Business results of Ericsson Nikola Tesla Group in Q1 2020
Gordana Kovačević, the President of Ericsson Nikola Tesla, commented:
“The beginning of 2020 will be remembered by the COVID-19 pandemic, which changed our everyday business and personal lives. With the aim to limit the spreading of the virus, Croatia, and countries worldwide, introduced numerous measures of social distancing, which slowed down and/or stopped the movement of people and equipment and impacted the realization of contracted projects and customer investments. Due to the fact that Ericsson Nikola Tesla Group operates globally, we estimate that all the above mentioned could negatively impact a certain part of our business, slow down investments, realization of contracted projects and collection dynamics of customer receivables. In addition to COVID-19 pandemic, at the end of March, Zagreb and its surrounding area were hit by the most powerful earthquake in the last 140 years, with 5.5 magnitude on the Richter Scale, which additionally burdened business performance, in already complex circumstances and caused damage to buildings and equipment. In this situation, our priority in business decision making is the health and safety of our employees, customers, partners and suppliers. Therefore, we have timely enabled a majority of our employees to work remotely and are proud of their dedication and engagement in providing services/support to our customers. We would like to thank Ericsson Nikola Tesla Group's Crisis Management Team who, in addition to their regular activities, have been providing quality support to employees, reaching decisions, securing necessary protection equipment, and regularly and transparently communicating with Ericsson Nikola Tesla Group’s employees with a lot of enthusiasm and motivation since February 25.
In Q1 2020, Ericsson Nikola Tesla Group realized solid results with a limited impact of COVID-19. Sales revenue increased by 26% year-over-year to MHRK 487.7, primarily due to significant sales revenue growth in the operator segment in the domestic market. Along with increased activities on modernization and expansion of operators’ networks capacities in the domestic market, I would like to highlight that in the beginning of 2020 we took over from Ericsson Corporation the full responsibility for the Managed Services of build and maintenance of HT’s telecommunications infrastructure, which are services delivered by our daughter company Ericsson Nikola Tesla Servisi d.o.o.. During Q1 2020, in export markets we signed contracts for mobile networks expansion (to be realized during 2020, depending on market situations related to COVID-19) and network maintenance with the operators HT Eronet (Bosnia and Herzegovina), Crnogorski Telekom (Montenegro), beCloud (Belarus), and IDC (Moldova). Research and Development Center (R&D Center) has been successfully balancing between the existing and new responsibilities and contributes to the overall financial stability. Despite extraordinary circumstances, all development activities as well as activities in global and regional Services and Solutions Expert Centers, are mostly ongoing as planned.
On Group level, gross margin decreased to 10.2%, as a result of business mix due to taking over the full responsibility for managed services, restructuring charges, and impact of COVID-19 during March 2020. Selling and administrative expenses are up by 23% year-over-year, due to higher presales activities, related to 4G/5G radio access and core networks. Operating profit is down by 17.8% and amounts to MHRK 33.5, due to lower gross profit and higher selling and administrative expenses. Net profit amounts to MHRK 29.6, while ROS amounts to 6.1%. We concluded Q1 with a solid balance sheet and an equity ratio of 32.7%. A positive cash flow from operating activities was also realized, amounting to MHRK 18.1, due to higher collection of customer receivables and prolongation of certain payments caused by COVID-19. Total cash and cash equivalents, including short-term financial assets, at the end of Q1 amounted to MHRK 154.1. Working Capital Efficiency, measured in Working Capital Days, was 44 days, and if we exclude services to Ericsson, WCD was 101 day. Cash conversion rate was 40%.
In the crisis we are facing, the importance of technology and implementation of ICT solutions within the digital transformation of society is undisputed, which is why we believe that encouraging investment in solutions such as 5G and digital transformation is the right way to accelerate the economic recovery. Our experts continuously work with the customers on monitoring and maintaining their networks and on the implementation of new solutions in order to enable connectivity and timely exchange of information.
On the day this report is published, the crisis caused by the COVID-19 continues and it is therefore difficult to predict the overall impact on Group’s business performance. Due to new circumstances, our strong focus is placed on even more detailed business planning, monitoring and managing risks, cost and operating efficiency and we are taking all the appropriate measures to secure the continuity of our stable business performance. We believe that along with the mentioned focus, the Group has sufficient funds and options on the financial market to respond to these challenges. In terms of our long-term outlook, we remain positive, even though we are expecting somewhat lower results in the upcoming period due to challenges and uncertainty caused by COVID-19.
Furthermore, we believe that investments into quality and expansion of networks’ capacities are the best way to respond to multiple increase of end user demand for telecommunication services. The current situation demonstrated the advantages of services’ digitalization; therefore the Group's long-term strategy remains unchanged and focuses on solutions and sales in the mobile broadband Internet access (4G/5G mobile solutions), Industry & Society segment (healthcare, public safety, e-Business), solutions for digital transformation and managed services.“