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Ericsson has signed its largest-ever deal with an $8.3 billion agreement to provide 5G solutions to Verizon, aiding the U.S. telecom giant in rolling out the next generation of wireless networks.
The Verizon
VZ,
deal, which Ericsson’s
ERIC,
ERIC.B,
finance boss told MarketWatch underscores the group’s commitment to the U.S. market, comes as the Swedish telecom equipment group faces headwinds from China in the form of geopolitical tensions surrounding 5G.
Sweden has bowed to pressure from the U.S. and allies to ban rival Huawei over national security concerns, which center on giving a company with ties to the Chinese regime access to critical technology infrastructure. Former U.S. Attorney General William Barr even suggested that the U.S. take controlling stakes in Nokia
NOKIA,
and Ericsson to stop Huawei’s dominance.
But Ericsson has pushed back on Sweden’s stance on China, which historically contributes to around 10% of the group’s revenue. Both its chief executive and an influential shareholder, Jacob Wallenberg — whose family also owns stakes in AstraZeneca
AZN,
and Nasdaq
NDAQ,
— have hit out against Sweden’s ban.
That’s because China has threatened to retaliate against Ericsson in a tit-for-tat move over Sweden’s treatment of Huawei. In May, Chinese state media said that Beijing would give Sweden one last chance to reverse the ban before Ericsson would take a hit in the next round of China’s massive 5G build-out.
Ericsson’s second-quarter earnings, released on Friday, underscore the level of pressure the group is under in China, as it posted its first decline in quarterly revenue in at least three years as sales and core profits fell short of analyst expectations.
The group reported total sales of 54.9 billion Swedish krona ($6.3 billion), a 1% decline from 2020 levels and below market estimates of SK 57.3 billion. Earnings before interest and taxes was SK 5.8 billion, missing expectations of closer to SK 6 billion, while net income attributable to shareholders of SK 3.9 billion beat out expectations of SK 3.6 billion.
China was the critical drag, as sales fell by SK 2.5 billion — more than half — in the three months to the end of June.
Losses in China were compounded by a SK 0.5 billion write-down linked to inventory and 5G equipment in China for contracts that failed to materialize, Ericsson’s chief financial officer, Carl Mellander, told MarketWatch.
“Where we are now is actually a state of uncertainty,” Mellander said, noting that the wave of contracts for the next wave of China’s 5G rollout are set to be announced as early as the end of this month. “There is a risk here that we will see an ongoing lower volume in China. Our job then is to compensate with other geographies.”
The group’s finance boss added that the Northeast Asian business as a whole helped compensate for weakness in China, growing organically by 1% from 2020, and he highlighted the Verizon deal as another way the company has global exposure.
“The single most important thing is the commitment that Verizon shows to us, and the trust — because it’s a five-year deal, and it’s very large,” Mellander said about the deal.
Ericsson also said that it expects the total radio access network market to increase 10% in 2021, up from previous guidance of 3%. Of that, mainland China is expected to grow 11% — which Ericsson is likely to miss out on. The company said it was “prudent to forecast a materially lower market share in mainland China for networks and digital services.”
