Business results of Ericsson Nikola Tesla Group for the first nine months of 2020

Gordana Kovačević, the President of Ericsson Nikola Tesla, commented: „The information-telecommunications market under the influence of COVID-19, both in the world and in Croatia, has shown great resilience and limited impact of the crisis, and at the same time emphasized the importance of digitalization in various industry segments and government institutions.

In addition to innovative solutions in the Industry & Society segment, especially solutions in the field of healthcare, public safety and e-business, there is a growing need for telecommunications solutions that ensure higher bandwidth within telecom infrastructure and mobile broadband access (like 5G), as well as solutions for smart network management and network capacity. Therefore, our focused strategy with a vision of continuously strengthening of an advanced, sustainable and connected world remains unchanged and is gaining additional momentum.

Despite the aggravated business conditions due to pandemic but also significant political instabilities in some of our markets, during the first nine months of 2020 Ericsson Nikola Tesla Group achieved solid business results. Sales revenue increased by 15.2% year-over-year, primarily as a result of taking over the full responsibility for delivering the services of build and maintenance of Hrvatski Telekom’s (HT) telecommunications infrastructure and activities aimed at introducing 5G standards in HT network. Percisely this circumstance has led to a significant increase in the share of sales revenue generated in the domestic market, in relation to export results.

The beginning of the commercial introduction of 5G in Croatia is expected during the first half of 2021, after HAKOM announces the conditions and allocates the radio-frequency spectrum. Considering our activities so far in preparing the networks of our key customers in Croatia (HT and A1) we look forward to the completion of this process, because then the 5G implementation process will begin, in which our company will have an important role.

In the segment of ICT solutions for Industry & Society in the domestic market, I would like to highlight the new three-year Contract on Support, Maintenance and Upgrade of the Central Part Software of the Integral Central Healthcare Information System of the Republic of Croatia (CEZIH). This is a confirmation of the Company's strategic positioning in e-health owing to our strong teams with respectable knowledge and competencies, and the customer's desire for CEZIH to continue its technological development to the satisfaction of its users.

Sales revenue in export markets are lower year-over-year, since the implementation of projects, along with COVID-19, is further aggravated by the political and social situation in certain markets, namely in Belarus, Kazakhstan, and Armenia. Therefore, in addition to internal risk analysis, as well as additional engagement and coordination with customers, we have intensified our cooperation with the partners that support our export activities, such as Croatian Bank for Reconstruction and Development (HBOR), etc. Although uncertainties represent a significant risk for the Company's business performance, our activities in these markets continue to the extent possible and with a strong focus on risk reduction. In Bosnia and Herzegovina, we are successfully continuing the upgrade and modernization of LTE network in cooperation with the operator HT Eronet. Namely, during Q3 we signed a contract with HT Eronet for the upgrade of 4G/4G+ network and the expansion of the transmission network. In other export markets, we have continued quality cooperation with the operators IPKO (Kosovo), Crnogorski Telekom (Montenegro), beCloud (Belarus) and Interdnestrcom (Moldova).

The delivery of services to Ericsson has been continuously growing, and all the activities and deliveries are ongoing as planned. The confirmation of the excellent work of our R&D Center experts came from Ericsson Corporation at the semi-annual evaluation meeting, where the representatives of global Ericsson organizations highly evaluated the work of our R&D center, which positions it at the very top of Ericsson’s global development community.

We are also intensively continuing activities on the digital transformation of Ericsson Nikola Tesla Group with the aim of simplifying key company processes and additional automation in order to become easier and faster to do business with.

The energy efficiency project encompassing a part of our plants and buildings is progressing as planned. As we have informed the public, the project is co-financed by the EU funds from the European Structural and Investment Funds within the “Competitiveness and Cohesion” Operational Program 2014-2020. For this project, we have been granted a maximum MHRK 20 used in the amount of almost 30 percent of eligible project costs.

Looking at the financial indicators at Group level gross margin decreased by 1.5 percentage points year-over-year as a result of business mix due to taking over the full responsibility for managed services for HT, transformation and restructuring costs and impact of COVID-19 pandemic. Operating profit was 14.7% lower year-over-year and amounted to MHRK 76.2, due to lower gross margin and higher selling and administrative expenses. Due to increased engagement in pre-sales activities related to 4G/5G radio access and core networks, as well as the increase of costs related to managed services for HT, selling and administrative expenses increased by 17.4% to MHRK 62.1. Net profit amounted to MHRK 67.2 and ROS was 4.7%. We concluded Q3 with a solid balance sheet, 17.7% higher compared to end of 2019, and an equity ratio of 34.1%. A strong cash flow from operating activities was realized, amounting to MHRK 232.9. Therefore, total cash and cash equivalents, including short-term financial assets, at the end of Q3 amounted to MHRK 347.6. Group's Working Capital Efficiency (WCD), measured in Working Capital Days, was 35 days, and if we exclude services to Ericsson, WCD was 71 days. Cash conversion rate was 142%.

Although there has been a relaxation of certain measures related to COVID-19 in Q3, on the day this report is published, we notice the reintroduction of restrictions in certain markets, due to a significant increase in the number of people infected by COVID-19. The data presented by the Croatian Civil Protection Headquarters show that the number of people infected by COVID-19 is significantly increasing daily, and accordingly, the Company is taking additional measures to ensure the health and safety of employees, customers, partners and suppliers. In this way, the preconditions are created for normal realization of business activities. Due to pandemic the risks impacting our business performance that we mentioned in the previous reports, such as the decrease of investments and postponement of realization of the existing contracts by our customers, and travelling restrictions, are still present. Therefore, we remain focused on responsible risk management, profitability and operating cash flow.

A particularly important component of our response to all the challenges in the environment are our employees. Owing to their efforts in these extraordinary circumstances, the contribution to global organization and position on the markets with our customers and partners, the continuity of our business performance was never brought into question. Moreover, this created new job opportunities. Therefore, I would like to use this opportunity to highlight that Ericsson Nikola Tesla has enough interesting jobs, especially in R&D, and I invite young people with ICT competencies and the necessary knowledge to join us.

The results realized in the first nine months, as well as a large number of important and complex projects we are working on, and the motivation and commitment of our employees strengthen our belief in achieving the Group’s targets for 2020. Furthermore, we stay confident in the long-term perspective of ICT industry and the important role Ericsson Nikola Tesla has in the digitalization of business entities and society as a whole. With all this in mind, the Management Board and the Supervisory Board made a joint proposal to shareholders at the Extraordinary General Meeting to adopt the decision on dividend payment amounting to HRK 49 per share.”

Communications Ericsson Nikola Tesla