Earnings Release • Apr 28, 2020
Earnings Release
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ERICSSON NIKOLA TESLA d.d. Krapinska 45 10000 Zagreb
SECURITY: ERNT (ISIN: HRERNTRA0000) LEI: 5299001W91BFWSUOVD63 HOME MEMBER STATE: Republic of Croatia REGULATED MARKET SEGMENT: Regular Market of the Zagreb Stock Exchange
Management Report on the Company and Ericsson Nikola Tesla Group business performance with comments on the financial results for Q1 2020
Highlights:
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.
April 28, 2020
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."
April 28, 2020
As at March 31, 2020, balances outstanding with related parties were as follows: receivables amounted to MHRK 124.3 (end of 2019: MHRK 116.1), and payables amounted to MHRK130.9 (end of 2019: MHRK 95.4).
Reclassification of financial data:
Compared to the results published in Q1 2019, the Group modified its presentation of Financial Statements to comply with the reporting as per the Capital Market Act (65/18 Article 470). The key changes include Other Group's revenues which were presented last year as the decrease of Direct expenses of sales of products and services, and operating currency exchange which is now presented as Financial income.
In the domestic market, sales revenue amounted to MHRK 199.9 (Q1 2019: MHRK 91.5), up by 118% year-overyear.
With the strategic partner Hrvatski Telekom (HT), we have continued the cooperation in the segment of radio access network, with a focus on additional increase of capacity and securing readiness for commercially introduction of 5G technology once the necessary radio frequency spectrum has been assigned for it and required conditions have been met.
Along with the mobile telecommunication network segment, we have continued our long-term cooperation in the segments of fixed telecommunication network and the delivery of HT's telecommunication infrastructure rollout and maintenance services (managed services).
In addition to the impact of COVID-19, which requires working in special conditions, the event that marked Q1 was the earthquake that hit Zagreb, which affected a building of Hrvatski Telekom, in which fire caused damage to part of the equipment related to providing internet access services. The experts of Ericsson Nikola Tesla Servisi d.o.o., in cooperation with HT's experts, promptly reacted in this crisis and returned the system into previous condition, thus securing service availability to end users, as well as customer satisfaction.
With the strategic partner A1 Hrvatska we continued the activities on further modernization and expansion of radio access network. Ericsson Nikola Tesla proved to be a reliable partner to A1 Hrvatska by securing high network quality in order for the customer to meet the increased end-users' demand during crisis. Furthermore, we continued the cooperation in the segments of core network and transport telecommunication network, which contributes to the increased network quality and new services for end-users.
With the mobile operator Tele2 we have worked on the expansion of microwave transport network. Furthermore, we have continued to provide support services for voice core network, as well as software solution for data traffic shaping.
With the company RUNE Crow, the activities are ongoing on creating project documentation regarding the implementation of ultra-fast broadband fiber infrastructure for users in Croatian rural areas (Primorje-Gorski Kotar County and Istria County).
In the field of ICT solutions for Industry & Society, we continued the upgrade of the Joint Information System of Land Registry and Cadaster (JIS). With the Ministry of Public Administration of the Republic of Croatia, a contract was signed for the introduction of quality management system into Public Administration. In cooperation with the Croatian Ministry of Health, Croatian Institute for Public Health, APIS IT and Croatian Health Insurance Fund, we have upgraded the Central Healthcare Information System of the Republic of Croatia (CEZIH). These upgrades refer in particular to CEZIH's security structure, in order to enable the implementation of new web applications to fight COVID-19.
In export markets (excluding Ericsson market), sales revenue recorded an increase by 47% year-over-year to MHRK 64.4 (Q1 2019: MHRK 43.8).
In Q1 2020, Ericsson Nikola Tesla signed new contracts in the operator's segment in the markets of Bosnia and Herzegovina, Montenegro, Belarus and Moldova, worth approximately MHRK 85. The contracts encompass mobile networks expansions and maintenance in the upcoming period.
We contracted network maintenance for the period of two years with HT Eronet (Bosnia and Herzegovina). With the operator IDC (Moldova), IP Multimedia Subsystem (IMS) maintenance was contracted, and with the operator beCloud (Belarus) LTE network expansion. With Crnogorski Telekom, we signed a contract to extend support for Contact Center platform in the following three years, and we have been continuously working on radio access network modernization.
In ICT segment for Industry & Society, within the project of healthcare system informatization in Kazakhstan, in cooperation with the Ministry of Healthcare of the Republic of Kazakhstan the activities are ongoing on the maintenance of the national information healthcare system. The activities also continue on healthcare system maintenance for the needs of the Ministry of Healthcare of Armenia.
Realization of signed contracts in export markets significantly depends on the development of the situation regarding COVID-19 in countries mentioned.
In Ericsson market, sales revenue amounted to MHRK 223.4 (Q1 2019: MHRK 252.9), down by 12% year-overyear, due to change of business model regarding managed services of HT's network in 2020. Sales revenue increased by 4.6% for comparable units, excluding managed services.
Ericsson Nikola Tesla's R&D Center continued with the ongoing business and projects. In radio development within the business segment Networks, a range of significant functions related to 5G products was completed and delivered. In core networks segment, the elements related to modernization (IPv6) and MSC (Mobile Switching Centre) virtualization for the customer CMCC (China Mobile Communication Company) were successfully delivered. Ericsson Nikola Tesla's responsibilities expanded within the system for the so called "Cloud functions", and the transfer of responsibilities for CUDB (Centralized User Database) nodes is ongoing within the organization for the development of Unified Data Management.
A regular semi-annual business overview of the R&D Center was conducted mid-March with the representatives of Ericsson Corporation organizations with whom our R&D Center experts cooperate. The quality and innovativeness of our teams were highlighted as well as achieved results, which provides a good basis for further R&D's development and business.
Demand for Ericsson Nikola Tesla's experts by Ericsson global/regional organizations remains high, however, the realization of activities is limited due to travel restrictions caused by COVID-19. Experts from Services and Solutions Center for Networks, along with projects for the customers of Ericsson Nikola Tesla Group, are included in activities of integration and optimization of various technologies for Ericsson customers in the USA, China, Japan, Brazil, Mexico, Nigeria, Egypt, Germany, Slovenia, Denmark, Norway, Finland, the United Kingdom, France, Australia, Vietnam and Turkey. Furthermore, they are engaged on support to the Swiss operator Swisscom for the maintenance of the "Best network in the world", according to P3 measurements. We have continued to work on the development and implementation of software tools for mobile networks management and optimization.
Experts from Services and Solutions Center for Digital Services, Media and Operations, along with working on projects for our customers, were also engaged on projects for Ericsson customers in Austria, Germany, Sweden, Switzerland, the United Kingdom, the Netherlands, Belgium, Denmark, Finland, France, Ireland, Norway, Lithuania, Italy, Slovenia, Czech Republic, Albania, Mexico and Bahrein. They are engaged in complex projects of 5G technology introduction, operational and business support systems, as well as projects of introduction of core solutions in Cloud.
The teams working IT& Engineering Services unit are achieving excellent results on projects of test environment management and IT operations management. Our experts have shown excellence, proactivity, speed and quality in organizing the necessary equipment and technical conditions for remote work, and the restoration of Company's IT equipment which was destroyed during earthquake. ICT for Industry and Society segment records good results in projects in the field of IoT platforms, Connected Urban Traffic and the development of solutions to fight COVID-19.
Regarding innovations we continue with the implementation of the best ideas from innovation competition of our Research and Development Unit regarding core networks, and Industry & Society Unit regarding the implementation of new possibilities that 5G brings within solutions in the Industry&Society segment.
April 28, 2020
Ericsson Nikola Tesla major shareholders (as at March 31, 2020)
| Number of shares |
% of share capital |
|
|---|---|---|
| Telefonaktiebolaget LM Ericsson | 653,473 | 49.07 |
| Addiko Bank d.d. / Raiffeisen mandatory pension fund, B category | 123,514 | 9.28 |
| OTP banka d.d. / Erste Plavi mandatory pension fund, B category | 56,013 | 4.21 |
| Addiko Bank d.d. / PBZ Croatia mandatory pension fund, B category | 31,023 | 2.33 |
| PBZ d.d. / The Bank of New York as Custodian | 12,173 | 0.91 |
| PBZ d.d. / custodian client account | 9,130 | 0.69 |
| OTP banka d.d. / OTP Index fund - open-end alternative investment fund with public offering |
8,271 | 0.62 |
| Addiko Bank d.d. / Raiffeisen voluntary pension fund | 8,094 | 0.61 |
| Zagrebačka banka d.d. / State Street Bank and Trust Company, Boston | 7,180 | 0.54 |
| Vuleta Ivica | 4,630 | 0.35 |
| Other shareholders | 418,149 | 31.39 |
Share price information in Q1 2020:
| Highest (HRK) | Lowest (HRK) | Closing (HRK) | Market cap. (In MHRK) |
|---|---|---|---|
| 1,500.00 | 1,020.00 | 1,120.00 | 1,491.5 |
Ericsson Nikola Tesla d.d. Krapinska 45 Zagreb
OIB: 84214771175
Pursuant to the Articles 462 to 468 of the Capital Market Law (Official Gazette 65/18) the Managing Director of the joint stock company Ericsson Nikola Tesla d.d. Zagreb, Krapinska 45 gives the following:
Statement
The accompanying consolidated and non-consolidated financial statements have been prepared in compliance with the International Financial Reporting Standards (IFRS). The financial statements also comply with the provisions of the Croatian Financial Accounting Law valid as of the date of these financial statements.
Unaudited financial statements for the period January 1, 2020 to March 31, 2020 present a true and fair view of the financial position of the Company and the Group and of the financial performance and cash flows in compliance with applicable accounting standards.
Managing Director:
Gordana Kovačević, MSc
For additional information, please contact:
Snježana Bahtijari Orhideja Gjenero Company Communications Director Investor Relations Manager Ericsson Nikola Tesla d.d. Ericsson Nikola Tesla d.d. Krapinska 45 Krapinska 45 HR-10 002 Zagreb HR-10 002 Zagreb Tel.: 385 1 365 4556 Tel.: +385 1 365 4431 Mob.: +385 91 365 4556 Mob.: +385 91 365 4431 Fax: +385 1 365 3156 Fax: +385 1 365 3156 E-mail: [email protected] E-mail: [email protected]
E-mail: [email protected]
For more information about Ericsson Nikola Tesla's business, please visit: http://www.ericsson.hr
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