Ericsson on Wednesday reported high quarterly core earnings as demand for 5G network equipment stayed strong dspite the coronavirus outbreak.
Ericsson delivered a solid result during the first quarter, with limited impact from the Covid-19 pandemic. An important indicator of the company's strategy execution is the improvement in gross margin. The Q1 gross margin increased to 40.4% (38.5%) YoY, driven by improvements across segments. The company expects its industry to show resilience throughout the pandemic, and remains confident about its 5G product offering and cost structure.
"There is near-term uncertainty around sales volumes due to Covid-19 and the macroeconomic situation, but with current visibility we have no reason to change our financial targets for 2020 and 2022," said Börje Ekholm, President and CEO of Ericsson.
The company’s first-quarter adjusted quarterly operating earnings rose to 4.6 billion Swedish crowns ($455.16 million) from a year earlier.
Total revenue for the telecom equipment maker, a rival of China’s Huawei Technologies Co Ltd and Finland’s Nokia, rose 2% to 49.8 billion crowns.
Gross margin increased to 39.8% in quarter from 38.4% in the year-earlier quarter.
Ekholm said that "leading operators have awarded us several 5G Core contracts, which are expected to start generating material revenues from 2021."
Ericsson says that the company's 5G equipment is used in 29 live networks across four continents, incluing China.
On the other hand, while the company has been successful improving its position in Europe, Ekholm concerned that 5G investments in Europe are delayed. "This means that Europe may fall behind on a critical digital infrastructure for the future. The criticality of the digital infrastructure has been further evidenced during the pandemic. We believe governments should encourage 5G investments as a way to restart economies," Ekholm said.
"The financial targets for 2020 take into account an increasing share of strategic contracts, including 5G in China. We expect a larger share of these contracts to weigh on profitability in Q2 rather than being evenly distributed over the year. Operational improvements will continue and are expected to partly offset the negative impact."
The approved operator merger in North America is expected to build an even stronger 5G momentum and Ekholm expects investments to intensify during the second half of the year. However, the company's managed services contract is expected to be negatively impacted over time, starting in Q2.