Ericsson NT published their FY 2019 results yesterday which they presented at an analyst conference held at their headquarters in Zagreb. Today we bring you an overview of those results, coupled with some key takes from the conference.
In 2019 Ericsson NT’s sales went up 14.2% YoY, amounting to HRK 1.8bn with sales growth witnessed in all markets. During 2019, Ericsson NT’s focus remained on network modernization for their customers in Croatia and abroad, development of new solutions in 5G, and strengthening of their technological leadership.
Sales in the domestic market amounted to HRK 497m, marking a high growth rate of 33.4% YoY. Note that this represents the second year in a row that Ericsson NT’s domestic market sales grew more than 30%, thus almost doubling their sales in two years’ time. Ericsson’s operations on the domestic market in 2019 were marked by projects connected with the preparation of both HT’s and A1’s network infrastructure for the commercial introduction of 5G technology after the necessary radio-frequency spectrum is assigned for it. Meanwhile, Ericsson NT also worked with Tele 2 to increase the database capacity with 4G user information and upgrade of the entire core network to the latest software release.
Export markets sales increased by 10.8% YoY, amounting to HRK 254.6m. From this market one should highlight that, in Bosnia and Herzegovina, 2019 was marked by the issuing of the long-awaited licenses for introduction of the fourth generation of mobile communications. As a result, Ericsson NT worked with the operator HT Eronet on the expansion of LTE network across Bosnia and Herzegovina. In other parts of the regions Ericsson NT continued to cooperate on modernization and maintenance of telecommunication networks with the operators Crnogorski Telekom (Montenegro) and IPKO (Kosovo). In the market of Belarus, the company continued their cooperation with the operator beCloud on the project of LTE network expansion. In ICT Industry & Society segment Ericsson NT signed an agreement on the continuation of healthcare system maintenance for the needs of the Ministry of Healthcare of Armenia. Also note that the project of healthcare system informatization in Kazakhstan, which was obtained in 2018, has successfully completed the managed services phase and entered the maintenance phase.
In the Ericsson market, sales passed the HRK 1bn mark, representing a 7.5% YoY increase. The increase came as a result of Ericsson NT’s continues increase of R&D responsibilities in the 5G area.
Of the total sales revenue, domestic market accounts for 28%, services to Ericsson account for 57.7% (of which 10.4% is related to Managed Services in Croatia), while other export markets account for 14.3%.
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 above, Ericsson NT’s parent company has been responsible for more than half of the Group’s sales for the past several years. As a result, any kind of volatility in the parent company’s business operations could have a strong impact on Ericsson NT. However, some changes in the sales structure will be occurring during 2020, but more about that later.
Before we continue to the operating and bottom line there is one important thing to take into consideration. In 2018, Ericsson NT’s results were positively impacted by the incentives based on the Investment Promotion Act, while in 2019, the positive impacts of this Act are visible exclusively in the tax liability decrease, i.e. effective tax rate.
Gross profit amounted to HRK 164.5m which represents a 16% YoY increase. The rise in gross profit can be attributed to higher sales revenue. Meanwhile the gross margin remained stable at 9.2% (compared to 9.1% recorded in 2018). Thus, showing the stability of ongoing and completed projects’ gross margins.
EBIT amounted to HRK 102.6m, representing a 14.5% YoY increase, due to the abovementioned tax incentives.
Finally, the bottom line amounted to HRK 102.6m, representing a 9.7% YoY decrease. Meanwhile the net profit margin also fell, amounting to 5.7 (-60 bps).
Ericsson NT Key Financial (HRK m)
What to expect in 2020
Earlier this year Ericsson NT announced that they are taking over the full responsibility for building and maintaining HT’s telecommunications infrastructure from their parent company. Since Ericsson NT previously acted as a sub-contractor of the global Ericsson, this revenue was recorded under the Ericsson market and ranged between HRK 160-180m every year (in 2019 it a was HRK 188.5m). Now as the company took over the full responsibility on to themselves, the expected contribution to the top line is around HRK 500m or more, however note that the HRK 180m recorded through the Ericsson market will disappear. Still, a nice net increase of roughly HRK 300m can be expected.
Furthermore, with the recent acquisition of Tele 2 Croatia by the United Group an opportunity to re-establish cooperation in providing telecommunication equipment and services to Tele 2 Croatia has emerged. If Ericsson NT manages to secure any kind of new deal with the new management, one could expect a positive contribution to the top line in the final quarter of this year.
However, we’d like to end on a bit more warily note. Our estimate is that 2020 will definitely be a year of both risks and opportunities for Ericsson NT. On one hand, new revenue from new responsibilities and potential cooperation could boost results, but on the other hand CAPEX from major Croatian telcoms is expected to decrease as they have all successfully prepared themselves for the unveiling of the 5G network. Furthermore, the licenses for the 5G radio-frequency spectrum will be allocated in the second part of 2020 and surely one cannot expect additional revenue from 5G operations to start pouring in instantaneously. Finally, as Ericsson NT holds a market share of more than 80% on the domestic market, the company will have to work closely with their customers in order to design new profitable services and projects for the upcoming new technology.