Ericsson CEO Scores Third Straight Quarterly Earnings Beat

(Bloomberg) -- Ericsson AB is powering ahead in a turnaround set in motion by Chief Executive Officer Borje Ekholm, as the wireless network maker’s third-quarter results showed carriers around the world are investing to start fifth-generation services.

Ericsson beat analysts’ expectations for sales, earnings and a closely-watched indicator of profit, the third straight surprise to the upside for Ekholm since he was appointed two years ago. The stock rose as much as 5.7 percent, the steepest intraday advance in three months.

Ericsson CEO Scores Third Straight Quarterly Earnings Beat

“We see that we have good momentum in our product portfolio,” Chief Financial Officer Carl Mellander said in a phone interview. “The growth is mainly in North America, but we have also won business in other parts of the world; Europe and Latin America, for example.”

The results show Ekholm has hit his stride in righting the Swedish company after initially confronting a slump in customer demand for equipment and having to pay for expensive investments. His recipe -- simultaneously cutting costs and boosting spending on research and development -- has improved profitability as phone carriers race to build new networks.

Ericsson CEO Scores Third Straight Quarterly Earnings Beat

Ericsson’s adjusted gross margin increased to 36.9 percent from 28.5 percent a year earlier, driven mainly by cost cuts and better contracts in its managed services unit, which runs carriers’ networks. Analysts had expected 36.1 percent.

A cloud on the horizon is an ongoing probe by the Securities and Exchange Commission and the U.S. Department of Justice, regarding the company’s compliance with a U.S. law that concerns the bribery of foreign officials and accounting transparency. Ekholm said the result is likely to be “monetary and other measures, the magnitude of which cannot be estimated currently but may be material.”

‘Fairly Wide’

On a webcast, the CEO said the scope of the investigation is “fairly wide,” and that 50 people have left the company as a result of Ericsson’s own probes. The probe relates to events from “before 2007 and onward,” Ekholm said.

Mellander didn’t provide details on the investigation, which started with questions from U.S. authorities in March 2013, saying Ericsson can’t say when it will know the end result or what that will be. In 2013, Ericsson said the probe was related to a payment system used to win contracts in the 1990s, including orders in Romania.

Ericsson shares have advanced 50 percent this year as the company benefits from positive momentum in network sales and improvement in digital services. The stock rose 3.5 percent to 80.70 kronor at 9:46 a.m. in Stockholm.

Expectations on Ericsson have increased steadily, and analysts raised their third-quarter sales estimates by 3.1 percent on average in the past month ahead of Thursday’s results.

Sales still beat estimates comfortably, rising 9 percent to 53.8 billion kronor ($6 billion), compared with the average prediction of 50.3 billion kronor. Adjusted operating profit was 3.8 billion kronor, compared with a loss of 800 million kronor a year earlier.

Sales were mainly driven by continued high demand, primarily in North America, which saw a jump of 21 percent. However, the company predicted that its network business will see a lower sales increase than usual in in the fourth quarter.

“We are running at full speed in North America now, so the seasonal pattern that we usually see from the third quarter to the fourth won’t happen,” Mellander said. “We see more of a flat scenario in North America, while the rest of the world probably will follow the usual seasonal pattern.”

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