Ericsson

Mainland China 5G contracts drive Ericsson sales up 7%

21 October 2020 | Melanie Mingas

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Ericsson has noted a 7% increase in sales year on year, which it said was mainly driven by sales in Mainland China.

In its Q3 financial results, released today, reported sales reached SEK 57.5 billion while operating income – excluding restructuring charges and items affecting comparability – increased from SEK 6.5 billion to SEK 9 billion, driven by the networks division of the business. Reported operating income stood at SEK 8.6 billion while net income reached SEK 5.6 billion.

Networks reported sales increased by 6% YoY, with an increase of 13% adjusted for comparable units and currency. The operating margin excluding restructuring charges stood at 22.7%.

The gross margin improved in all segments in the third quarter and reached 43.2%, the highest since 2006. Ericsson said it was on track to meet its 2020 group targets and that its 2022 financial targets remain.

President and CEO Börje Ekholm (pictured), said: “Amid the continuing global Covid-19 pandemic and with more than 80% of our people working from home, we keep on executing on our focused strategy.

“We continue to win footprint in several markets leveraging our competitive 5G portfolio,” he added saying that although Covid-19 had had a limited impact on the business to date, Ericsson continued to monitor for “any signs of a change in the situation”.

Ericsson’s 112 commercial 5G agreements and 65 live networks include deals with China Mobile, China Telecom and China Unicom. In June, the company forecast losses of “approximately SEK 1 billion” in its Q2 results, due to asset write-downs of product inventory in China.

However, commenting on the situation now, Ekholm said: “The 5G contracts in Mainland China have developed according to plan, contributing positively to profits in Q3 and are expected to improve further.

“Our business in Europe grew based on several footprint gains. While the pandemic has hurt revenues for several of our customers, and in some cases this has led to a reduction of capex, we have not seen any negative impact on our business, largely due to footprint gains. However, the pandemic negatively impacted our sales in Latin America and Africa.”

Recent operational highlights for Ericsson included the US$1.1 acquisition of Cradlepoint, confirmed last month and expected to close in Q4, which Ekholm said marked a sign of progress  in the strategy to “build  an enterprise business”. High levels of activity in North East Asia and North America saw networks grow organically by 13%, with a gross margin reaching 46.7%

Summarising performance across key global markets, Ekholm continued: “Underlying business fundamentals remain strong in North America driven by consolidation in the US operator market, pending spectrum auctions, and increased demand for 5G.  The 5G contracts in Mainland China have developed according to plan, contributing positively to profits in Q3 and are expected to improve further.

“Our business in Europe grew based on several footprint gains. While the pandemic has hurt revenues for several of our customers, and in some cases this has led to a reduction of capex, we have not seen any negative impact on our business, largely due to footprint gains. However, the pandemic negatively impacted our sales in Latin America and Africa,” he added.

Today Ericsson also announced it has won another contract with Telia , this time to deliver radio access network technology (RAN) to base stations to modernise Telia’s 4G network and upgrade it to 5G in Sweden.

Ekholm added: “Open RAN is a hot topic in our industry today and Ericsson is a strong supporter of openness and actively engages in alliances, such as 3GPP, ONAP and the O-RAN alliance. In the years to come, networks will gradually evolve, as will the current open standards. At the same time 5G is ready and happening now so focus must be on providing early access to 5G networks to enable the broader ecosystem to innovate at scale.”

Elsewhere in the business, Ericsson said patent licensing was performing well, even though revenues decreased in Q3 due to a licensee experiencing reduced sales volumes. With “several important contract renewals” on the horizon, Ekholm warned: “we may see gaps in IPR revenues in 2021 and 2022.”

However, free cash flow before M&A increased by SEK 1.9 billion to reach SEK3.9 billion. On a 4Q rolling basis Ericsson has generated SEK 17.7 billion of free cash flow before M&A when the payments to SEC and DOJ are excluded.