Ericsson notes “solid” Q2 performance but raises concerns for Europe
Ericsson has published its second quarter financial results, noting a “solid” result and maintaining its full-year targets for the group.
However, president and CEO Börje Ekholm (pictured), raised concerns about Europe's future ability to compete on new tech.
Overall, Ericsson's gross margin excluding restructuring charges improved to 38.2%, including the inventory write-down related to mainland China, which equalled -1.6 percentage points. Net income increased 40% year-on-year and 13% between Q1 and Q2, while the first half year-on-year increase in net income stood at 14%.
Ericsson said the impact of Covid-19 had been limited and, in its outlook, said the short term strategy would include an acceleration in R&D investments, potentially leading to a “delay of some quarters in reaching the 2020 target of low single-digit margin for digital services”.
The firm said it was “staying firm on our 2022 operating margin target of 10-12%.”
Ekholm commented: “The human toll caused by Covid-19, directly and indirectly through a weak economy, is increasingly clear. We continue to put the 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 organic sales were flat and gross margin improved to 38.2% (36.7%) YoY, including negative effects from strategic contracts. Free cash flow before M&A improved to SEK 3.2 billion. While the effects of Covid-19 create uncertainties, with current visibility we maintain the full-year targets for the group.”
Networks grew organically by 4% and the gross margin stood at 40.5%, absorbing a larger share of strategic contracts, including 5G volumes in mainland China. There, Ericsson also took an inventory write-down.
While Chinese 5G contracts had a negative contribution to gross margin in Q2, they are still expected to be profitable over the lifecycle.
The firm said its 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 digital services business posted a Q2 gross margin of 43.6% supported by increased software sales. Despite the positivity, the declining legacy portfolio and Covid-19-related market uncertainty had a negative impact on overall sales, but demand for Ericsson’s cloud-native and 5G portfolio is expected to generate revenues in 2021 and beyond.
As of mid-June Ericsson had 93 commercial agreements for 5G and 40 live networks across 22 countries and it noted strong demand for its cloud-native and 5G portfolio, recording several “important tier 1 customer wins” in 5G Core that will generate revenues in 2021 and beyond.
Earlier this year, the firm almost doubled its global forecast for 5G mobile subscriptions to 190 million by 2020-end, due to faster than expected uptake in China. The Q2 results reinforce the same trend.
Ericsson said its R&D investments have established the firm as a “leader in 5G” with proven performance and cost of ownership benefits for customers. It said strategic investments will continue in addition to the earlier mentioned acceleration in R&D investments.
Ekholm said: “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.”
On patents, Ericsson confirmed some agreements are scheduled for renewal in 2021, which could temporarily affect royalty payments. However, the addition of 5G patents is expected to strengthen the intellectual property business overall.
Last month, Ericsson added the antenna-integrated radio (AIR) solutions Hybrid AIR and Interleaved AIR to its radio system portfolio, enhancing the company’s 5G platform.
Now, communications service providers can deploy mid-band 5G networks faster and on a wider scale without adding to their site footprint,
Concerns for Europe
Although the results were largely positive, concerns remain, not only around the future of the business in the current economic environment, but also around the future competitive ability of the European market.
As a result, Ekholm called for digital infrastructure investment to be prioritised and spectrum availability to be expedited across the continent.
Ekholm said: “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,” Ekholm continued.
He concluded: “I believe Europe must prioritise actions to incentivise investments in the digital infrastructure, to include lowering the cost and speeding up the availability of spectrum.”