Ericsson Network Sales Grow in Q2 on North American Investment in 5G

Ericsson reported improved sales growth at its core networks business in Q2, driven by investment at North American operators in 5G. However, increased R&D spending and restructuring costs meant the company’s net loss widened.

Total revenues for the second quarter reached SEK 49.8 billion, down 1 percent from a year earlier. The Networks division posted sales up 2 percent to SEK 32.4 billion, as the expansion in the US offset weakness in parts of Asia. Networks also improved the gross margin before restructuring costs to 40.2 percent from 36.0 a year ago, thanks to an improved sales mix and cost reductions.

The gross margin also improved at the Digital Services (43%) and Managed Services (14%) divisions, helping the group result rise to 34.8 percent from 29.1 percent a year ago. Operating profit also improved, to a positive SEK 0.2 billion versus a loss of SEK 0.5 billion a year earlier. However, the operating margin of 0.3 percent is still a long way off Ericsson’s target of 10 percent in 2020.

CEO Borje Ekholm said the investments in technology have strengthened the gross margin and the R&D spending will continue. This contributed to the increase in operating expenses to SEK 17.2 billion in Q2 from SEK 15.4 billion a year ago. The company also took a higher provision for variable compensation and increased provisions for overdue trade receivables, offsetting continued cuts in SG&A costs and loss of another 2,000 jobs in the quarter.

Ericsson said it’s completed the SEK 10 billion cost reduction programme started a year ago, with in total more than 20,000 jobs cuts. However, efficiency efforts will continue in the rest of this year, leading to total restructuring charges of SEK 5-7 billion for the full year.

The additional costs led to a net loss of SEK 1.8 billion in the quarter, up from a loss of SEK 0.5 billion a year ago. However, operating cash flow improved to a positive SEK 1.4 billion, and free cash flow reduced to a negative SEK 0.6 billion from minus SEK 1.3 billion a year earlier.

On the outlook, Ericsson said it expects to complete the sale of its Media Solutions unit by the end of Q3. The company maintained its forecast for the RAN market to contract around 2 percent this year but show a positive CAGR of 2 percent in the period 2017-22 on strengthening demand for 5G. Seasonal trends suggest a small sequential decline in Q3 and a strong rebound in sales in Q4. – Telecompaper