Telecomunicazioni
Ericsson Reports Second Quarter Results 2020
Adjusted for comparable units and currency.
(please see the quarterly report for complete planning assumptions)
SEK b.
YoY
change
2%
24%
Non-IFRS financial measures are reconciled to the most directly reconcilable line items in the financial statements at the end of this report.
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 .).
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 organic 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% organically 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 margin 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 margin 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
Sales adjusted for comparable units and currency
Excluding restructuring charges
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
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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A live audio webcast of the conference call will be available at www.ericsson.com/investors and https://www.ericsson.com/en/newsroom
of the conference call will be available from about one hour after the conference call has ended until July 24, 2020 .
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FOR FURTHER INFORMATION, PLEASE CONTACT
Peter Nyquist , Head of Investor Relations
Phone: +46 10 714 64 99
E-mail: peter.nyquist@ericsson.com
Stella Medlicott , Senior Vice President, Marketing and Corporate Relations
Phone: +46 10 713 65 39
E-mail: media.relations@ericsson.com
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
Peter Olofsson , Head of Corporate Communications
Phone: +46 10 719 18 80
E-mail: media.relations@ericsson.com
Corporate Communications
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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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