STOCKHOLM, July 17, 2019 /PRNewswire/ --
Second quarter highlights
- Sales were SEK 54.8 (49.8) b. Sales adjusted for comparable units and
currency increased by 7% driven by growth in Networks in
North America and North East Asia.
Reported sales grew by 10%.
- Gross margin was 36.6% (34.8%). Gross margin excluding
restructuring charges was 36.7% (36.7%).
- Networks gross margin excluding restructuring charges improved
to 41.4% (40.2%) YoY. Sequentially, Networks gross margin decreased
from 43.2%, mainly due to costs related to a previously
communicated license settlement agreement, negative impact from
strategic contracts and lower IPR licensing revenues.
- Operating income was SEK 3.7
(0.2) b. and operating margin was
6.8% (0.3%). Operating income excluding restructuring charges was
SEK 3.9 (2.0)
b. and operating margin excluding restructuring charges was
7.0% (4.1%).
- Net income improved to SEK 1.8
(-1.8) b.
- Free cash flow before M&A was SEK
2.2 (-0.2) b. Net cash
amounted to SEK 33.8 (33.1) b.
SEK b.
|
Q2
2019
|
Q2
2018
|
YoY
change
|
Q1
2019
|
QoQ
change
|
6 months
2019
|
6 months
2018
|
Net sales
|
54.8
|
49.8
|
10%
|
48.9
|
12%
|
103.7
|
93.2
|
Sales
growth adj. for comparable units and currency
|
-
|
-
|
7%
|
-
|
-
|
-
|
-
|
Gross
margin
|
36.6%
|
34.8%
|
-
|
38.4%
|
-
|
37.5%
|
34.5%
|
Operating income
(loss)
|
3.7
|
0.2
|
-
|
4.9
|
-24%
|
8.6
|
-0.1
|
Operating
margin
|
6.8%
|
0.3%
|
-
|
10.0%
|
-
|
8.3%
|
-0.2%
|
Net income
(loss)
|
1.8
|
-1.8
|
-
|
2.4
|
-23%
|
4.3
|
-2.5
|
EPS diluted
SEK
|
0.51
|
-0.58
|
-
|
0.70
|
-27%
|
1.21
|
-0.83
|
EPS (non-IFRS)
SEK[1]
|
0.59
|
-0.09
|
-
|
0.80
|
-26%
|
1.39
|
0.02
|
Free cash flow
excluding M&A
|
2.2
|
-0.2
|
-
|
4.1
|
-45%
|
6.3
|
0.6
|
Net cash, end of
period
|
33.8
|
33.1
|
2%
|
36.1
|
-7%
|
33.8
|
33.1
|
Gross margin
excluding restructuring charges
|
36.7%
|
36.7%
|
-
|
38.5%
|
-
|
37.5%
|
36.3%
|
Operating income
(loss) excluding restructuring charges
|
3.9
|
2.0
|
89%
|
5.1
|
-24%
|
9.0
|
2.9
|
Operating margin
excluding restructuring charges
|
7.0%
|
4.1%
|
-
|
10.4%
|
-
|
8.6%
|
3.1%
|
[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.
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)
Organic sales growth[1] was 7% in the quarter, mainly driven by
sales in North America and North
East Asia. We see strong momentum in our 5G business with both new
contracts and new commercial launches as well as live networks. To
date, we have provided solutions for almost two-thirds of all
commercially launched 5G networks.
5G momentum is increasing. Initially, 5G will be a capacity
enhancer in metropolitan areas. However, over time, new exciting
innovations for 5G will come with IoT use cases, leveraging the
speed, latency and security 5G can provide. This provides
opportunities for our customers to capture new revenues as they
provide additional benefits to consumers and businesses.
In the quarter, gross margin[2] was unchanged YoY at 36.7%, with
improvements in segment Networks being offset by lower margins in
Digital Services and Managed Services.
Networks had another solid quarter with an organic sales
growth[1] of 11% YoY, driven by 4G and 5G investments in
North America and North East Asia
as well as increased volumes related to strategic contracts. While
the strategic contracts will be margin accretive in the long term,
the impact on near-term profitability is negative. In the quarter
we had a negative impact on gross margin and expect this impact to
increase during the second half of the year. In addition, costs
related to the previously announced license settlement agreement
impacted margins negatively. Despite this, gross margin[2] improved
to 41.4% (40.2%) YoY mainly due to increased IPR revenues. To
ensure we meet customer requirements for fast and agile deliveries,
we have decided to invest in a state-of-the-art 5G production site
in the US to complement our global supply chain.
In Digital Services we continue to execute on the plan to reach
low single-digit margins for 2020. The improvements are not linear
and will vary between quarters. Organic sales[1] in Digital
Services were down by -3% YoY as a result of rapid decline in
legacy products. Gross margin[2] was 37.1% (42.6%). The decline in
gross margin was mainly driven by a change in sales mix. The mix
may vary between quarters. Our 5G and Cloud native portfolio is
gaining customer traction and we are increasing related R&D
investments to ensure portfolio readiness. The reshaped BSS
strategy is gaining momentum and contracts were signed with several
new customers in the quarter. The share of recurrent business is
increasing, we are tracking towards having 75% of the 45 critical
and non-strategic contracts addressed by year-end and we have cost
efficiency programs in place throughout Digital Services.
In Managed Services the strategy is to enhance the customer
offering by relying more on automation, machine learning and AI,
which will longer-term change and improve the margin profile of the
business. Near-term margins are negatively impacted by the increase
in R&D investments. Organic sales[1] declined by -6%, mainly
explained by the negative effect from the customer contract
reviews. Gross margin[2] declined to 12.3% (14.0%) YoY, negatively
impacted by timing of costs.
Organic sales growth[1] in Emerging Business and Other was 24%
driven by a continued growth in iconectiv. Operating income[2]
improved YoY to SEK -0.7 (-1.2) b. supported by increased profits in
iconectiv and the divestment of MediaKind. In this segment we
invest in initiatives that aim to scale and help create future
business for Ericsson. With the exception of iconectiv, the
portfolio is still in an early investment phase.
Driven by improved earnings, free cash flow excluding M&A
improved to SEK 2.2 (-0.2) b.
We are in ongoing settlement negotiations with the United States
Securities and Exchange Commission (SEC) and the United States
Department of Justice (DOJ) in connection with their previously
reported investigation under the U.S. Foreign Corrupt Practices Act
(FCPA). We are not able to estimate the length of these settlement
discussions. Further, as this is an ongoing legal matter we cannot
provide any detail. However, it is our current assessment that the
resolution of these matters will result in material financial and
other measures, the magnitude and impact of which cannot be
reliably estimated or ascertained at this time.
We continue to take strategic contracts and the large-scale
network deployments expected to commence in parts of Asia, will gradually impact margins negatively
in the short term but strengthen our position in the long term.
Continued technology and market investments, especially in 5G,
automation and AI, are fundamental for long-term competitiveness
and a key part of our focused strategy to strengthen our long-term
business and path to reaching our targets for 2020 and 2022.
Börje Ekholm
President and CEO
[1] Organic sales growth: Sales growth adjusted for comparable
units and currency
[2] Excluding restructuring charges
Planning assumptions going forward
Market related
- The Radio Access Network (RAN) equipment market is estimated to
increase by 3% for full-year 2019 with 2% CAGR for 2018-2023.
(Source: Dell'Oro.)
Ericsson related
Net sales
- Two-year average sales seasonality between Q2 and Q3 is 3%. The
current sales level in North
America is expected to remain throughout 2019.
- The revenues for current IPR licensing contract portfolio is
approximately SEK 9 b. on an annual
basis.
Gross margin
- Strategic contracts in Networks, with initially low margins,
taken to strengthen the market position, will have a negative
impact on gross margin without jeopardizing the 2020 target. The
negative impact is expected to increase in 2H 2019.
- Large 5G deployments in parts of Asia are expected to commence at the end of
2019 and will gradually impact gross margin negatively in the short
term.
- The share of services sales in North
America is expected to gradually increase, impacting gross
margin negatively.
- The targeted improvements in Digital Services are not linear
and will vary between quarters.
Operating expenses
- Operating expenses typically decrease somewhat between Q2 and
Q3 due to seasonality.
- Costs for 5G field trials will continue to impact SG&A
.
- Networks R&D expenses are expected to flatten out.
Restructuring charges
- Restructuring charges for full-year 2019 are estimated to be
SEK -2 to -4
b. (the previous estimate was SEK
-3 to -5 b.).
Currency exposure
- Rule of thumb: A change of 10% of USD to SEK would have an
impact of approximately +/-5% on net sales and approximately +/-1
percentage point on operating margin.
NOTES TO EDITORS
You find the complete report with tables in the attached PDF or
by following this link
https://www.ericsson.com/assets/local/investors/documents/financial-reports-and-filings/interim-reports-archive/2019/6month19-en.pdf
or on www.ericsson.com/investors
Conference calls for journalists, analysts and
investors
The company will hold two identical conference calls for
journalists, financial analysts and investors. President and CEO
Börje Ekholm and CFO Carl Mellander
will comment on the report and take questions.
The first conference call will begin at 09:00 CEST (08:00
BST in London, 03:00 EDT in New
York and 16:00 JST in Tokyo), and the second at 14:00 CEST (13:00
BST in London, 08:00 EDT in New
York and 21:00 JST in Tokyo).
To join the conference call, please phone one of the following
numbers:
Sweden: +46 (0) 8 56642651
(Toll-free Sweden: 0200 883
685)
International/UK: +44 (0) 333 300 0804 (Toll-free UK:
0800 358 9473)
US: +1 631 913 1422 (Toll-free US: +1 855 85
70686)
PIN code: For 09:00 CEST call,
77905138# and for 14:00 CEST call,
63330598#
Please call in at least 15 minutes before the conference call
begin. As there is usually a large number of callers, it may take
some time before you are connected.
A live audio webcast of the conference call will be available at
www.ericsson.com/investors and www.ericsson.com/press
Replay:
Replay of the conference calls will be available from about one
hour after each has ended until July 24,
2019.
Sweden replay number: +46 (0)
8-519-993-85
International replay number: +44 (0) 333-300-0819
For 09:00 CEST call, 301292129#
and for 14:00 CEST call,
301292137#
FOR FURTHER INFORMATION, PLEASE CONTACT
Contact person
Peter
Nyquist
Head of Investor Relations
Phone: +46-10-714-64-99
E-mail: peter.nyquist@ericsson.com
Additional contacts
Stella
Medlicott
Senior Vice President
Marketing and Communications
Phone: +46-10-713-65-39
E-mail: media.relations@ericsson.com
Investors
Stefan Jelvin
Director, Investor Relations
Phone: +46-10-714-20-39
E-mail: stefan.jelvin@ericsson.com
Rikard Tunedal,
Director, Investor Relations
Phone: +46-10-714-54-00
E-mail: rikard.tunedal@ericsson.com
Media:
Ola Rembe
Vice President, Head of External Communications
Phone: +46-10-719-97-27
E-mail: media.relations@ericsson.com
Corporate Communications
Phone: +46-10-719-69-92
E-mail: media.relations@ericsson.com
This information is information that Telefonaktiebolaget LM
Ericsson is obliged to make public pursuant to the EU Market Abuse
Regulation and the Swedish Securities Markets Act. The information
was submitted for publication, through the agency of the contact
person set out above, at 07:30 CET on
July 17, 2019.
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SOURCE Ericsson