Ericsson reports first quarter results 2020
First quarter highlights
- Sales were SEK 49.8 (48.9) b. A decline by -2% adjusted for comparable units and currency.
- The Covid-19 pandemic had limited impact on operating income and cash flow in the quarter.
- Gross margin excluding restructuring charges improved to 40.4% (38.5%). Gross margin improved QoQ in all segments.
- Operating income excluding restructuring charges was SEK 4.6 b. (9.3% operating margin). Q1 2019 operating income excluding restructuring charges and items affecting comparability was SEK 3.5 b. (7.2% operating margin).
- Networks sales adjusted for comparable units and currency were flat YoY and operating margin improved to 16.6% (16.3%).
- Digital Services operating income was SEK -1.4 (-1.8) b. Gross margin improved driven mainly by higher software sales. Sales adjusted for comparable units and currency declined by -9% due to lower services and legacy hardware sales, and negative impact from Covid-19.
- Net income was SEK 2.3 (2.4) b.
- Free cash flow before M&A was SEK 2.3 (3.5) b. further strengthening the net cash position to SEK 38.4 b. from SEK 34.5 b. in Q4 2019.
|Sales growth adj. for comparable units and currency||-||-||-2%||-||-|
|Gross margin excluding restructuring charges||40.4%||38.5%||-||37.1%||-|
|Operating income excl. restr. charges & items affecting comparability in 2019||4.6||3.5||30%||6.0||-23%|
|Operating margin excl. restr. charges & items affecting comparability in 2019||9.3%||7.2%||-||9.0%||-|
|EPS diluted, SEK||0.65||0.70||-7%||1.33||-51%|
|Free cash flow before M&A||2.3||3.5||-33%||-1.9||-|
|Net cash, end of period||38.4||36.1||6%||34.5||11%|
 Excludes restructuring charges in all periods. No other adjustments made in Q1 2020. Q4 2019 excludes a provision reversal related to the SEC and DOJ investigations (SEK 0.7 b.) and costs related to wind-down of the ST-Ericsson legal structure (SEK -0.3 b.). Q1 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.).
Non-IFRS financial measures are reconciled to the most directly reconcilable line items in the financial statements at the end of this report.
Comments from Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC)
We are going through unprecedented times with Covid-19 which has impacted everyone around the world either directly or indirectly. Throughout this crisis, we guide our decisions by putting the safety and health of our employees, customers and partners as a first priority. Ericsson delivered a solid result during the first quarter, with limited impact from the Covid-19 pandemic. An important indicator of our strategy execution is the improvement in gross margin. The Q1 gross margin increased to 40.4% (38.5%) YoY, driven by improvements across segments. We expect our industry to show resilience throughout the pandemic and we are well positioned with a competitive 5G product offering and cost structure. There is near-term uncertainty around sales volumes due to Covid-19 and the macroeconomic situation, but with current visibility we have no reason to change our financial targets for 2020 and 2022.
In segment Networks, the gross margin increased to 44.6% (43.2%) reflecting the strong business fundamentals with high activity across multiple regions. A favorable business mix more than compensated for an increased portion of strategic contracts and the expected negative effect from the acquired antenna and filter business. The operating margin reached 16.8%.
We see strong underlying customer momentum in segment Digital Services. We are confident about our offering and market position. Leading operators have awarded us several 5G Core contracts, which are expected to start generating material revenues from 2021. While the rationalization of the legacy portfolio will continue, we are increasing R&D investments in our 5G and cloud-native portfolio to capture the new opportunities. Execution of the turnaround follows the plan, but earnings will vary between quarters. In the first quarter, currency adjusted sales declined by -9% due to fewer project completions and a somewhat negative impact from Covid-19 as access to some customer networks was limited. In addition, legacy hardware sales declined in line with our strategy. However, fundamental to our strategy, sales of software increased and gross margin reached 40%, despite a SEK -0.2 b. negative impact from one of the few remaining critical contracts.
In Managed Services our investments in automation and AI continue to contribute to improving the gross margin. There will be quarterly variations depending on timing of add-on sales and costs, but underlying margins have been established at a higher level.
Our cash position has further strengthened driven by free cash flow before M&A of SEK 2.3 b. in the quarter. This further solidified our resilience which enables us to continue to invest in our technology leadership. At the same time, we will continue our efforts to drive efficiency and cost reductions to further increase competitiveness.
Underlying business fundamentals remain strong. With growth in data in general and with working from home as the new normal in many countries, good connectivity is more important than ever. For 2020 we estimate the RAN market to grow by 4%, however for Q2 we expect somewhat lower than normal sequential sales growth as there are uncertainties impacting short-term growth negatively. Covid-19 and actions taken by governments to slow down the spread are making our service delivery and supply harder due to lockdowns and travel restrictions in many countries. In addition, while we have seen no material effects so far on our demand situation, it is prudent to believe that the slowdown in the general economy may lead some operators to delay investment programs.
Our 5G equipment is used in 29 live networks across four continents. As a further proofpoint of our technology leadership we were awarded an increased market share from one of the operators in China. The full value and margin impact from the 5G deployments in China will be assessed after market share decisions by all operators.
While we have been successful improving our position in Europe, we are concerned that 5G investments in Europe are delayed. This means that Europe may fall behind on a critical digital infrastructure for the future. The criticality of the digital infrastructure has been further evidenced during the pandemic. We believe governments should encourage 5G investments as a way to restart economies.
The financial targets for 2020 take into account an increasing share of strategic contracts, including 5G in China. We expect a larger share of these contracts to weigh on profitability in Q2 rather than being evenly distributed over the year. Operational improvements will continue and are expected to partly offset the negative impact.
The approved operator merger in North America is expected to build an even stronger 5G momentum and we expect investments to intensify during the second half of the year. However, our managed services contract is expected to be negatively impacted over time, starting in Q2.
We are well positioned with a resilient balance sheet and a solid competitive position based on our 5G portfolio, set to deliver on the promises of 5G. A key factor for our long-term growth is to provide our customers with leading solutions. We are determined to come out of the Covid-19 situation in a stronger competitive position and our investments in R&D is a strategic cornerstone which we will not sacrifice. We also continue investments in digital transformation which is expected to generate competitive advantages.
The massive disruption caused by Covid-19 has demonstrated the criticality of the network in today’s society and we are currently working closely with our customers to keep their networks running. During this period, our supply and service delivery has worked with limited interruption. We made an early decision to encourage a majority of our workforce to work remotely and are very proud of our people who have relentlessly served our customers during this period. Our business continuity plans have safeguarded operations during Q1 and we will continue to work to further improve our resilience by for example increasing inventories of critical components. At the same time, the longer the lockdown in many countries continue, the more disruptions we will likely see for example of our supply chains.
The current global uncertainty requires a humble attitude towards predicting the near-term future. We remain positive on the longer-term outlook, but the second quarter is likely to be a tad softer than normal due to timing of strategic contracts and uncertainty induced by Covid-19. Predicting when the restrictions to curb the pandemic will be lifted and how the recovery will look is impossible. However, with current visibility we maintain the targets for 2020 and 2022.
Stay healthy and well.
President and CEO
 Excluding restructuring charges
 Dell’Oro estimate
Planning assumptions highlights (please see quarterly report for complete planning assumptions)
The RAN equipment market is estimated to increase by 4% for full-year 2020 with 0% CAGR for 2019-2024. (Source: Dell’Oro Jan and Feb, 2020)
Three-year average sales seasonality between Q1 and Q2 is 11%. For Q2 somewhat lower than normal sequential sales growth is expected as there are uncertainties impacting short-term growth negatively:
- Covid-19 and actions taken by governments to slow down the spread are making service delivery and supply harder due to lockdowns and travel restrictions in many countries.
- While there have been no material effects so far on the demand situation, it is prudent to believe that the slowdown in the general economy may lead some operators to delay their investment programs.
- The approved operator merger in North America is expected to build an even stronger 5G momentum and investments are expected to intensify during the second half of the year. However, the Ericsson managed services contract is expected to be negatively impacted over time, starting in Q2.
The targets for full-year 2020 take into account an increasing share of strategic contracts, including 5G in China. A larger share of these contracts is expected to impact Q2, rather than being evenly distributed over the year. Operational improvements will continue and are expected to partly offset the negative impact.
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/2020/3month20-en.pdf or on www.ericsson.com/investors
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