For the first time in three years, mainland China didn't contribute to the quarterly total. Instead that market saw sales decline by SEK2.5 billion. However, sowing the seeds for Q3 Ericsson also confirmed today that it has signed the single largest deal in its history – an US$8.3 billion agreement with Verizon.
Under this, Ericsson will deploy its 5G MIMO C-band, low-band and mmWave solutions, expanding Verizon's 5G Ultra Wideband coverage.
On the financials, in Q3 last year, the firm said growth in mainland China had driven a 7% growth in sales. At the time, reported sales stood at SEK 57.5 billion while operating income – excluding restructuring charges and items affecting comparability – increased from SEK 6.5 billion to SEK 9 billion, driven by the networks division of the business. Reported operating income stood at SEK 8.6 billion while net income reached SEK 5.6 billion.
However, Q2 2021 looks very different with sales in mainland China down SEK2.5 billion. The results also showed that following the agreement with Samsung in December, IPR revenue declined by SEK0.5 billion year on year and reported sales came in at SEK 54.9 billion, compared to SEK 55.6 billion previously.
Commenting on the results, president and CEO, Börje Ekholm (pictured), said: "We are well positioned to take advantage of continued market momentum with our competitive 5G product portfolio and cost structure. However, it is prudent to forecast a materially lower market share in Mainland China for networks and digital services as the earlier decision to exclude Chinese vendors from the Swedish 5G networks might influence market share awards."
On IPR, Ekholm added: "The new IPR agreement with Samsung reaffirms the significant value of our patent portfolio and with this agreement in place we are well positioned to conclude pending and future patent license renewals. One additional agreement was signed in July. There is currently high activity in renewal negotiations. As new contracts are concluded, revenues will include retroactive payments for the unlicensed period prior to signing."
Q2 2020 was also negatively impacted by inventory write-down and initial 5G deployments – again in mainland China. Reported gross margin was 43.4%, compared to 37.6% last year.
Organic sales in networks grew by 11% year on year, driven by market share gains, but sales in Mainland China were SEK 2.0 billion lower year on year.
Organic sales in digital services were overall stable when compared to last year, but in mainland China saw sales declined by SEK 0.5 billion. Excluding this figure, sales grew by 5% and gross margin decreased to 37.9% from 43.6% last year, mainly due to a write-down of SEK 0.3 billion related to pre-commercial product investments for the Chinese market.
Ekholm warned: "A material loss of market share in mainland China, which contributed 5.4% of digital services sales in 2020, would cause a delay in reaching the EBIT margin target for 2022. A significantly reduced volume would lead to a limited loss in 2022 in digital services.
He continued: "Improvements are skewed towards the year end 2022, as we expect to see a gradual increase in core revenues. Based on our strong portfolio, we expect to exceed our original EBIT margin target of 4-7%, as sales in other markets over time will compensate for the reduction in mainland China. We see strong demand for our OSS, BSS and 5G core offerings, positioning us well for longer-term profitability."
Silver linings
Beyond mainland China the North East Asia market saw growth in 5G volumes and a 7.4% gain on last year's gross margin of 40.5%.
Ekholm said: "Through proactive and continuous measures for supply chain resilience we have accelerated production to meet customer demand, and we are well prepared for any challenges in the future."
He added that product development had gained pace this quarter with the cloud RAN portfolio strengthened with 5G mid-band and massive MIMO support.
Deflecting from the results in Asia, this morning a multi-billion dollar deal with Verizon was also announced. The US telco is to expand its 5G Ultra-Wideband coverage by deploying Ericsson's 5G MIMO C-band, low-band and mmWave solutions.
The deal builds on a longstanding relationship between the two: Ericsson delivered the first US-manufactured 5G base station to Verizon in July 2020. Their latest contract is the single largest deal in the history of Ericsson.
Niklas Heuveldop, president and head of Ericsson North America, said: “This is a significant strategic partnership for both companies and what we’re most excited about is bringing the benefits of 5G to U.S. consumers, enterprises and the public sector. We’re looking forward to working with Verizon to leverage solutions like Cloud RAN and our Street Macro, adding depth and versatility to 5G network rollouts across the U.S.”
Verizon CTO Kyle Malady added: “With this new agreement, we will be able to continue driving innovation and widespread adoption of 5G. We are pleased to continue this work through our long-standing relationship with Ericsson.”
