Ericsson reports second quarter results 2020

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 sales[1] 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.

[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, news, filings)

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[1] 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[1] 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[2] 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[2] 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

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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.