ERIC Ericsson

By Dominic Chopping and Parmy Olson 

STOCKHOLM -- Ericsson AB returned to profit in the fourth quarter but concerns about higher costs associated with new fifth-generation mobile networks and a slowdown in North America sent its shares down more than 7%.

The Swedish telecom-equipment maker, emerging from years of costly restructuring, has bet big on the growing 5G market, where it is battling Finland's Nokia Corp. and China's Huawei Technologies Co. That effort, and cost cuts elsewhere, have started to bear fruit in recent quarters.

However, Ericsson on Friday said momentum stalled in North America in the last three months of 2019, with sales in the region falling 4% compared with the previous year.

"Due to the uncertainty related to an announced operator merger, we saw a slowdown in our North American business," said Chief Executive Börje Ekholm, adding that the region generated "the lowest share of total sales for some time."

T-Mobile US Inc. and Sprint Corp. agreed to merge almost two years ago but the deal hasn't been finalized amid a protracted antitrust fight.

Ericsson said there was growth among other customers and that the underlying fundamentals in North America remain strong. It also said the slowdown in North America was offset by operators in Asia and the Middle East continuing to spend on 5G networks.

Still, investments associated with the new technology, which promises to supercharge cellphones and ultimately enable driverless cars and internet-controlled factories, are increasing costs.

Ericsson said its costs rose in the quarter as it invested in acquisitions, digitization and security, and warned expenses would continue to rise this year. While the company said higher costs won't jeopardize its financial targets, Citi analyst Amit Harchandani said he expects consensus earnings this year to move lower.

Despite the challenges, Ericsson reported a net profit of 4.43 billion Swedish kronor ($465 million) for the fourth quarter, up from a loss of 6.55 billion kronor in the same period last year. Sales rose 4% to 66.37 billion kronor, driven by its key networks unit, and the company raised its full-year dividend.

Ericsson said it now has 78 commercial 5G agreements with operators and 24 live 5G networks on four continents.

Analysts have raised expectations that Ericsson and Nokia might benefit from a U.S. push to discourage allied governments and their carriers from buying Huawei gear. The U.S. says Huawei's equipment could be commandeered by Chinese authorities to disrupt or spy on communications, an allegation the company denies.

However, while Huawei is shut out of America, its absence has only given way to fierce competition between the two European companies. Ericsson also says it is yet to see much benefit elsewhere in the world.

Mr. Ekholm said in an interview with The Wall Street Journal earlier this week that adoption of 5G is "actually slowing down, in many countries" because of geopolitical concerns around the use of Huawei equipment. "That has created more uncertainty for our customers," he said, adding, "This whole notion that this was a win for Ericsson and Nokia so far has not materialized."

Against that backdrop, Ericsson is pushing to make the most of the U.S.

At a dinner with President Trump and other CEOs at the World Economic Forum in Davos, Switzerland, this week, Mr. Ekholm directly asked the president to make more spectrum available to mobile operators to help boost 5G deployments. He added, according to a transcript of the event, that permitting processes were "a real restriction."

Write to Dominic Chopping at dominic.chopping@wsj.com and Parmy Olson at parmy.olson@wsj.com

(END) Dow Jones Newswires

January 24, 2020 07:22 ET (12:22 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.