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Ericsson Sees Negative Q2 Margin In China; Maintains Group Targets For 2020, 2022

Ericsson (ERIC) announced Monday that it has maintained financial targets for 2020 and 2022.

The company noted that it has increased its footprint in China through 5G contract awards from all three major operators in China. Ericsson's 5G business in China is expected to have healthy profitability over the life of the contracts.

However, the margins during the second quarter of 2020 are expected to be negative due to high initial costs for new products.

The company earlier said that an increasing share of strategic contracts was expected to weigh negatively on profitability in the second quarter 2020 primarily driven by temporary negative gross margin in China.

The quarter would also be impacted by a cost of around 1 billion Swedish kronor related to asset write-downs of pre-commercial product inventory for the Chinese market. The cost will be reported in segment Networks, impacting gross margin.

The company said, "While the deployment of 5G in China will continue to be dilutive to Segment Networks gross margin short-term, it is expected to contribute positively to gross and operating income from the second half of 2020 and in line with the business plan be profitable over time."

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