Ericsson has reported quarterly core earnings. The Covid-19 pandemic had limited impact on operating income and cash flow in the quarter. As the coronavirus slams the brakes on industries globally, telecom is one of the few industries that remain relatively resilient.
Net sales were 49.8 billion Swedish crowns, a decline by -2% adjusted for comparable units and currency. Gross margin improved QoQ in all segments. Gross margin excluding restructuring charges improved to 40.4% from 38.5%.
“An important indicator of our strategy execution is the improvement in gross margin. We expect our industry to show resilience throughout the pandemic and we are well positioned with a competitive 5G product offering and cost structure,” Chief Executive Borje Ekholm said in a statement.
"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, excluding restructuring charges, increased to 44.6% from 43.2%, reflecting the strong business fundamentals with high activity across multiple regions.
Digital Services operating income was -1.4 (-1.8) billion Swedish crowns. Gross margin improved which is 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.
“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,” CEO Borje Ekholm said.
The operating margin reached 16.8%.Operating income excluding restructuring charges was SEK 4.6 billion. (9.3% operating margin). In 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%). Net income was SEK 2.3 billion, down slightly from 2.4 billion.
Free cash flow before M&A was SEK 2.3 billion (3.5), strengthening the net cash position to 38.4 billion Swedish crowns from 34.5 billion in Q4 2019.
“Our cash position has further strengthened driven by free cash flow before M&A of SEK 2.3 billion in the quarter. This further solidified our resilience which enables us to continue to invest in our technology leadership.”
The demand for 5G network equipment remains high even as the coronavirus outbreak wreaked havoc in its main markets, US and China. However, Ekholm expresses concern about Europe lagging in 5G investments as a result of Covid-19. He believes governments should encourage 5G investments as a way to restart economies.
“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.”