5G to the fore as Ericsson beats expectations in financial year

Modest quarterly and annual sales have translated into strong profits in both the fourth quarter and 2020 calendar year for communications technology provider Ericsson, with network sales and 5G making healthy contributions.

For the fourth quarter of the year, sales adjusted for comparable units and currency were SEK69.6bn (£6bn) growing by 13% on an annual basis, driven by sales in Northeast Asia, Europe and North America. Gross margin excluding restructuring charges inched up just over three percentage points from 37.1% to 40.6%, with margin improvements in all segments. Operating income excluding restructuring charges improved annually by 80% to SEK11bn, while reported net income was SEK7.2bn.

For the full year, sales grew by 2% annually to SEK232.4bn, with reported operating income almost trebling in a year to SEK27.8bn. Reported net income was SEK17.6bn, growing significantly from the SEK1.8bn reported at the end of 2019.

Looking at highlights for the year, Ericsson noted that network sales grew organically by 20%, reporting a gross margin of 43.5% for the fourth quarter. It said this reflected continued high activity levels in North America and Northeast Asia, and also in Europe where it further increased market share.

The gross margin at the digital services division rose from 38.1% to 41% in the fourth quarter. From 2017 to 2020, gross margin excluding restructuring charges and items affecting comparability increased from 29% to 42%, as a result, said Ericsson, of a streamlined product portfolio, fewer critical contracts, a growing portion of software sales and lower service delivery costs.

Noting that it continued to execute on its turnaround plan, and that the division’s fourth-quarter operating income of SEK500m was the best quarterly result to date, Ericsson also revealed that its cloud-native 5G portfolio had a high win ratio and that “significant” new customer contracts would start to generate revenues during the next 12 to 18 months. The company said it ended the year with 127 commercial 5G contracts and 79 operating networks around the world. The company said it would aim to capture further opportunities by selective research and development (R&D) investments to accelerate the growth of its portfolio.

The managed services division delivered a gross margin of 17.7% in the fourth quarter, up just over two percentage points even though sales declined on operator consolidation in the US last year. The full-year 2020 operating margin was above target at 8.1%. Ericsson anticipated margin profile to improve further due to increasing sales of its Operations Engine with its high value-added services, driven by R&D investments in artificial intelligence (AI) and automation.

Emerging business and other sales lines grew in enterprise offerings such as internet of things (IoT) platforms, complemented by Ericsson’s acquisition of Cradlepoint in September 2020. Ericsson said the business would drive new revenues for mobile service providers and strengthen its position in the 5G enterprise market, alongside the existing dedicated networks and IoT portfolio.

Reported sales and costs for Cradlepoint were impacted by purchase price allocations, however, and 2021 operating margin is expected to be negatively impacted by approximately one percentage point due to amortisation of intangibles and increased cost for market expansion.