinese equipment (Huawei and ZTE accounted for over 50% market share in 2019), 5G investment in Europe was delayed, resulting in a 6% decrease in Ericsson's sales in Europe and South America compared to the previous year. European telecom companies are considering measures such as expanding Open RAN to replace existing Huawei and ZTE equipment starting from 5G.

The researcher said, "With the expansion of 5G smartphone adoption, European telecom companies cannot delay equipment installation, so installation will accelerate from this year." He added, "In the U.S., following Verizon, AT&T and Sprint secured the 3.5 GHz frequency band in February, so sales are expected to continuously increase this year." Furthermore, he noted, "The Swedish government banned the use of Chinese companies' 5G equipment, and China may also partially suspend the use of Ericsson equipment." He predicted, "Since the net increase in 5G base stations in China last year reached 700,000, the highest level, growth is expected to slow this year."

This content was produced with the assistance of AI translation services.