Ericsson confident on Q4 recovery as Nokia posts 2023 profit warning

Ericsson confident on Q4 recovery as Nokia posts 2023 profit warning

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The dominant theme of Ericsson’s Q2 earnings call was how and why sales would pick back up towards the end of 2023, or potentially 2024.

 Released today, Ericsson’s Q2 results “developed in line with expectations,” as organic sales growth fell by 42% year-over-year in North America, but rose 71% in India, Southeast Asia and Oceania.

This was largely helped by network equipment sales doubling in India, which has been aggressively rolling out 5G since October 2022.

In the US however, network deployment has slowed due to the macro-economic environment, and a reduction in investment following high capex in 2021 and 2022.

Furthermore, US operators were looking to reduce their inventory, after ordering equipment in high volumes while supply chains experienced instability coming out of the pandemic.

Speaking to analysts, Ericsson CEO Börje Ekholm and CFO Carl Mellander were keen to emphasise that following conversations with customers, they were confident the US market would see a gradual recovery in late 2023 and improve in 2024.

The reasons they gave included increasing data consumption requiring capacity upgrades, which have very short lead times and therefore see very quick recovery rates. Furthermore, investments in new, more efficient technology will be made to reduce energy consumption and bills.

Globally, Ericsson’s organic sales declined 9% year-on-year, with network sales falling 13%, but enterprise sales rising by 20%.

Meanwhile Ericsson’s main western competitor, Nokia, posted a profit warning for the full year, reducing their net sales outlook to €23.2 - 24.6billion from €24.6 -26.2billion. The change was related to its network infrastructure and mobile networks business groups.

The global markets’ weaker demand outlook in the second half is due to the macro-economic environment and customers’ inventory digestion.

“Customer spending plans are increasingly impacted by high inflation and rising interest rates along with some projects now slipping to 2024 – notably in North America. There is also inventory normalisation happening after the supply chain challenges of the past two years,” Nokia said in a statement today.

Ericsson meanwhile said that they expect inventory corrections to flatten out by the end of the year, which will make their H2 results stronger.

Nokia will release its second quarter and half year 2023 financial results on Thursday 20 July 2023.

While sales in Ericsson’s network equipment were down in Q2, enterprise sales were up, and it expects to see break-even earnings before interest, taxes, depreciation, and amortisation (EBITDA) on cloud software and services by the end of the year.

Ericsson also expects to see its gross margins pick back up. In Q2 2023 gross margins dropped to 37.4% from 42.3% in the same period in 2022.

The drop was attributed to the business mix changing as India picked up steam and the US dropped off. Ericsson anticipates that the US will account for 25% of its global organic sales, down from 35%, while India will pick up from 3% to 18%.

The initial network rollout stages in India and other markets that saw sales growth such as Brazil, come with lower margins as service costs are higher, but are anticipated to pick up over time.

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