Ericsson (ERIC - Get Report) shares skidded lower Wednesday after the network equipment maker posted solid second quarter earnings but said it would likely face weaker near-term profit margins as it moved to win bigger 5G contracts from rivals such as Finland's Nokia (NOK - Get Report) and China's Huawei Technologies.
Ericsson said earnings for the three months ending in June came in at 0.59 Swedish crowns, a major swing from last year's 0.58 Swedish crown loss but just shy of the consensus forecast. Group revenues, Ericsson said, rose 7% on a comparable basis to 54.8 billion Swedish crowns ($5.83 billion), topping analysts' forecasts of $5.68 billion.
Ericsson said its overall gross profit margin improved by 180 basis points to 36.6%, but noted that declining margins in its networks division, which fell 180 basis points from the previous quarter to 41.4%, would likely continue over the second half of the year.
"We see strong momentum in our 5G business with both new contracts and new commercial launches as well as live networks," said CEO Borje Ekholm. "To date, we have provided solutions for almost two-thirds of all commercially launched 5G networks."
"We continue to take strategic contracts and the large-scale network deployments, expected to commence in parts of Asia, will gradually impact margins negatively in the short term but strengthen our position in the long term," he added. "Continued technology and market investments, especially in 5G, automation and AI, are fundamental for long-term competitiveness and a key part of our focused strategy to strengthen our long-term business and path to reaching our targets for 2020 and 2022."
Ericsson shares were marked 9% lower in Stockholm trading Wednesday to change hands at 82.18 Swedish crowns each, the biggest single-day decline in two years and a move that trims the stock's year-to-date advance to around 6%.