European stocks struggled for direction on Friday as investors monitored economic data, corporate earnings and the spread of the delta Covid-19 variant.
Earnings season is also beginning in earnest in Europe, with Richemont, Rio Tinto and Ericsson the big names reporting on Friday, while Burberry issued a promising first-quarter trading update.
Ericsson said group organic sales grew by
8% YoY, despite a sales decline in Mainland China of SEK -2.5 b. YoY and an IPR
revenue decline of SEK -0.5 b. YoY. Reported sales were SEK 54.9 (55.6) b.
Gross margin excl. restructuring charges
improved to 43.4% (38.2%) driven mainly by operational leverage in Networks. Q2
2020 was negatively impacted by inventory write-down and initial 5G deployments
in Mainland China. Reported gross margin was 43.4% (37.6%).
EBIT excluding restructuring charges
improved to SEK 5.8 b. (10.6%) from SEK 4.5 b. (8.2%) YoY driven by Networks.
Reported EBIT was SEK 5.8 (3.9) b.
Organic sales in Networks grew by 11% YoY,
driven by market share gains. Sales in Mainland China were SEK -2.0 b. lower
YoY. Reported EBIT margin was 21.7% (13.2%).
Organic sales in Digital Services were
stable YoY, despite a sales decline in Mainland China of SEK -0.5 b. YoY.
Reported EBIT (loss) was SEK -1.6 (-0.7) b., impacted by a write-down of SEK -0.3
b. for pre-commercial product investments for the Chinese market.
Reported net income was SEK 3.9 (2.6) b.
Free cash flow before M&A was SEK 4.1
(3.2) b. supported by higher incoming IPR payments. Net cash per June 30, 2021
was SEK 43.7 (37.5) b.
The RAN market outlook for 2021 has been
updated to 10% growth YoY, compared with previously 3% growth. Source: Dell’Oro
Commenting on this, the President and CEO of Ericsson, Börje Ekholm said;
Our strong business performance continued,
with an organic sales[1] growth of 8% in the quarter. This was despite a sales
decline of SEK -2.5 b. YoY in Mainland China. Networks continued to grow market
shares in the quarter with some significant wins. Group gross margin[2]
increased to 43.4% (38.2%).
We are well positioned to take advantage of
continued market momentum with our competitive 5G product portfolio and cost
structure. However, it is prudent to forecast a materially lower market share
in Mainland China for Networks and Digital Services as the earlier decision to
exclude Chinese vendors from the Swedish 5G networks might influence market
share awards.
Networks sales[1] grew organically by 11%,
despite lower volumes from delayed 5G deployment in Mainland China. This growth
reflects the continued high activity levels in most markets. The North East
Asia market outside Mainland China saw strong growth in 5G volumes.
Gross margin[2] improved to 47.9% (40.5%).
Through proactive and continuous measures for supply chain resilience we have
accelerated production to meet customer demand, and we are well prepared for
any challenges in the future. Our increased R&D investments have
accelerated product development. We strengthened our Cloud RAN portfolio
further with 5G mid-band and massive MIMO support for increased network
performance. Cloud RAN will enable service providers to seamlessly evolve their
networks towards cloud-native technologies and open network architectures,
meeting demand for more deployment flexibility. We continue on the successful
path of 5G wins in North America. We have signed another 5-year contract, this
one amounting to USD 8.3 b. (SEK 71 b.), with a leading customer. This is the
single largest deal in the history of Ericsson.
In Digital Services the strong momentum in
5G Core continued and we are ramping up R&D investments in the cloud native
5G portfolio. Organic sales were stable in the quarter. However, excluding the
reduced sales in Mainland China, sales[1] grew by 5%. Gross margin[2] decreased
to 37.9% (43.6%) YoY, mainly due to a write-down of SEK -0.3 b. related to
pre-commercial product investments for the Chinese market. A material loss of
market share in Mainland China, which contributed 5.4% of Digital Services
sales in 2020, would cause a delay in reaching the EBIT margin target for 2022.
A significantly reduced volume would lead to a limited loss in 2022 in Digital
Services.
Improvements are skewed towards the year
end 2022, as we expect to see a gradual increase in Core revenues. Based on our
strong portfolio, we expect to exceed our original EBIT margin target of 4-7%,
as sales in other markets over time will compensate for the reduction in
Mainland China. We see strong demand for our OSS, BSS and 5G core offerings,
positioning us well for longer-term profitability.
The new IPR agreement with Samsung
reaffirms the significant value of our patent portfolio and with this agreement
in place we are well positioned to conclude pending and future patent license
renewals. One additional agreement was signed in July. There is currently high
activity in renewal negotiations. As new contracts are concluded, revenues will
include retroactive payments for the unlicensed period prior to signing.
Whilst many markets are returning to normal
following the COVID-19 pandemic, we continue to see rising numbers of cases in
South East Asia, which may result in a slower recovery for impacted countries.
We continue to invest in compliance to
fully embed our commitments to ethical business practice, in all areas across
the organization. Ensuring all decisions are taken with integrity is a driving
force in our culture-change journey.
The opportunity from enterprise for 5G
provides an exciting growth path for Ericsson. Building on the strong
foundations of our core business we will continue to take a stepwise approach
to investing in growth in Dedicated Networks, IoT and the wireless portfolio
acquired with Cradlepoint. We foresee 20-30% annual market growth in
enterprise, with opportunities in automation, remote operations and safety
management across whole industry sectors such as smart manufacturing, ports and
airports, energy, mining, health and agriculture.
Enterprise use cases in 5G – and the
continuing growth in 4G – will drive the digital transformation of business
globally combining the high performance, low latency and security benefits of
wireless over traditional fixed networks. We are confident that wireless will
be the first-choice connection for global business in the 5G era.
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