Ericsson announced its second quarter earnings last week with admittedly diminished results due to the pandemic. Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC), said the human toll caused by COVID-19, directly and indirectly through a weak economy, is increasingly clear.
“We continue to put the safety of our people as first priority, and more than 80 percent of our employees are currently working from home. Despite the difficult environment we delivered a solid result. Q2 organic sales were flat and gross margin improved to 38.2 percent (36.7 percent YoY), including negative effects from strategic contracts. Free cash flow before M&A improved to $350M. While the effects of COVID-19 create uncertainties, with current visibility we maintain the full-year targets for the Group,” Ekkholm said.
Networks grew by 4 percent organically and the gross margin was 40.5 percent absorbing a larger share of strategic contracts including 5G volumes in Mainland China where we also took an inventory write-down. The strengthened market position in Mainland China is strategically important as this market is expected to be a driver of critical future requirements and provide us with important scale. The Chinese 5G contracts are expected to be profitable over the life cycle, but had a negative contribution to gross margin in Q2.
Second quarter highlights:
- Gross margin excluding restructuring charges improved to 38.2 percent, including the earlier communicated inventory write-down related to mainland China
- Operating income excluding restructuring charges improved to $500M from $430M. (7.0 percent operating margin) driven by improvements in segment Digital Services
- Networks sales increased by 4 percent YoY. Networks operating margin excluding restructuring charges was 14.1 percent impacted by strategic contracts and the inventory write-down, partly compensated by operational leverage and a favorable business mix
- Gross margin improved driven mainly by higher software sales while sales declined by -5 percent
- Net income was $290M
- Free cash flow before M&A was $3250M Net cash June 30, 2020, was $4.16B
- The COVID-19 pandemic had a limited impact on operating income and cash flow in the quarter