Ericsson eyes long term profits in China, as it posts strong figures for Q2 2020

Key wins in China are expected to bear fruit in the second half of 2020
Ericsson, Q2, 2020, Financials, Telecoms, China, 5G, Networks

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Swedish tech giant, Ericsson, has posted a strong set of financials for the second quarter of 2020, with total revenues and total sales increasing during the period.

Net sales grew by 12 per cent from $6.1 billion (SEK 54.8 billion) in Q1 to $6.2 billion (SEK 55.6 billion) in Q2. Net income also increased by 13 per cent to stand at $290 million (SEK 2.6 billion) in Q2 compared to $256 million (SEK 2.3 billion) in Q1.

Ericsson’s president and CEO, Börje Ekholm, praised the company’s efforts as it continues to perform strongly, despite the industry wide disruption caused by the global Covid 19 pandemic.

“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 per cent 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 per cent (36.7 per cent) 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,” said Börje Ekholm, president and CEO of Ericsson.

Ericsson’s Q2 financial figures remained strong, despite a $100.4 million (SEK 900 million) write down of pre-commercial assets in China. Aside from the write down, which Ericsson had already announced in Q1, China was a particularly buoyant market for Ericsson in Q2, with the Swedish vendor winning key 5G contracts with all three of China’s mobile network operators.

“Networks grew by 4 per cent organically and the gross margin was 40.5 per cent (41.4 per cent), 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,” Ekholm explained.

Ericsson has performed rather better than its regional rival Nokia in mainland China and has won contracts for work in both the radio access networks and the core of China’s big three mobile networks. While the capital expenditure demanded at the beginning of these contracts has weighed down Ericsson’s gross margin in Q2, the company believes that the scope and scale of these deals will bear significant fruit in the mid to long term.

“While the deployment of 5G in China will continue to be dilutive to Segment Networks gross margin short-term, it is expected to contribute positively to gross and operating income from the second half of 2020 and in line with the business plan be profitable over time,” an Ericsson spokesperson said in a statement to the press, earlier this month.

The company said that 5G would remain a key driver for it, not only in China but across its global footprint, and maintained its group targets for 2020 and 2022. 

“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,” Ekholm concluded.

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