After a lagging Q3, Ericsson NT posted a strong Q4 which sweetened the company’s FY 2018 results. Group sales are up 6% YoY, EBITDA 31% YoY and net profit amounted to HRK 113.6m (+67% YoY).
Ericsson NT held a conference yesterday during which the Management presented the company’s results and the outlook for the upcoming five years. Below we bring you an overview of Ericsson’s FY 2018 financial results and some key takes from the conference.
Sales in 2018 amounted to HRK 1.6bn, representing a 5.2% YoY increase. Sales in the domestic market amounted to HRK 372.6m, marking a high growth rate of HRK 34.7% YoY. The high growth rate can be attributed to the local operators’ investment in mobile networks modernization and digital transformation projects. In 2018 the Group worked closely with Croatia’s two largest telcoms, HT and A1, to modernize their radio access networks. The goal of the modernization is to prepare the infrastructure of those companies for the implementation of the 5G network in the upcoming years. The uptake of the new technology would be a strong push for Ericsson as the company is currently at the forefront of the new technology wave in Croatia. Meanwhile, the Group has also been working with Tele2 on increasing their voice core network capacity, with emphasis of increasing the register of 4G users.
On the flip side sales in export markets are down by 17.7% YoY to HRK 229.8m caused by the ramping down of network modernization projects and challenging economic and political environments in some markets. However, despite the decrease in sales recorded by the segment, one should highlight the project of healthcare system informatization in Kazakhstan which stands out by its significance and business impact. Services to Ericsson continued to grow, reaching HRK 955.8m (+3.2% YoY) as the Group’s s R&D Centre was awarded an expansion of responsibilities in the development of 5G network systems.
Sales-wise, one should highlight the concern regarding the high share which the parent company has in the Group’s sales. As one can see on the chart below, Ericsson NT’s parent company has been responsible for more than half of the Group’s sales for the past several years.
Ericsson NT Sales Breakdown
Source: Ericsson NT, InterCapital Research
As a result, any kind of volatility in the parent company’s business operations could have a strong impact on the Group. Furthermore, with a local market share of roughly 80% the possibilities for the domestic market to take additional share in total sales seems slim. However, the Management stated that the development of new technologies (5G in particular) could yield new projects and thus secure new income in the future.
Higher sales coupled with an improved efficiency and cost cutting led to an increase in the Group’s EBITDA which amounted to 153m (31%). EBITDA margin grew as well, ending the year at 9.8% (+1.9 p.p.).
Below the operating line the company benefited from an improved FX result which turned positive to HRK 2.3m, from a loss of HRK -2.6m recorded in 2017. This gave an additional leg up to the company’s bottom line which soared 67% YoY to HRK 113.6m. Also note that the company’s effective tax rate has decreased to 5.8% (-1.3 p.p. YoY) because of the realization of projects in line with the Investment Promotion Act.
On the balance sheet the company still maintains a strong cash position with total cash and cash equivalents, including short term financial assets, amounting to HRK 236.4m (28.1% of the total assets).
It is also worth highlighting that the cash flow from operating activities is down by 30.5% YoY to HRK 75m. According to the Management this is due to higher inventory in connection with the ongoing networks modernization projects.
When talking about their outlook until 2024 the Management stated that they will continue to uphold high standards of business efficiency and cost cutting, however investments into the further development of 5G technology could impact short term profitability. Nevertheless, the Management believes that this will be the key to securing future growth and a strong market presence.
When talking about their outlook until 2024 the Management stated that they will continue to uphold high standards of business efficiency and cost cutting, however investments into the further development of 5G technology could impact short term profitability. Nevertheless, the Management believes that this will be the key to securing future growth and a strong market presence.
