Ericsson's SEK1.8 billion net profit for Q2 is driven by 5G uptick

The company has supplied equipment to 15 live 5G networks as of the end of the second quarter.
Written by Campbell Kwan, Contributor
(Image: Corinne Reichert/ZDNet)

Ericsson has revealed its net income increased to 1.8 billion Swedish kronor (SEK) for Q2 2019, a reversal of the SEK1.8 billion net loss it accrued in the same period a year ago. The uptick has primarily been driven by new 5G contracts and the increased roll out of the next-generation networks, according to the Swedish equipment maker.

"We see strong momentum in our 5G business with both new contracts and new commercial launches as well as live networks. To date, we have provided solutions for almost two-thirds of all commercially launched 5G networks," Ericsson president and CEO Börje Ekholm said.

The company's overall sales for Q2 grew 7% year over year, up to SEK54.8 billion, and its overall gross margin increased from 34.8% to 36.6% year over year. R&D expenditure remained steady at SEK9.5 billion.

Taxes for the quarter came to SEK1.5 billion, an increase of SEK300,000 from the year prior, which equates to a 44% tax rate and includes a non-recurring major tax provision. 

Delving into Ericsson's various segments, the Network segment -- its core business -- was the most successful of the bunch, gaining net sales of 37.8 billion kronor, an increase of 11% from 32.4 billion kronor the year prior. This accounted for almost 70% of the company's entire net sales for the quarter. 

The 11% increase was due to 4G and 5G investments in North America and North East Asia, Ericsson said.

The Network segment's operating income was SEK5.7 billion, a 60% increase from the SEK3.5 billion from the previous year. Operating margins for Ericsson's networking segment for Q2 was 15%, which is currently meeting the company's target for its Network segment to generate an operating margin of 15-17% by 2020. 

"5G momentum is increasing. Initially, 5G will be a capacity enhancer in metropolitan areas. However, over time, new exciting innovations for 5G will come with IoT use cases, leveraging the speed, latency and security 5G can provide. This provides opportunities for our customers to capture new revenues as they provide additional benefits to consumers and businesses," Ekholm said.

See also: Deutsche Telekom and Ericsson push microwave link over 100Gbps

Ericsson's Digital Services segment continues to be in the red however, recording operating losses of SEK1.4 billion. This was an improvement from Q2 2018, when the Digital Services had an operating loss of SEK2.4 billion.

A key activity to turnaround the Digital Services segment, Ericsson said, will be to complete, re-negotiate, or exit various customer contracts that are not critical to the business.

"New ways of working and investments in automation to further improve R&D efficiency as well as investments in the new portfolio of 5G and cloud-native products will continue to strengthen the current market position and prepare Digital Services for profitable growth," Ericsson said.

Ericsson's Managed Services business, meanwhile, remained somewhat steady in Q2 2019, with net sales dipping slightly from 6.5 billion kronor to 6.3 billion kronor year over year. Similarly, its operating income only changed slightly from 300,000 kronor in Q2 2018 to 200,000 kronor for the current quarter.

During the last quarter, Ericsson launched a new AI-based managed services offering for operators -- the Ericsson Operations Engine -- which it expects will enhance its customer offerings in its Managed Services business by relying more on automation, machine learning, and artificial intelligence, and improve the long-term margin profile of the business.

North America continues to be where Ericsson does best, with SEK17.7 billion of the company's net sales in Q2 2019 being accounted for by that region. This was followed by Europe and Latin America, where Ericsson made SEK14 billion in net sales, and South East Asia, Oceania, and India at SEK6.9 billion.

Ericsson is currently building a 5G factory in the US which is expected to be running sometime early next year. Ericsson is also currently signed on by T-Mobile, Verizon, Sprint, AT&T, US Cellular, and GCI to help build out their respective 5G mobile networks. 

According to the Ericsson's latest mobility report, North America is expected to lead in the adoption of 5G, with the company predicting that 63% of North American mobile subscriptions will be 5G-based in 2024.

At the close of the quarter, Ericsson's network business supplied equipment to 15 live 5G networks.

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