Ericsson reports second quarter 2023

Second quarter highlights – In line with expectations 

• Group organic sales[1] declined by -9% YoY. Segment Networks sales[1] declined by -13%, while segment Enterprise sales[1] grew by 20%. Reported sales was SEK 64.4 (62.5) b. 
• The sharp decline in sales in North America was partly offset by strong sales development in India. 
• Gross income excluding restructuring charges decreased to SEK 24.7 (26.3) b. as a result of lower sales and margins in Networks. Gross income increased in Enterprise, mainly driven by the consolidation of Vonage. Reported gross income was SEK 24.1 (26.3) b. 
• Gross margin excluding restructuring charges was 38.3% (42.2%) primarily impacted by changed business mix in Networks. Reported gross margin was 37.4% (42.1%). 
• EBITA excluding restructuring charges amounted to SEK 3.7 (7.5) b. with an EBITA margin of 5.7% (12.0%). Reported EBITA was SEK 0.5 (7.5) b. with restructuring charges amounting to SEK -3.1 (0.0) b. 
• Net loss was SEK -0.6 (4.7) b. primarily due to restructuring charges. EPS diluted was SEK -0.21 (1.35). 
• Free cash flow before M&A was SEK -5.0 (4.4) b., impacted by lower EBIT, payment to U.S. Department of Justice (DOJ) and increased working capital. Net cash on June 30, 2023, was SEK 1.9 b. compared with SEK 13.6 b. on March 31, 2023. 

[1] Sales adjusted for comparable units and currency 

[2] Non-IFRS financial measures are reconciled at the end of this report to the most directly comparable IFRS measures. 

Comments from Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC) 

Building on our strong position and despite challenging market conditions we delivered a solid quarter – meeting expectations. We continue to execute with discipline and focus without losing sight of the long term. We are leveraging our 5G technology, growing our enterprise business and driving our cultural transformation to accelerate our growth trajectory and shape the communications industry landscape. 

Q2 in line with our expectations  

Performance in Q2 was in line with our expectations, despite the uncertain macro backdrop and significant changes in market mix. This is a testament to our strategy, the excellence of our portfolio, and our ability to adapt and execute. 

Group organic sales declined by -9%, as a Networks decline of -13% was partly mitigated by a 20% organic growth in Enterprise. Group EBITA excluding restructuring charges was SEK 3.7 (7.5) b. or 5.7% (12.0%) of sales. 

In Networks, we saw strong execution with record build-out speed in India, where we now have a leading market share. Sales growth in India partly offset the expected softening we saw in other markets, notably in North America, where build-out pace moderated and customer inventory levels were reduced. Despite the business mix change and several large rollout contracts, Networks had a gross margin[2] of over 39%. 

In Cloud Software and Services, we continue to execute on the turnaround, including exiting subscale business and improving delivery efficiency. We are on track to deliver an EBITA[2] of at least break-even for the full year 2023. 

In Enterprise we saw continued strong growth in Enterprise Wireless Solutions, and we recorded positive EBITA in the Global Communications Platform business. 

We landed another important 5G licensing agreement with a device vendor, further validating our IPR portfolio strength, positioning us well for continued IPR growth as we license vendors previously unlicensed for 5G. 

We are well on track to reduce our annual run rate by at least SEK 11 b. by year-end, which will positively impact the P&L over the coming quarters with full effect during 2024. 

Free cash flow before M&A was SEK -5.0 (4.4) b. primarily driven by lower EBIT[2] and increased working capital including the payment to the US Department of Justice. We expect an improvement in cash flow during the second part of the year and gradually move towards our long-term target of 9-12% of Net sales. 

Driving execution of our strategy  

Ericsson is shaping the industry landscape by leveraging the full value of 5G and creating the world’s most powerful innovation platform. We remain focused on three priorities: i) bolstering our leadership in mobile networks; ii) growing our enterprise business; and iii) driving our cultural transformation. 

Leadership in mobile networks is the cornerstone of our success. Our competitive advantage is clear – we deliver leading performance, energy efficiency and cost optimization. Our radios carry about half of the world’s 5G traffic outside China. 

Building on this position and our market leading technologies, we are expanding into the fast-growing enterprise segment, substantially increasing our addressable market and diversifying our portfolio. 5G offers advanced capabilities such as Quality of Service, speed, latency, and location, and our platform allows these capabilities to be monetized in new ways by exposing them through network APIs. Operators and enterprises are showing great interest, as our platform will enable operators to offer differentiated performance levels and allow developers to integrate these capabilities into both existing and innovative new use cases. 

We continue our relentless focus on enhancing our ethics and compliance program. Our compliance program and controls have been significantly enhanced since 2019 and our monitorship is entering its final year. We conduct testing to ensure our compliance program is effective and fully embedded across the company. 

Looking ahead  

For Q3 we expect similar market mix and trends as in Q2. In addition, Q3 will benefit from an early impact of our strong focus on cost-out execution. Overall, we thus expect Q3 EBITA margin[2] to be in line with or slightly higher than Q2, followed by a seasonally stronger Q4. 

As we look ahead, a fundamental driver of network capex is the continued rapid data traffic growth. Average smartphone usage is expected to exceed 20 GB/month in 2023 with strong growth. 240 operators have launched 5G, bringing new revenue growth with pricing model innovation. We forecast 5G subscriptions to top 1.5 billion by end-2023 and reach 4.6 billion by 2028. Fixed Wireless Access (FWA) also grows quickly, driving further traffic growth. 

Traffic growth and operators’ desire to meet expectations for network quality with cost and energy efficiency, will stimulate investments. We estimate 75% of all base station sites outside China are not yet updated with 5G mid-band, and migration to 5G standalone will continue in order to deliver on 5G’s full potential. 

We are confident that the market will recover as a consequence of these fa4ctors, and Ericsson is well positioned to benefit from increased investments. The exact timing of these increased network investments is, of course, in the hands of our customers, but we expect that the market will see a gradual recovery in late 2023 and improve in 2024. 

Our technology leadership, solid performance and growth potential, position us well for the future. We are navigating the current environment with discipline and focus, and we tackle areas within our control. We execute on the Cloud Software and Services turnaround, portfolio adjustments, enhanced R&D productivity, IPR growth and cost reductions. Based on the expected recovery of the mobile networks market towards the end of the year, we remain focused on reaching the lower end of the 15-18% EBITA margin[2] long-term target range in 2024. 

Börje Ekholm  

President and CEO 

[1] Sales adjusted for comparable units and currency 

[2] Excluding restructuring charges 

NOTES TO EDITORS 

You find the complete report with tables in the attached PDF or on www.ericsson.com/investors

Video webcast for analysts, investors and journalists 

President and CEO Börje Ekholm and CFO Carl Mellander will comment on the report and take questions at a video webcast at 9:00 AM CEST (8:00 AM BST London, 3:00 AM EDT New York). 

Join the webcast or please go to www.ericsson.com/investors

To ask a question: Access dial-in information here

The webcast will be available on-demand after the event and can be viewed at www.ericsson.com/investors. 

FOR FURTHER INFORMATION, PLEASE CONTACT 

Contact person 

Peter Nyquist, Head of Investor Relations 
Phone: +46 705 75 29 06 
E-mail: peter.nyquist@ericsson.com

Additional contacts 

Stella Medlicott, Senior Vice President, Marketing and Corporate Relations 
Phone: +46 730 95 65 39 
E-mail: media.relations@ericsson.com

Investors 

Lena Häggblom, Director, Investor Relations 
Phone: +46 72 593 27 78 
E-mail:  lena.haggblom@ericsson.com

Alan Ganson, Director, Investor Relations 
Phone: +46 70 267 27 30 
E-mail: alan.ganson@ericsson.com

Media 

Ralf Bagner, Head of Media Relations 
Phone: +46 76 128 47 89 
E-mail: ralf.bagner@ericsson.com

Media relations  
Phone: +46 10 719 69 92 
E-mail: media.relations@ericsson.com

This 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 07:00 CEST on July 14, 2023. 

Tags: