Business results of Ericsson Nikola Tesla Group in H1 2020
Gordana Kovačević, the President of Ericsson Nikola Tesla, commented:
“The extraordinary circumstances, caused by the COVID-19 pandemic that marked the end of Q1 2020, continue. Although during May and June many countries started relaxations of strict measures of movement and distancing, the movement of people and goods is still limited and impacts the global business environment. Since Ericsson Nikola Tesla Group operates globally, these disruptions negatively impact certain part of our business activities. Some customers and partners slowed down or postponed the implementation of contracted projects and reduced their investments. We have also noticed a trend of an increasing number of requests to postpone collection of receivables and new payment models. Our priority is to secure the health and safety of our employees, customers, partners and suppliers, as well as the continuation of stable business performance. Therefore, most of our employees continue to provide services/support to our customers by working remotely, while some of them work from offices. In addition, due to restrictions in travelling our employees cannot carry out some of the activities.
In H1 2020, sales revenue increased by 17.6% year-over-year, primarily as a result of taking over the full responsibility for delivering the services of build and maintenance of Hrvatski Telekom’s (HT) telecommunications infrastructure (network managed services). The cooperation with HT in radio part of the network, which started with network modernization two years ago, has continued by signing the first 5G agreement in Croatia, making our company the exclusive supplier of the radio part of HT’s network until 2024. By signing this agreement, HT became one of 99 providers of communication services worldwide that decided to implement Ericsson’s 5G technology.
Furthermore, in the operator segment in the domestic market, we continue to provide quality support to our long-term partner A1 Hrvatska in additional modernization and expansion of telecom network.
In the segment of ICT solutions for Industry & Society, we signed a new contract in the field of the Joint Information System of Land Registry and Cadaster (JIS). In the healthcare segment, we have continued the maintenance of the national IT health system - CEZIH.
In export markets, sales revenue is somewhat lower year-over-year, due to the negative impact of COVID-19 on the dynamic of operators' investments. Despite the current circumstances, we continue a good cooperation with the operators HT Eronet (Bosnia & Herzegovina), IPKO (Kosovo), and Crnogorski Telekom (Montenegro). We would like to highlight the continuation of activities on the LTE network expansion for the operator beCloud (Belarus).
The delivery of services to Ericsson has been continuously growing due to new responsibilities, the quality of the performed activities and the competences of our experts in R&D Center, as well as Services and Solutions Expert Centers. Along with the R&D Center’s activities on the development of new functionalities, I am proud that our experts were among the first to work on the implementation of 5G networks for Ericsson Corporation. Despite the challenging situation related to COVID-19 and the fact that many employees are working from home, the activities are ongoing as planned.
Looking at the financial indicators at Group level, gross margin decreased to 7.7% as a result of business mix due to taking over the full responsibility for managed services for HT, transformation and restructuring costs, as well as the impact of COVID-19 since March 2020. Operating profit was down by 49% year-over-year, amounting to MHRK 42.7, as a result of lower gross margin and higher selling and administrative expenses. Selling and administrative expenses were higher primarily due to an increased engagement on presales activities related to 4G/5G radio access and core networks, and higher expenses related to managed services with HT. Net profit amounted to MHRK 35.0 and Return on Sales (ROS) was 3.6%. We concluded H1 2020 with a solid balance sheet and an equity ratio of 35.2%. A strong cash flow from operating activities was realized, amounting to MHRK 157.6. At the end of H1, total cash and cash equivalents, including short-term financial assets, amounted to MHRK 290. The Group’s Working Capital Efficiency, expressed in Working Capital Days (WCD), was 42 days, and if we exclude services to Ericsson, Working Capital Efficiency was 87 days. Cash conversion rate was 224%.
The project of energy efficiency and the use of renewable energy sources in Ericsson Nikola Tesla, co-financed by the EU from the European Structural and Investment Funds is ongoing as planned, and we expect a successful realization until the end of 2020.
The crisis caused by COVID-19 pandemic clearly shows the important role that telecommunications and introduction of digital services have for the economy and society. We believe that encouraging investments in 5G and digital transformation will have a positive impact on the recovery/development of the economy, attracting investments and speeding up technology innovations, while for the creative individuals it will open opportunities for innovation and business development. In terms of operator segment, the growth of data traffic requires additional customers’ investments in networks modernization and expansion in order to secure new services for end-users and high network quality.
The inability to predict the development of the pandemic represents one of the major challenges in risk management. Therefore, we remain focused on detailed business planning, risk monitoring, cost and operating efficiency and we undertake the appropriate measures in order to mitigate the negative impact on our business performance. New circumstances show daily the advantages of digitalization; therefore, the Group's long-term strategy remains unchanged, and the ongoing process of the Company’s digital transformation remains one of our priority tasks. Our advantage is technology leadership, competent, innovative and motivated employees and partnership with customers. Out of 3200 employees of Ericsson Nikola Tesla Group, 1500 work in the largest Croatian R&D Center that significantly contributes to the development of 5G networks functionalities within the Ericsson’s global R&D community. “