Ericsson Q2 financial report: Revenue increased by 8% year-on-year and received the largest order in history of US$8.3 billion

Jiwei.com reported that Ericsson recently released its second quarter 2021 financial report. The report showed that in the second quarter of 2021, Ericsson's sales were 54.9 billion Swedish kronor (about US$6.3 billion), a year-on-year increase of 8%. Among them, sales in mainland China decreased by 2.5 billion Swedish kronor (about US$290 million) year-on-year.

In addition, Ericsson said it has signed another five-year contract with a major customer for $8.3 billion (71 billion Swedish kronor), its largest deal ever.

Second quarter earnings highlights:

Group organic sales increased by 8% year-on-year to SEK 54.9 billion (SEK 55.6 billion in the same period of 2020).

Gross margin excluding restructuring charges improved to 43.4% (38.2% in the same period of 2020). Reported gross margin for the quarter was 43.4% (37.6% in the same period of 2020).

EBIT before restructuring charges increased year-on-year from SEK 4.5 billion (EBIT margin 8.2%) to SEK 5.8 billion (EBIT margin 10.6%), driven by Networks. Reported EBIT was SEK 5.8 billion (SEK 3.9 billion in the same period of 2020).

Organic sales in the Networks business increased by 11% year-on-year, driven by market share gains. The reported EBIT margin was 21.7% (2020: 13.2%).

Reported net profit of SEK 3.9 billion (SEK 2.6 billion in the same period of 2020).

Free cash flow before acquisitions was SEK 4.1 billion (SEK 3.2 billion in the same period of 2020), driven by higher intellectual property payments. Net cash flow was SEK 43.7 billion (SEK 37.5 billion in the same period of 2020) as of June 30, 2021.

The outlook for the RAN market in 2021 is updated to 10% year-on-year growth, compared to 3% previously. Data source: Dell'Oro.

Börje Ekholm, President and CEO of Ericsson, says:

Ericsson's strong business performance continues. In the second quarter, Ericsson achieved organic sales growth of 8%[1]. This was achieved despite a year-on-year sales decline of SEK 2.5 billion in Mainland China. Ericsson's Networks business continued to gain market share due to some important order wins. The Group's gross margin[2] increased to 43.4% (38.2% in the same period of 2020). With a competitive 5G product portfolio and cost structure, Ericsson will be better positioned to seize market opportunities. Sweden's decision to exclude Chinese manufacturers from the construction of Sweden's 5G network may have an impact on our market share, and we cautiously expect market share losses in the Networks and Digital Services business in Mainland China.

Despite lower sales due to lower 5G deployments in Mainland China, Ericsson's Networks business sales[1] still achieved an organic growth of 11%. This fact reflects Ericsson's continued high performance in most markets. Outside of Mainland China, 5G sales in Northeast Asia grew strongly. Gross margin[2] increased to 47.9% (40.5% in the same period of 2020). Our supply chain remained resilient due to active and continuous measures, allowing us to accelerate production to meet customer needs and prepare for future challenges. Our increased investment in R&D has accelerated product development. We further strengthened our Cloud RAN portfolio with 5G mid-band and massive MIMO support, improving network performance. With Cloud RAN, operators will be able to seamlessly evolve their networks to cloud-native technologies and open source network architectures to meet the demand for greater deployment flexibility. In North America, our 5G business continued to be successful. We have now signed another 5-year contract with a major customer for USD 8.3 billion (SEK 71 billion). This is Ericsson's largest deal ever.

In Digital Services, we continued to see strong momentum in 5G Core and are increasing our R&D investments in our cloud-native 5G portfolio. Organic sales were stable in the quarter. Excluding China, we achieved sales growth of 5%[1]. Gross margin[2] decreased year-on-year to 37.9% (43.6%), mainly due to a SEK 0.3 billion impairment charge on pre-commercial products in China. China accounted for 5.4% of Digital Services sales in 2020. The significant decline in market share will delay Ericsson's 2022 EBIT margin target, but will have limited impact on Digital Services in 2022. We expect Core revenue to increase gradually, so the turning point may come in late 2022. Over time, sales in other markets will gradually offset the impact of lower sales in China with a strong portfolio. As a result, we expect to exceed our original EBIT margin target of 4-7%. The market has responded strongly to and has huge demand for our OSS, BSS and 5G core network products, which has created good conditions for our long-term profitability.

The new IP agreement with Samsung reaffirms the significant value of our patent portfolio. With this agreement, we will be able to smoothly complete the pending and future patent license renewals. In July, we also signed another agreement. We are currently actively negotiating renewals. With the signing of the new contract, retroactive payments for the period of unlicensed licenses before the signing will also become a source of income for us.

While many markets are recovering from the impact of the epidemic, the number of cases in Southeast Asia is still increasing, which may lead to a slower recovery in the relevant countries.

We will continue to strengthen our firm commitment to ethical compliance and fully demonstrate this commitment in all areas of the company. Our commitment to base all decisions on integrity is the driving force behind our corporate culture change.

The business opportunities presented by enterprise 5G provide an exciting growth path for Ericsson. Building on the solid foundation of our core business, we will continue to take a step-by-step approach, investing in private networks, IoT, and the wireless portfolio acquired through the acquisition of Cradlepoint. We expect the enterprise market to achieve annual growth of 20-30%. Opportunities exist in various areas such as automation, remote operations and security management in industries such as smart manufacturing, ports and airports, energy, mining, healthcare and agriculture. 5G enterprise use cases and the continued growth of 4G will combine the high performance, low latency and security advantages of wireless networks over traditional fixed networks to drive digital transformation around the world. We believe that in the 5G era, wireless networks will become the preferred connection method for enterprises around the world.