Ericsson estimates an £85 million write-down in the second quarter

Ericsson (STO: ERIC-B) said on Monday that it is anticipating an £85 million write-down in the second quarter ascribed to product inventory in China. In the largest Asian economy, the Swedish telecommunications equipment manufacturer has so far signed 5G agreements with three prominent operators. Owing to higher initial costs, the company said that its Q2 gross margins are likely to remain negative in China.

Shares of the company were reported 2.2% down in premarket trading on Monday. At £7.42 per share, Ericsson is roughly 3% up year to date in the stock market after recovering from a low of £5.23 per share in March. Learn more about how to invest in the stock market.

U.S. seeks to exclude Huawei from the global 5G network

In its financial report for the first quarter, Ericsson had already highlighted that its second-quarter will likely see a hit to profitability due to strategic contracts that are likely to weigh on quarterly gross margins in China.

According to media reports, the three largest telecom companies in China; China Unicom, China Telecom, and China Mobile, have awarded billions of dollars worth of 5G contracts in 2020 primarily to domestic manufacturers like ZTE and Huawei.

On a global level, as the United States pushed its allies into excluding Huawei from their 5G networks on concerns of national security, rivals like Ericsson and Nokia found a place in the forefront of the worldwide 5G network.  

JP Morgan analysts’ comments on Ericsson’s announcement

In a client note, JP Morgan analysts also commented on the news on Monday and remarked:

“This has always been an issue with China contracts in our opinion that they cause gross margin issues so though this announcement is not a surprise, investors will want further clarity on the extent of the impact.”

In its report earlier this year, Ericsson confirmed its full-year financial guidance for 2020 and also for 2022. The company acknowledges that in the short term, rolling out a 5G network in China will weigh on its financial performance. In the later years, however, Ericsson is confident that its 5G contracts will help fuel profitability.  

The Swedish multinational networking company performed slightly upbeat in the stock market last year with an annual gain of about 5%. At the time of writing, Ericsson has a market cap of £24.95 billion and has a price to earnings ratio of 139.58.