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.
SEK b. Q2
2020 Q2
2019 YoY
change Q1
2020 QoQ
change Jan-Jun
2020 Jan-Jun
2019 YoY
change
Net sales 55.6 54.8 1% 49.8 12% 105.3 103.7 2%
Sales growth adj. for comparable units and currency - - 0% - - - - -1%
Gross margin 37.6% 36.6% - 39.8% - 38.6% 37.5% -
Operating income 3.9 3.7 3% 4.3 -11% 8.2 8.6 -6%
Operating margin 6.9% 6.8% - 8.7% - 7.7% 8.3% -
Net income 2.6 1.8 40% 2.3 13% 4.9 4.3 14%
EPS diluted, SEK 0.74 0.51 45% 0.65 14% 1.39 1.21 15%
Measures excl. restructuring charges and other items affecting comparability[1]
Gross margin excluding restructuring charges 38.2% 36.7% - 40.4% - 39.3% 37.5% -
Operating income excl. restr. charges & items affecting comparability in 2019[2] 4.5 3.9 18% 4.6 -2% 9.1 7.4 24%
Operating margin excl. restr. charges & items affecting comparability in 2019[2] 8.2% 7.0% - 9.3% - 8.7% 7.1% -
Free cash flow before M&A 3.2 1.6 102% 2.3 40% 5.6 5.1 10%
Net cash, end of period 37.5 33.8 11% 38.4 -2% 37.5 33.8 11%
[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 B rje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC)
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 2
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Second quarter highlights
