The rollout of 5G in North America buoyed Ericsson’s second quarter financial results, arguably the highlight of a mixed quarter of declining year-over-year (Y/Y) sales, improving margins, and greater net income loss.

Networks performance

Networks is the core of Ericsson’s business and the bellwether for the company. Network revenue was SEK32.4 billion ($3.6 billion), down 1 percent Y/Y and 15 percent above the first quarter’s results.

Networks sales to North American operators, representing 35 percent of segment revenue, grew 11 percent Y/Y and 27 percent sequentially, which Ericsson attributed to investments in “5G readiness” by all major customers.

In comparison, sales to Northeast Asia, which includes China, declined 19 percent Y/Y and contributed 11 percent of Network sales in the quarter. Ericsson said the decline reflected reduced investments in LTE. Revenue to Europe was flat Y/Y and down in all other regions.

Ericsson estimates the radio access network (RAN) equipment market will decline 2 percent in 2018, reflecting reduced investments in LTE. North America is leading 5G investment and will be followed by the other regions, with estimated average annual growth of 2 percent over the period 2017 to 2022.

Company results

Ericsson reported total company sales of SEK49.8 billion ($5.6 billion), down 1 percent compared to the prior year’s quarter and up 15 percent sequentially. Gross margin was 34.8 percent, compared to 29.1 percent in the prior year’s quarter, and operating margin improved Y/Y from −1.1 percent to +0.3 percent. However, net income declined to SEK−1.8  billion, compared to SEK−0.5 billion in the year-ago quarter. The company generated SEK1.4 billion in cash from operations, although the free cash flow (subtracting capital and other investments) was SEK−0.6 billion.

The company said the number of employees at the end of June (2018) was 95,260, a net reduction of 2,321 during the quarter and 13,867 compared with June 30, 2017. The decrease reflects Ericsson’s cost reduction efforts to restore profitability.

During the second quarter of 2017, Ericsson launched a cost reduction program, committing to removing SEK10 billion. Ericsson said the program successfully achieved the objective and is now complete.

Investing in 5G

In parallel with restructuring, Ericsson has continued to invest in 5G, positioning itself to be a major player in the next-generation of mobile. In the earnings release, the company said “We will continue to invest in securing leadership in 5G. This includes further investments in R&D, to solidify our complete 5G portfolio, and investments in field trials.”