Ericsson reports third quarter results 2017

THIRD QUARTER HIGHLIGHTS

• Reported sales decreased by -6% YoY. Sales adjusted for comparable units and currency declined by -3%.
• Networks sales declined by -4% YoY. Sales adjusted for comparable units, currency and the rescoped managed services contract in North America, increased slightly.
• Gross margin was 25.4% (28.3%). Adjusted1) gross margin was 30.0% (29.4%) driven by increased adjusted1) gross margin in Networks.
• Operating income was SEK -4.8 (0.3) b. Adjusted1) operating income declined to SEK 0.0 (1.6) b. Higher amortization than capitalization of development expenses and higher recognition than deferral of hardware costs had a negative impact on operating income of SEK -1.5 (0.5) b.
• As communicated in the second quarter report 2017, the company identified an increased risk of further market and customer project adjustments. In the quarter provisions and adjustments were made impacting operating income by SEK -2.3 b., with limited effect on cash flow.
• As a result of the ongoing cost reductions, restructuring charges of SEK -2.8 (-1.3) b. were taken in the quarter. This included a write-down of SEK -1.6 b. related to the decision to close and divest the ICT center in Canada.
• Cash flow from operating activities was SEK 0.0 (-2.3) b. Free cash flow2) was SEK -0.5 (-5.0) b. Net cash per Sept. 30, 2017, was SEK 24.1 (16.3) b.

1) Adjusted: the numbers are adjusted for restructuring charges and for certain other items affecting comparability in 2017.
2) Free cash flow: Cash flow from operating activities less net capital expenditures and other investments, see APMs at the end of the report.

3) EPS diluted, excl. amortizations and write-downs of acquired intangible assets, and excluding restructuring charges.

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 business strategy. While more remains to be done we are starting to see some encouraging improvements in our performance despite a continued challenging market. Networks showed a slight sales growth year over year, adjusted for the rescoped managed services contract in North America and for currency. Networks adjusted1) operating margin was 11%. While losses continue in IT & Cloud, we see increased stability in product roadmaps and projects.

The general market conditions continue to be tough. Sales adjusted for comparable units and currency declined by -3% YoY. Sales in North America, adjusted for comparable units, currency and the rescoped managed services contract were stable. We also saw growth returning in several countries as operators are increasing their investments in network capacity. Sales in Mainland China declined as the market is normalizing following a period of significant 4G deployments, representing more than 60% of global 4G volumes in the industry. We have managed to increase our LTE market shares in Mainland China to position Ericsson in 5G. However, this will have a dilutive effect on gross margin in Mainland China in Q4 2017, but the ambition is to continue to deliver double digit adjusted operating margin in Networks in Q4 2017.

Reported operating income was negative at SEK -4.8 (0.3) b. in the quarter while the operating income, adjusted for restructuring, additional provisions and adjustments as well as a gain from divestment of the power modules business, was SEK 0.0 (1.6) b. Operating income was negatively impacted by higher amortization than capitalization of development expenses and higher recognition than deferral of hardware costs of SEK -1.5 (0.5) b. As described in the second quarter report, we have reduced capitalization of development expenses and deferral of hardware costs due to technology and portfolio shifts.

As communicated in the Q2 2017 report we have identified an increased risk of further market and customer project adjustments, considering the current market environment and our focused strategy. In total, the negative impact on results was then estimated to be SEK 3-5 b. until mid-2018. In the quarter, costs of SEK 2.3 b. impacted the result, with limited effect on cash flow. With current visibility, we believe we will be in the higher end of the range of the risk estimate.

Restructuring charges in the quarter were SEK -2.8 b. including a write-down of SEK -1.6 b. related to one of our global ICT centers, as rapid technology development allows us to consolidate test activities to the two remaining centers. For full-year 2017 we expect restructuring charges to be approximately SEK 9-10 b.

In the quarter, we have accelerated cost and efficiency measures, which are key in our focused strategy. Activities to reduce the workforce have been initiated in many markets. In the quarter, there was a net reduction of 3,000 employees despite 1,100 new recruitments in R&D. We expect efficiency improvements to accelerate in the fourth quarter to reach an annual run-rate effect of at least SEK 10 b. by mid-2018.

Sales in Networks grew, adjusted for currency and the previously communicated rescoped managed services contract in North America. Higher hardware capacity sales and a more competitive product portfolio resulted in an adjusted1) operating margin of 11% (9 %). The Ericsson Radio System portfolio, accounting for 55% of total radio volumes year to date, is proving competitive, contributing both to improved earnings and a stronger market position.

The work to focus the managed services business and to review under-performing contracts continues. To date we have either exited, renegotiated or transformed 13 out of the 42 contracts, resulting in an annualized profit improvement of SEK 0.4 b.

In IT & Cloud, sales declined and losses increased in the quarter. The increase in QoQ losses is largely due to higher amortization than capitalization of development expenses of SEK -0.7 (0.4) b. Our turn-around plan builds on stability, profitability and growth in that order. The initial focus has been on stabilizing both product roadmaps and challenging contracts. We have made good progress in the quarter. However, securing deliveries on large transformation projects puts pressure on gross margin in the near term.

The IT & Cloud business is of strategic importance as our customers are preparing for 5G and will digitalize their operations and invest in a future network architecture based on software-defined logic.

We now expand our focus to improve profitability through increased efficiency in service delivery. In addition, we will scale the software part of the business mix and increase the level of pre-integration services, which will lead to a higher gross margin but lower services sales. Positive effects on gross margin are expected in 2018.

Despite continued decline in legacy product sales there is good traction in our new media portfolio with several important wins in the quarter. We have accelerated our efficiency measures and continue to pursue strategic opportunities for this business.

Managing our cash is a top priority. Free cash flow2) in the quarter was SEK -0.5 (-5.0) b., driven by reductions in working capital and lower CAPEX. Our net cash position remained solid at SEK 24.1b.

We remain fully committed to our focused business strategy. We continue to invest to secure technology leadership and year to date we have recruited more than 1,000 R&D employees in Networks. Customers give positive feedback on both our long-term strategy and on our current 5G-ready portfolio.

1) Adjusted: the numbers are adjusted for restructuring charges and for certain other items affecting comparability in 2017.
2) Free cash flow: Cash flow from operating activities less net capital expenditures and other investments, see APMs at the end of the report.

Planning assumptions going forward

Market related                                                                                                         

• In line with previous estimate and that of external sources, the Radio Access Network (RAN) equipment market outlook is estimated to decline by -8% for full-year 2017.

Ericsson related

• Focusing the business and addressing low-performing operations in Managed Services, Industry & Society and Network Rollout is expected to reduce full-year sales by up to SEK 10 b. by 2019.
• Sequential sales increase between Q3 and Q4 is expected to be lower than normal seasonality (normal +24%) driven by decreased 4G investments levels in Mainland China, primarily impacting Networks.
• The plan is to implement cost savings with an annual run rate effect of at least SEK 10 b. by mid-2018.
• Expanded focus on profitability in IT & Cloud is expected to generate positive effects on gross margin in 2018.
• The company aims to increase R&D efficiency. However, to strengthen the technology leadership, R&D expenses will increase primarily in Networks.
• Impact of higher amortization than capitalization of development expenses and higher recognition than deferral of hardware costs: Q3 2017 SEK -1.5 b. Estimate for: Q4 2017 SEK -1.4 b., full-year 2018 SEK -3 b., full-year 2019 SEK -1 to -2 b.
• Restructuring charges for Q4 2017 are estimated to be SEK 3-4 b.
• The earlier estimated risk of market and customer project adjustments of SEK 3-5 b. from July 1, 2017, to June 30, 2018, are now expected to be in the higher end of the range. 30% is estimated to impact cash.
• To position Ericsson in 5G in Mainland China, the company has managed to increase its market shares. However, this will have a dilutive effect on gross margin in Mainland China in Q4 2017, but the ambition is to continue to deliver double digit adjusted operating margin in Networks in Q4 2017.
  

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/2017/9month17-en.pdf or on www.ericsson.com/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 0900 CEST (0800 BST in London, 0300 EDT in New York and 1600 JST in Tokyo) and the second at 1400 CEST (1300 BST in London, 0800 EDT in New York and 2100 JST in Tokyo).

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Please call in at least 15 minutes before the conference calls 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 at: www.ericsson.com/press

REPLAY: 

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FOR FURTHER INFORMATION, PLEASE CONTACT

Contact person

Peter Nyquist, Head of Investor Relations
Phone: +46 10 714 64 49
E-mail: peter.nyquist@ericsson.com 

Additional contacts

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E-mail: media.relations@ericsson.com

Investors

Åsa Konnbjer, Director, Investor Relations
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E-mail: asa.konnbjer@ericsson.com

Stefan Jelvin, Director, Investor Relations
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Rikard Tunedal, Director, Investor Relations
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Media

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Corporate Communications
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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 20, 2017.

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