Your browser is not supported. Please update it.

27 July 2020

Second quarter results show Ericsson’s stability, but China crisis looms

Ericsson and Nokia are engaged in their habitual impersonation of a German weather house, in which as one figure emerges, the other retreats into the shadows. Currently, it is Ericsson’s turn to shine. After a couple of difficult years, it has recently delivered improved financial stability – particularly welcome to customers and investors during the current crisis – and a string of high profile 5G contracts.

Meanwhile, Nokia is going through a downturn, after the 5G setbacks of late 2019 and the current change of management, which combine to make it less robust to cope with economic uncertainty, and less well-positioned to take advantage of Huawei’s far greater woes. These factors also make it vulnerable to unwelcome takeover advances and to loss of customer confidence, driving it to take radical action to outwit Ericsson in new growth areas such as industrial 5G (see separate item).

Ericsson’s second quarter results would have seemed uninspiring in normal times, but in the current climate, they were reassuringly solid, suggesting that the Swedish company’s recent recovery is substantial enough to be maintained even in the teeth of global slowdown.

The vendor reported a healthy 40% year-on-year leap in net income to $290m, on sales that rose by 1% year-on-year to $6.15bn.

All eyes are on the vendors’ and operators’ second quarter results, since these will provide far better indicators of the impact of the Covid-19 pandemic than the results for Q120, in which most countries had not yet been significantly affected by the crisis.

Ericsson had managed expectations by warning, in advance, that its second quarter results would be slightly softer than normal because of pandemic-induced uncertainty among customers and the supply chain. However, the company said it remained confident that it would hit its financial targets for 2020 and 2022 without adjusting them for the pandemic.

The main area of decline in revenues in Q2 was legacy equipment – 2G, 3G and even 4G networks, as opposed to 5G, or 5G-ready LTE, systems. This is hardly surprising and not necessarily related to the pandemic, though there are early signs in Rethink’s operator surveys that the crisis is pushing many operators in one of two directions – to accelerate their preparations for 5G, implementing 5G-ready equipment at an earlier stage in order to reap the increased efficiencies of the platform; or to suspend network expansion and upgrade and wait until the economic situation is more certain.

Either route hits legacy equipment sales, but Ericsson CEO Börje Ekholm, on the earnings call, highlighted the way that, as Rethink’s studies indicate too, Covid-19 is increasing demand for cloud-native and 5G core platforms. A brief period of hunkering-down may be a useful breathing space for some telcos, especially in markets where 5G spectrum and services are not yet rolling out, but the crisis has certainly focused the minds of many on planning the most cost-efficient and agile network possible, not just to release pressure on hard-pressed cash reserves, but to increase the operator’s ability to cope with the unexpected.

Ekholm said: “We’ve been impacted by Covid-19 and related market uncertainty, and we have also seen a decline in our legacy portfolio. However, we see a strong demand for our cloud-native and 5G core portfolio.”

He said that 5G network deployments running on Ericsson equipment were up 86% compared to the previous quarter. “We now have 99 commercial 5G contracts and 54 live 5G networks performing across 27 countries,” he said. At the end of the first quarter, the company had 86 commercial 5G contracts and 29 live networks, and at the end of 2019 the figures were 78 and 24 respectively.

The second quarter results saw overall network equipment sales total $4.41bn, up 5% year-on-year, indicating that 5G growth is outpacing legacy network decline. However, the other main business units reported lower revenues – digital services declined by 5% year-on-year to $950m and managed services’ revenues were down 12% to $620m.

Ericsson said it planned to boost R&D spending on digital services but most of that would be focused on the 5G core, in line with the company’s strategy, since Ekholm took over as CEO in January 2017, to concentrate on core competencies such as 5G networks, rather than try to diversify into other platforms or into non-telco markets.

One risk factor for Ericsson’s ability to continue with its stable performance in the year ahead is, of course, China. In the most recent wave of Chinese 5G contracts, Ericsson strengthened its position in the country, winning deals with all three telcos. Its share of the huge RAN awards was dwarfed by that of Huawei and ZTE, but increased its overall penetration of the world’s largest 5G market, especially as Nokia missed out in the RAN (though it won some 5G core business).

However, it is possible that China will impose sanctions on western suppliers in retaliation for bans on Huawei 5G kit in the USA, UK and others (see separate item). Or at least, it may put pressure on operators to buy Chinese-first to an even greater extent than they already do, effectively shutting Ericsson and Nokia out of this huge opportunity – which will only get larger as a result of the significant 5G component in China’s vast Covid-19 recovery fund.

Ekholm remained confident about China, and certainly, the telcos do not want their vendor choices restricted any more than their counterparts in the west do. Ericsson has invested large sums in buying 5G share in China, a gamble which led to a $108.5m inventory writedown related to pre-commercial 5G equipment provided as part of the bid to win Chinese contracts. The popularity of Ericsson’s 5G-ready equipment in China, and its willingness to offer keen pricing, have both been credited with its increase in sales to the country, despite the geopolitical tensions surrounding Huawei. But Ekholm insisted Ericsson will achieve profitability through the duration of the Chinese contracts, which is important when other key markets, notably Europe, are dragging their feet in 5G (see separate item).

He said Ericsson’s share of the European mobile networks market is “a touch north of 30%). Regarding the UK’s decision to ban Huawei from 5G networks, he said: “What we have had for a period of time now is very uncertain — who is approved, who’s not approved, what’s going to happen, what’s not going to happen? That has

created an environment for our customers that are not friendly for investments.”