Ericsson shares surged Thursday as investors cheered strong growth in sales of network gear, shrugging off a company warning that higher component costs will be a headwind to profitability next year.
Ericsson's U.S.-listed shares rose 11% in premarket trading.
The Swedish telecommunications equipment maker said its key networks business posted an organic sales increase of 9% in the third quarter, driven by project deliveries in Japan and India, as well as continuing network modernization and expansion in the Middle East. Networks sales in North America expanded slightly, while overall sales were supported by higher licensing revenues.
Networks profitability also increased, despite Ericsson continuing to warn of increasing cost pressures from rising semiconductor costs. The rapid build-out of artificial-intelligence infrastructure has led to a shortage of memory chips, sending prices higher.
"Looking ahead, the radio access network market is flat, geopolitical uncertainty remains elevated and component costs are a headwind to gross margin next year," Chief Executive Per Narvinger said.
The company has been working to offset these higher component costs by burden-sharing with customers and suppliers as well as by substituting products to reduce costs.
Speaking on a call with analysts, Narvinger said the company is adjusting pricing in current tenders and discussing broader price increases and commercial mitigations with its current customers, at the same time as continuing efficiency and supply chain actions.
"The industry is entering a period of higher input costs, and the financial impact will continue to build up in the coming quarters," he said. "Our near term mitigation actions across the business, mainly commercial measures, are working well so far."
The company reported an adjusted gross margin for the networks unit of 50.3% in the quarter, above the guided 48% to 50% range, and said the margin is expected to land between 49% and 51% in the fourth quarter.
Sales in the unit are expected to rise in line with average seasonality of 17% in the fourth quarter, and analysts at J.P. Morgan noted that after a "significant beat" in third quarter networks sales, the guidance implies revenue in the final quarter landing 4.8% ahead of consensus.
Ericsson also set out plans to streamline its operating structure, seeking to strengthen its customer focus and drive efficiencies.
A new Asia-Pacific market area will be established from Jan. 1, combining its North East Asia and South East Asia, Oceania and India markets. Bringing these markets together will allow more effective operations across the region while maintaining a strong focus at country and customer levels, it said.
The new APAC market area will be headed by Patrick Johansson, who currently leads the Europe, Middle East and Africa region. The company is starting a recruitment process for a new EMEA head.
"It will enable us to move faster, improve accountability and better support our customers in a changing market," Narvinger said.
The company reported third-quarter earnings before interest and taxes of 8.86 billion Swedish kronor ($883.9 million), ahead of the 7.12 billion kronor expected in a FactSet poll.
Sales rose 5.8% to 59.48 billion kronor, versus the 55.28 billion kronor FactSet estimate, while the group's gross margin slipped to 47.1% from 47.6%.
The results mark the first under the leadership of new CEO Per Narvinger, a company veteran who headed the networks business and took over from Borje Ekholm on Oct. 1.
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