By Johannes Hellstrom
STOCKHOLM (Reuters) - Sweden's Ericsson (ST:ERICb) reported a smaller-than-expected rise in fourth-quarter core earnings on Friday and said higher costs would spill over into 2020 as the telecoms equipment maker looks to exploit its leading position in super-fast 5G networks.
Its shares fell more than 6% in early trading.
After a number of lean years, Ericsson has been boosted by the roll-out of 5G, particularly in the United States.
But while 5G has helped sales, it has increased costs. Ericsson has also opted to take on strategically important clients to gain market share, betting a hit on margins in the short term will help to deliver longer-term profitability.
The company 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 through 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.
Ericsson shares were down 6.1 percent to 79.44 Swedish crowns at 0840 GMT, underpeforming the STOXX Europe 600 Technology Index (SX8P), which was up 1.2%.
Nevertheless, CEO Borje Ekholm said Ericsson was on track to deliver on its 2020 targets of an adjusted operating margin of more than 10% and sales of 230 to 240 billion Swedish crowns.
5G
Ericsson is fighting rivals Nokia (HE:NOKIA) and Huawei [HWT.UL] to take the lead in the roll out of 5G networks, which are expected to host critical functions from driverless vehicles to smart electric grids and military communications.
That has led the United States to blacklist Huawei and launch a worldwide campaign to try to persuade allies to ban the Chinese firm from their 5G networks, alleging its equipment could be used by Beijing for spying - which Huawei denies.
Britain is expected soon to make a final decision on whether to allow Huawei equipment in its 5G mobile networks, while Germany may also rule on the matter during the spring.
North America has been the biggest market for 5G so far, boosting Ericsson's sales, but the company said demand slowed in the fourth quarter as the proposed merger between Sprint (N:S) and T-Mobile hit their spending.
"It was a significant impact in a small part of the market which means the quarter came out negative in North America," Ekholm said. "But in general demand is very strong there."
While the United States is an early 5G adopter, China is expected to start its roll out this year and Western Europe after that.
By 2025, the GSMA telecoms industry lobby group estimates operators globally will have spent $1 trillion building up 5G networks, offering a huge jackpot for the leading suppliers.
Ericsson's adjusted quarterly operating earnings rose to 5.7 billion crowns ($600.2 million) from 2.6 billion a year earlier, but were down from 7.4 billion the previous quarter. Analysts in a Refinitiv poll had forecast 6.9 billion crowns.
(For a graphic on 5G networks, click on: https://graphics.reuters.com/USA-5G/0100B08J0JE/index.html)