Ericsson warns of trouble ahead but stays upbeat as results impress market
Ericsson delivered a fairly robust set of first-quarter results and clung to full-year guidance despite warning investors that COVID-19 could result in project delays and supply chain disruption this year as quarterly sales fell for the first time since early 2018.
First-quarter revenues fell just 2% year-on-year on a comparable basis, after growing by 7% in the year-earlier period. Sales were down at every one of the company's business units except networks, which registered zero growth after reporting a 10% increase in the year-earlier quarter.
Thanks to currency effects and takeover activity, reported revenues rose 2%, to 48.9 billion Swedish kronor ($4.9 billion), and Ericsson's share price gained 6% in Stockholm this morning as investors took encouragement from the update.
Even so, the the organic slowdown may rattle those concerned about the impact of European lockdowns and a worsening situation in North America, which contributed heavily to growth in the first quarter.
In his published comments, CEO Börje Ekholm said Ericsson was looking at "lower than normal sequential sales growth" for the second quarter because of the pandemic.
"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," he said. "In addition, while we have seen no material effects on our demand situation, it is prudent to believe that the slowdown in the general economy may lead some operators to delay investment programs."
Despite the warning, Ericsson made no changes to its target of a 10% operating margin for the full year and continues to expect full-year sales growth in the addressable market for radio access networks of 4% this year, based on figures published by market-research firm Dell'Oro at the start of this year.
But that was some weeks before COVID-19 was declared a pandemic by the World Health Organization and those figures may have to be revised.
Executives appear to hope that a major 5G deployment in China and continued investment activity in the US, where T-Mobile and Sprint recently finalized their merger, will more than compensate for the demand constraints in Europe and other countries.
"We see a number of countries actually accelerating investment in 5G and 4G capacity in response to the pandemic," said Ekholm on a call with analysts this morning. "We don't see a reason to have a different view from Dell'Oro, but of course it is an acceleration in the second half partly driven by China."
The Swedish vendor recently picked up more than 11% of a $5.6 billion 5G tender announced by China Mobile, the country's biggest operator, and Fredrik Jejdling, Ericsson's head of networks, says the award represents a slight increase in its market share, which Ericsson has previously estimated at about 10%. "We expect to have decisions from other Chinese operators at the end of the month," said Carl Mellander, Ericsson's chief financial officer, during today's call.
Table 1: Ericsson's Q1 headline results (SEK billions)
|Q1 2020||Q1 2019||Change|
|–Emerging business and other||1.6||1.8||-11%|
|Sales growth adjusted for comparable units and currency||N/A||N/A||-2%|
|Gross margin||39.8%||38.4%||1.4 percentage points|
|–Emerging business and other||-0.5||0||N/A|
|Operating margin||8.7%||10%||-1.3 percentage points|
That will initially put some pressure on profitability, but Mellander believes a continued efficiency drive will help to offset the impact on margins. In the first quarter, Ericsson's operating income was down 12%, to SEK4.3 billion ($430 million), producing an operating margin of 8.7%, while its net income dropped 5%, to around SEK2.3 billion ($230 million).
On the positive side, the company still looks in far better shape than it did when Ekholm took charge at the start of 2017, and the first-quarter profit performance was better than expected by analysts polled by market-research firm Refinitiv, according to a Reuters report.
Ericsson's net cash position of SEK38.4 billion ($3.8 billion) at the end of the first quarter also puts it in a strong position to withstand a prolonged pandemic and country lockdowns that extend into the summer months.
While it hopes for improvements later in the year, and sustained spending on 5G rollout by its customers, Ericsson can do nothing about delays to European spectrum auctions that will hinder its business activities in the region.
One uncertainty is whether COVID-19 will prompt service providers under sales pressure to reduce their planned investments in mobile networks this year. In countries under lockdown, most of the growth in data traffic has occurred on fixed-line broadband networks, and some operators may no longer see 5G as an immediate priority.
Asked by one analyst why mobile traffic would increase when movements are restricted, Ekholm said: "In some countries you see exactly the situation you describe – in countries with a very strong fiber network, for example – but there are a large number of countries that experience heavy growth in [mobile] traffic, so the picture is not as straightforward. In large parts of the world, people hardly have a fixed-line connection at home and rely on mobile for all connectivity needs."
When it comes to the coronavirus, the main impact in the first quarter was on Ericsson's digital services unit, where sales fell 9% on a like-for-like basis, to SEK7.3 billion ($730 million). Ericsson blamed the decline partly on the company's ongoing shift from hardware to software sales while acknowledging the virus had taken its toll.
"It is a bit more exposed on service delivery with people traveling to countries and going to customer premises, and that is a bit more difficult in this environment," said Ekholm.
Adjusted for comparable units and currency effects, Ericsson's managed services business showed a 5% dip in sales, to around SEK5.7 billion ($570 million), while revenues at its emerging business and other unit were down 8%, to SEK1.6 billion ($160 million).
Ericsson's update comes just a day after fierce rival Huawei reported a huge slowdown in sales growth, with revenues up just 1.4% for the first quarter after rising 39% a year earlier. Net income at the Chinese firm was down nearly 8%, to around $1.9 billion.
Like Ericsson, the company has flagged concern about the outlook in Europe as spectrum auctions are postponed and projects delayed.
- Huawei's hardest year starts with profit down $160M but sales up
- Ericsson shows unease as corona crisis continues
- Ericsson beats Cisco and Nokia to replace Huawei in BT core
- Amid COVID-19, China dependence no longer seems such a good idea
- COVID-19 will help China to extend its 5G lead
— Iain Morris, International Editor, Light Reading
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