Ericsson Reports Second Quarter Results 2020

Rhea-AI Summary

Ericsson reported Q2 2020 sales of SEK 55.6 billion, a 1% increase YoY, with adjusted sales flat. Gross margin improved to 38.2% from 36.7%, largely due to higher software sales. Operating income rose to SEK 4.5 billion, achieving an operating margin of 8.2%. Net income increased by 40% to SEK 2.6 billion. Free cash flow before M&A jumped to SEK 3.2 billion. Despite Covid-19 uncertainties, Ericsson maintains its full-year financial targets, emphasizing strong performance in Networks with a 4% organic sales growth.

Positive

• Sales increased by 1% YoY to SEK 55.6 billion.
• Gross margin improved to 38.2% from 36.7% YoY.
• Operating income rose to SEK 4.5 billion, up 18% YoY.
• Net income increased by 40% to SEK 2.6 billion.
• Free cash flow before M&A improved to SEK 3.2 billion, a 102% increase YoY.

Negative

• Digital Services operating income was negative at SEK -0.7 billion.
• Inventory write-down of SEK -0.9 billion impacted gross margin negatively.
• Networks operating margin decreased to 14.1% from 15.0% YoY.

STOCKHOLM, July 17, 2020 /PRNewswire/ --

Second quarter highlights           

• Sales were SEK 55.6 (54.8) b. Sales adjusted for comparable units and currency were flat YoY.           
• Gross margin excluding restructuring charges improved to 38.2% (36.7%), including the earlier communicated inventory write-down related to Mainland China (SEK -0.9 b., which equals to -1.6 percentage points).           
• Operating income excluding restructuring charges improved to SEK 4.5 b. (8.2% operating margin) from SEK 3.9 b. (7.0% operating margin) driven by improvements in segment Digital Services.            
• Networks sales[1] increased by 4% YoY. Networks operating margin excluding restructuring charges  was 14.1% (15.0%) impacted by strategic contracts and the inventory write-down, partly compensated by operational leverage and a favorable business mix.            
• Digital Services operating income excluding restructuring charges was SEK -0.7 (-1.3) b. Gross margin improved driven mainly by higher software sales while sales¹ declined by -5%.            
• Net income was SEK 2.6 (1.8) b.            
• Free cash flow before M&A was SEK 3.2 (1.6) b. Net cash June 30, 2020, was SEK 37.5 (33.8) b.           
• The Covid-19 pandemic had a limited impact on operating income and cash flow in the quarter.

¹ Adjusted for comparable units and currency.

Planning assumptions highlights (please see the quarterly report for complete planning assumptions)           

• With current visibility Group financial targets for 2020 and 2022 are maintained.           
• R&D investments in Digital Services are accelerated to capture additional business opportunities. In combination with lower sales, this will likely cause a delay of some quarters in reaching the 2020 financial target. 2022 operating margin target of 10-12% remains firm.

SEK b.	Q2 2020	Q2 2019	YoY change	Q1 2020	QoQ change	Jan-Jun 2020	Jan-Jun 2019	YoY change
Net sales	55.6	54.8	1%	49.8	12%	105.3	103.7	2%
Sales growth adj. for comparable units and currency                         Gross margin	- 37.6%	- 36.6%	0% -	39.8%	-	38.6%	37.5%	-1% -
Operating income                             Operating margin	3.9 6.9%	3.7 6.8%	3% -	4.3 8.7%	-11% -	8.2 7.7%	8.6 8.3%	-6% -
Net income	2.6	1.8	40%	2.3	13%	4.9	4.3	14%
Measures excl. restructuring charges and other items affecting comparability1
Gross margin excluding restructuring charges	38.2%	36.7%	-	40.4%	-	39.3%	37.5%	-
Operating income excl. restr. charges & items affecting comparability in 20192	4.5	3.9	18%	4.6	-2%	9.1	7.4	24%
Operating margin excl. restr. charges & items affecting comparability in 20192	8.2%	7.0%	-	9.3%	-	8.7%	7.1%	-
Free cash flow before M&A	3.2	1.6	102%	2.3	40%	5.6	5.1	10%
Net cash, end of period	37.5	33.8	11%	38.4	-2%	37.5	33.8	11%

 

¹ Non-IFRS financial measures are reconciled to the most directly reconcilable line items in the financial statements at the end of this report.

² Excludes restructuring charges in all periods. No other adjustments made in 2020. Jan-Jun 2019 excludes a capital gain related to the divestment of 51% of MediaKind (SEK 0.7 b.), divestment of certain assets in Red Bee Media (SEK 0.1 b.) and a reversal of an earlier provision for impairment of trade receivables following customer payment (SEK 0.7 b.).

Comments from Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC)

The human toll caused by Covid-19, directly and indirectly through a weak economy, is increasingly clear. We continue to put safety of our people as first priority, and more than 80% of our employees are currently working from home. Despite the difficult environment we delivered a solid result. Q2 organic¹ sales were flat and gross margin[2] improved to 38.2% (36.7%) YoY, including negative effects from strategic contracts. Free cash flow before M&A improved to SEK 3.2 (1.6) b. While the effects of Covid-19 create uncertainties, with current visibility we maintain the full-year targets for the Group.

Networks grew by 4% organically¹ and the gross margin[2] was 40.5% (41.4%), absorbing a larger share of strategic contracts including 5G volumes in Mainland China where we also took an inventory write-down. The strengthened market position in Mainland China is strategically important as this market is expected to be a driver of critical future requirements and provide us with important scale. The Chinese 5G contracts are expected to be profitable over the life cycle, but had a negative contribution to gross margin in Q2.  

Investments in R&D have established us as a leader in 5G, with proven performance and cost of ownership benefits for our customers. We have continued to increase our market share in several markets by leveraging our competitive product portfolio. Profitability in earlier awarded strategic contracts has improved according to plan. We consider strategic contracts to be a natural part of the business and we will stop our forward looking commentary unless there is an extraordinary impact.  

Digital Services continues to execute on its turnaround plan with continuous improvements in the underlying business, and a Q2 gross margin² reaching 43.6% (37.1%), supported by increased software sales. Sales is being impacted by the declining legacy portfolio and Covid-19-related market uncertainty and we expect this negative impact to continue throughout the year. There is however a strong demand for our cloud-native and 5G portfolio, and we have recorded several important tier 1 customer wins in 5G Core that will generate revenues in 2021 and beyond. Encouraged by the success of our offering, we have decided to accelerate R&D investments. These investments have a positive long-term value but will result in increased R&D costs. We are for this reason, in combination with the lower sales, likely to see a delay of some quarters in reaching the 2020 target of low single-digit margin for Digital Services, however, we are staying firm on our 2022 operating margin² target of 10-12%.

Our patent licensing business continues to perform well due to our strong IPR portfolio. Licensing agreements are often multi-year and term-based and renewals normally require negotiations, particularly in conjunction with introducing new standards such as 5G. Next year, certain agreements are up for renewal and royalty payments can be temporarily affected. The inclusion of 5G patents is expected to strengthen our IPR business further. 

At Ericsson, we are committed to conducting business responsibly and with integrity. We continue our efforts to strengthen and improve our Ethics and Compliance program. In the quarter, the three-year term of the monitorship under the resolution with the U.S. authorities started. We look forward to working together with the independent compliance monitor and to benefit from his extensive experience. We fully believe this will help us reach our ambitions.

As we prepare to exit the crisis caused by Covid-19, there is a need to restart economies and make strategic, forward looking investments which we suggest must include the future digital infrastructure. We see many regions around the world increasing investments in this space and as a European company we are concerned that Europe will fall behind. As critical national infrastructure, 5G will be a key determinant for long-term competitiveness of the general economy, and act as a stimulant to accelerate economic growth, attract future investments and speed up technology innovation. I believe Europe must prioritize actions to incentivize investments in the digital infrastructure, to include lowering the cost and speeding up the availability of spectrum.

We are ready to deliver on the promises of 5G, based on our strong 5G portfolio and a resilient balance sheet. We remain positive on the longer-term outlook. Some customers are accelerating their investments while others are temporarily cautious. With current visibility we maintain the Group targets for 2020 and 2022.  

Stay healthy and well.

Börje Ekholm

President and CEO
 

¹ Sales adjusted for comparable units and currency
² Excluding restructuring charges

NOTES TO EDITORS

You find the complete report with tables in the attached PDF or by following this link https://www.ericsson.com/assets/local/investors/documents/financial-reports-and-filings/interim-reports-archive/2020/6month20-en.pdf or on www.ericsson.com/investors

Conference call for analysts, investors and journalists

President and CEO Börje Ekholm and CFO Carl Mellander will comment on the report and take questions. The conference call will begin at 9:00 AM CEST (8:00 AM BST London, 3:00 AM EDT New York).

To join the conference call, please phone one of the following numbers:

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Please call in at least 15 minutes before the conference call starts.

A live audio webcast of the conference call will be available at www.ericsson.com/investors and https://www.ericsson.com/en/newsroom

A replay of the conference call will be available from about one hour after the conference call has ended until July 24, 2020.

Sweden replay number: +46 (0)8 519 993 85

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FOR FURTHER INFORMATION, PLEASE CONTACT

Contact person

Peter Nyquist, Head of Investor Relations
Phone: +46 10 714 64 99
E-mail: peter.nyquist@ericsson.com

Additional contacts

Stella Medlicott, Senior Vice President, Marketing and Corporate Relations
Phone: +46 10 713 65 39
E-mail: media.relations@ericsson.com

Investors

Lena Häggblom, Director, Investor Relations
Phone:  +46 10 713 27 78
E-mail:  lena.haggblom@ericsson.com

Stefan Jelvin, Director, Investor Relations
Phone: +46 10 714 20 39
E-mail: stefan.jelvin@ericsson.com

Rikard Tunedal, Director, Investor Relations
Phone: +46 10 714 54 00
E-mail: rikard.tunedal@ericsson.com

Media

Peter Olofsson, Head of Corporate Communications
Phone: +46 10 719 18 80
E-mail: media.relations@ericsson.com

Corporate Communications
Phone: +46 10 719 69 92
E-mail: media.relations@ericsson.com

This is information that Telefonaktiebolaget LM Ericsson is obliged to make public pursuant to the EU Market Abuse Regulation and the Swedish Securities Markets Act. The information was submitted for publication, through the agency of the contact person set out above, at 07:00 CEST on July 17, 2020.

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Ericsson second quarter report 2020

 

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SOURCE Ericsson