STOCKHOLM, October 18, 2018 /PRNewswire/ --
Third quarter highlights
- Sales as reported increased YoY by 9% and sales adjusted for
comparable units and currency increased by 1%.
- Segment Networks showed a sales growth adjusted for comparable
units and currency of 5% YoY with strong sales growth in
North America as well as in
Europe and Latin America.
- Gross margin was 36.5% (26.9%). Gross margin excluding
restructuring charges improved to 36.9% (28.5%), driven mainly by
cost reductions, the continued ramp-up of Ericsson Radio System
(ERS) and good progress in reviewing Managed Services
contracts.
- Operating margin was 6.0% (-7.4%). Operating margin excluding
restructuring charges was 7.0% (-1.7%).
- Networks operating margin excluding restructuring charges was
16.1% (11.9%) driven by cost reductions and ERS ramp-up, partly
offset by increased investments in R&D.
- Digital Services operating margin excluding restructuring
charges was -15.9% (-29.9%) supported by a gross margin excluding
restructuring charges of 36.9% (32.0%). Sequentially, gross margin
declined from 42.6% mainly due to increased provisions related to
transformation projects.
- Managed Services operating margin excluding restructuring
charges improved to 6.8% (-9.5%) as a result of cost reductions and
customer contract reviews.
- Cash flow from operating activities was SEK 2.0 (0.0) b.
and free cash flow excluding M&A was SEK
0.7 (-0.8) b. Net cash
increased YoY to SEK 32.0
(24.1) b.
Q3 Q3 YoY Q2 QoQ 9 months 9 months
SEK b. 2018 2017 change 2018 change 2018 2017
Net sales 53.8 49.4 9% 49.8 8% 147.0 147.5
Sales growth adj. for
comparable units and
currency - - 1% - 7% - -
Gross margin 36.5% 26.9% - 34.8% - 35.2% 24.0%
Operating income (loss) 3.2 -3.7 - 0.2 - 3.1 -15.5
Operating margin 6.0% -7.4% - 0.3% - 2.1% -10.5%
Net income (loss) 2.7 -3.5 - -1.8 - 0.2 -13.9
EPS diluted, SEK 0.83 -1.09 - -0.58 - 0.01 -4.31
EPS (non-IFRS), SEK [1] 1.03 -0.29 - -0.09 - 1.04 -2.15
Cash flow from operating
activities 2.0 0.0 - 1.4 41% 5.1 -1.6
Free cash flow excluding M&A
[2] 0.7 -0.8 - -0.2 - 1.3 -5.4
Net cash, end of period 32.0 24.1 33% 33.1 -3% 32.0 24.1
Gross margin excluding
restructuring charges 36.9% 28.5% - 36.7% - 36.5% 26.2%
Operating income (loss)
excluding restructuring
charges 3.8 -0.8 - 2.0 85% 6.7 -9.4
Operating margin excluding
restructuring charges 7.0% -1.7% - 4.1% - 4.6% -6.4%
[1] EPS diluted, excl. amortizations and write-downs of
acquired intangible assets, and excluding restructuring charges.
Potential ordinary shares are not considered when their conversion
to ordinary shares would increase earnings per share.
[2] Free cash flow excluding M&A: See Alternative
Performance Measures (APM) at the end of the report.
Non-IFRS financial measures are reconciled to the most directly
reconcilable line items in the financial statements at the end of
this report.
Comments from Börje Ekholm, President and CEO of Ericsson
(NASDAQ:ERIC)
"We continue to execute on our focused strategy, tracking well
towards our 2020 targets. We see improvements across our businesses
resulting in a gross margin[1] of 36.9% (28.5%) and an operating
margin[1] of 7.0% (-1.7%). Organic [2] sales growth was 1% for the
Group, despite headwind from exited non-strategic contracts.
We continue to invest in our competitive 5G-ready portfolio to
enable our customers to efficiently migrate to 5G. Operators around
the world plan for launching 5G services, led by North America. The strong customer interest in
5G generates a gradual increase in costs for field trials. We
expect the costs to remain on high levels, at least for the coming
12-18 months, and they are included in our 2020 profitability
target of at least 10%.
Networks gross margin[1] improved to 41.5% (34.8%) with an
organic[2] sales growth of 5%. The strong sales were mainly driven
by a continued high activity level primarily in North America. Due to the strong sequential
sales increase in the third quarter we expect lower effects from
seasonality than normal in the fourth quarter in Networks.
Digital Services gross margin[1] improved to 36.9% (32.0%) YoY,
but declined QoQ. We see clear results of our cost-out activities
and good progress in large parts of the business. At the same time,
provisions related to large digital transformation projects
increased in the quarter, explaining the sequential drop in gross
margin. We are not satisfied with the development in these digital
transformation projects and are thus increasing our efforts to turn
them around.
In Managed Services, gross margin[1] improved to 12.9% (-4.0%)
supported by efficiency gains and customer contract reviews. We
have finalized 40 of the targeted 42 contracts, with an annualized
profit improvement of SEK 0.9 b. We
are increasing our investments in R&D to reshape the offering
based on automation and artificial intelligence. We see strong
customer interest in the coming solutions, but sales are so far
limited as we are in early stages.
In segment Emerging Business and Other, sales grew by 22% driven
by growth in the iconectiv business. We continue to invest in
strategic future growth areas such as Internet of Things (IoT) and
saw increasing momentum with one important customer win with our
connectivity platform solutions in the quarter. As parts of the
portfolio in Emerging Business are in an early phase, sales are so
far limited. We will remain disciplined in our investments in
Emerging Business by tracking each venture against delivery
milestones.
Even though the cost reduction program, announced in
July 2017, has been completed, we
continue our efforts to drive efficiency and cost reductions to
further increase competitiveness. Our estimate for restructuring
charges of SEK 5-7 b. for the full year remains. Free cash flow
excluding M&A improved to SEK 0.7
(-0.8) b. and our cash position
remains strong. Our work to further strengthen the balance sheet
continues.
As previously disclosed, we have been voluntarily cooperating
since 2013 with an investigation by the SEC and, since 2015, with
an investigation by the DOJ into Ericsson's compliance with the
U.S. FCPA. While we cannot comment in detail we can provide the
following update on the process. We have identified facts that are
relevant to the investigations and these facts have been shared
with the authorities. We continue to cooperate with the SEC and the
DOJ and are engaged in discussions with them to find a resolution.
While the length of these discussions cannot be determined, based
on the facts that we have shared with the authorities, we believe
that the resolution of these matters will likely result in monetary
and other measures, the magnitude of which cannot be estimated
currently but may be material. We continue our efforts to improve
on our compliance program. See further details in "Other
information".
There is strong momentum in the global 5G market with lead
markets moving forward. The global radio access market is
recovering from several years of negative growth and our
investments in R&D have positioned us well to benefit from this
development. More work remains, however, to get all parts of the
business to a satisfactory performance level. We remain confident
in reaching our long-term target of at least 12% operating margin
beyond 2020."
Börje Ekholm
President and CEO
[1] Excluding restructuring charges
[2] Organic sales growth: Sales adjusted for comparable units
and currency
Planning assumptions going forward
Market
related
- The Radio Access Network (RAN) equipment market is estimated to
decline by -2% for full-year 2018 with 2% CAGR for 2017-2022.
(Source: Dell'Oro)
Currency
exposure
- Rule of thumb: A weakening by 10% of USD to SEK would have a
negative impact of approximately -5% on net sales and approximately
-1 percentage point on operating margin (based on 2017 full-year
currency exposure).
Ericsson related 2018; Sales
- Sales growth in 2017 between Q3 and Q4 was 17%.
- Due to strong sequential sales increase in the third quarter,
lower effects from seasonality than normal are expected in the
fourth quarter in Networks.
Ericsson related 2018; Operating expenses
- Gradually increased cost for field trials.
- Operating expenses typically increase between Q3 and Q4 due to
seasonality.
- To further strengthen technology leadership, R&D expenses
will increase primarily in Networks in Q4.
- The divestment of Media Solutions is expected to be closed
around year-end 2018 with estimated additional expenses of
SEK -0.2 b. in Q4.
Ericsson related 2018; Other
- Restructuring charges for full-year 2018 are estimated to be
SEK 5-7
b.
- Actual and estimated net impact from amortization and
capitalization of development expenses and from recognition and
deferral of hardware costs:
Q3 2018 Q4 2018 Q4 2017 FY 2017 FY 2018 FY 2019
SEK b. Actual Estimate Actual Actual Estimate Estimate
Cost of sales -0.2 -0.1 -0.8 -2.6 -0.7
R&D expenses -0.5 -0.5 -0.6 -0.3 -1.7
Total impact -0.7 -0.6 -1.4 -2.9 -2.4 -1 to -2
NOTES TO EDITORS
You find the complete report with tables in the PDF or by
following this
link https://www.ericsson.com/assets/local/investors/documents/financial-reports-and-filings/interim-reports-archive/2018/9month18-en.pdf or
on http://www.ericsson.com/investors
The company will hold a press briefing, which will also be
available through a live webcast, starting at 09.00 CEST on
October 18, 2018 at Ericsson Studio,
Grönlandsgatan 8, Kista, Sweden. A conference call for
analysts, investors and media will begin at 14.00 (CEST).
Live webcast of the briefing and conference call details, as
well as supporting slides, will be available
at http://www.ericsson.com/press and http://www.ericsson.com/investors
This information is information that Telefonaktiebolaget LM
Ericsson is obliged to make public pursuant to the EU Market Abuse
Regulation. The information was submitted for publication, through
the agency of the contact person set out above, at 07:30 CEST on October
18, 2018.