STOCKHOLM, Oct. 17, 2019 /PRNewswire/ --
Third quarter highlights
- Sales were SEK 57.1 (53.8) b. Sales adjusted for comparable units and
currency increased by 3% driven by strong growth in North America and North East Asia. Reported
sales grew by 6%.
- Operating income was impacted by cost provisions of
USD -1.2 b. (SEK -11.5 b.) related to a resolution of the
investigations by SEC and DOJ in the US and a refund of social
security costs of SEK 0.9 b.,
referred to as "items affecting comparability" in the report.
- Operating income was SEK 6.5 b.
(11.4% operating margin) when excluding restructuring charges and
items affecting comparability. Reported operating income was
SEK -4.2 (3.2)
b.
- Gross margin excluding restructuring charges was 37.8% (36.9%)
with improvements in Managed Services, Digital Services and
Networks. Reported gross margin was 37.7% (36.5%).
- Net income was SEK -6.9
(2.7) b., negatively impacted by
items affecting comparability.
- Free cash flow excluding M&A was SEK
5.5 (0.7) b. Net cash
increased to SEK 37.4 (32.0) b.
Investor Update key messages
Focused business strategy remains and the Company is tracking
towards the new financial targets:
- Sales ambition of SEK
230-240 b. for 2020
(previously SEK 210-220 b.), based on a SEK/USD rate of 9.50.
- Operating margin target for 2020, excluding restructuring
charges, remains unchanged at >10% of sales. This incorporates
continued dilutive impact from strategic contracts, an initially
higher cost level for newly introduced 5G products and a target
adjustment for segment Emerging Business and Other to SEK -1.5 to -2.0 b.
(previously break-even).
- Operating margin target of 12-14% for 2022 (previously
>12%), excluding restructuring charges, based on an ambition to
grow faster than the market in combination with leverage from
investments in market position and R&D.
SEK b.
|
Q3
2019
|
Q3
2018
|
YoY
change
|
Q2
2019
|
QoQ
change
|
Jan-Sep
2019
|
Jan-Sep
2018
|
Net sales
|
57.1
|
53.8
|
6%
|
54.8
|
4%
|
160.8
|
147.0
|
Sales growth adj.
for comparable units and currency
|
-
|
-
|
3%
|
-
|
-
|
-
|
-
|
Gross
margin
|
37.7%
|
36.5%
|
-
|
36.6%
|
-
|
37.5%
|
35.2%
|
Gross margin
excluding restructuring charges
|
37.8%
|
36.9%
|
-
|
36.7%
|
-
|
37.6%
|
36.5%
|
Operating income
(loss)
|
-4.2
|
3.2
|
-
|
3.7
|
-
|
4.4
|
3.1
|
Operating
margin
|
-7.3%
|
6.0%
|
-
|
6.8%
|
-
|
2.8%
|
2.1%
|
Operating income
excl. restr. charges & items affecting comparability
[1]
|
6.5
|
3.8
|
71%
|
3.9
|
68%
|
14.0
|
6.7
|
Operating margin
excl. restr. charges & items affecting comparability
[1]
|
11.4%
|
7.0%
|
-
|
7.0%
|
-
|
8.7%
|
4.6%
|
Net income
(loss)
|
-6.9
|
2.7
|
-
|
1.8
|
-
|
-2.6
|
0.2
|
EPS diluted,
SEK
|
-1.89
|
0.83
|
-
|
0.51
|
-
|
-0.67
|
0.01
|
Free cash flow
excluding M&A
|
5.5
|
0.7
|
-
|
2.2
|
147%
|
11.8
|
1.3
|
Net cash, end of
period
|
37.4
|
32.0
|
17%
|
33.8
|
11%
|
37.4
|
32.0
|
[1] Operating income excluding restructuring charges in all
periods. Excluding cost provisions related to resolution of the SEC
and DOJ investigations of SEK -11.5
b. and refund of social security costs of SEK 0.9 b. in Q3 2019. Excluding a capital gain
related to the divestment of MediaKind of SEK 0.7 b. and a reversal of a provision for
impairment of trade receivables of SEK 0.7
b. in Q1 2019.
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 see strong momentum in our business, based on the
strategy to increase our investments for technology leadership,
including 5G. We saw organic sales growth[1] of 3% in the quarter,
driven by the early adopters of 5G, in North America and North East Asia. Our
operating income was SEK 6.5 b.,
corresponding to a margin of 11.4% excluding restructuring costs,
the SEC and DOJ provision of USD -1.2
b. (SEK -11.5 b.) and the
refund of social security costs of SEK 0.9
b. Free cash flow before M&A was SEK 5.5 (0.7) b.
adding to our strong financial position.
Our focused strategy, introduced in 2017, is aimed at building a
stronger Ericsson longer term. With clear focus on our operator
customers the strategy stands on a foundation of increased
investments in R&D for technology and cost leadership, and
growing market footprint. Increased R&D efforts, which will
continue, have resulted in a competitive portfolio driving improved
gross margin. In addition, we have been able to record several
important wins improving market footprint for future business. We
are disciplined in the deals we take and target opportunities where
we have a clear competitive advantage through technology
leadership, supported by our improved cost structure in hardware
and software. While we believe the strategic contracts are
attractive long term, the initial margins may be challenging. This
is due to high associated costs as operators change vendors.
An important indicator for our execution of the strategy is the
improvement in gross margin. The gross margin[2] in the quarter
ended at 37.8% compared with 36.9% last year and 36.7% last
quarter. Within the 0.8 percentage point[3] sequential decline in
Networks gross margin, we have absorbed the margin impact and
inventory provisions related to strategic contracts.
The largest market for 5G infrastructure will be China where deployments are expected to start
near term. We have invested to increase our market share, however
it is still too early to assess possible volumes and price levels.
Based on historic experience we expect to have challenging margins
initially but positive margins over the lifespan of a contract.
With an organic sales growth[1] of 4%, segment Networks
delivered another solid quarter, with strong development in
North America. Operating margin
improved YoY, with continued good traction for the Ericsson Radio
System.
The turnaround of Digital Services is on track for low single
digit margins in 2020. Driven by strong improvement in the
underlying business, the losses were substantially reduced QoQ, in
spite of a negative impact from the remainder of the 45 critical
contracts of SEK 0.5 b. (slightly
more than in the second quarter). The negative impact of these
contracts will continue to vary between quarters as they are
addressed. We continue to focus on developing a full 5G and
cloud-native portfolio. It is encouraging to see that the sales
growth in our new product portfolio improved from 13% to 19%
rolling 12 months.
5G is taking off faster than earlier anticipated and we see
initial 5G buildout as a capacity enhancer in metropolitan areas.
However, over time, new exciting innovations for 5G will come with
industrial and IoT use cases, leveraging the speed, latency and
security characteristics of 5G. This provides opportunities for our
customers to capture new revenues as they provide additional
benefits to consumers and businesses.
Our IoT business is growing almost twice as fast as the
estimated market growth of 20-25% per year. We have more than 4,500
enterprises on our IoT platform and the number of connected devices
on the platform has more than doubled year to date. To fully
leverage our position and capture new recurring revenue streams we
are increasing our investments in IoT within Emerging Business.
With this investment, we do not expect to reach breakeven for the
segment next year, and instead incur losses of SEK -1.5 to -2.0
b.
Investor Update
In conjunction with today's report we are hosting an Investor
Update where we will discuss company strategy, including financial
targets. Continued technology and market investments will remain
key for long-term competitiveness and for reaching our targets for
2020 and 2022. A solid financial position and continued strong cash
flow are important for our ability to deliver on our focused
strategy. As a consequence of currency movements and a stronger 5G
market, our sales ambition for 2020 is to reach SEK 230-240 b.
compared with the previous estimate of SEK
210-220 b. Our 2020 target of
reaching an operating margin of more than 10% remains. This
includes the changed target for Emerging Business and Other,
short-term dilutive impact from strategic contracts and the
initially higher cost level for newly introduced 5G products. For
2022 the operating margin target is 12-14%[2] (previously >12%)
based on an ambition to grow faster than the market in combination
with leverage from investments in market position and R&D.
Börje Ekholm
President and CEO
[1] Organic sales growth: Sales growth adjusted for comparable
units and currency.
[2] Excluding restructuring charges.
[3] Excluding restructuring. Networks gross margin adjusted for
a license settlement cost in Q2 2019.
Planning assumptions going forward
Market related
- The Radio Access Network (RAN) equipment market is estimated to
increase by 5% for full-year 2019 with 2% CAGR for 2018-2023.
(Source: Dell'Oro)
Ericsson related
Net sales
- Two-year average sales seasonality between Q3 and Q4 is 18%.
However, uncertainty regarding the announced operator merger in
North America is likely to impact
operators' spending negatively short term.
- The revenues for current IPR licensing contract portfolio are
approximately SEK 9 b. on an annual
basis.
Gross margin
- Strategic contracts in Networks, with initially low margins,
taken to strengthen the market position, are expected to have a
somewhat increased negative impact on gross margin short term
without jeopardizing the 2020 target.
- Large 5G deployments in China
are expected to commence in 2020. Ericsson has invested in R&D
and supply chain capacity, aiming to increase market share. Based
on historic experience margins are initially challenging but turn
positive over the lifespan of a contract.
- The acquired Kathrein antenna and filter business will
initially have a negative impact on Networks margins without
jeopardizing the 2020 targets.
- The improvements in Digital Services continue, but earnings
will vary between quarters depending on business mix, sales
seasonality and impact of the remainder of the 45 critical
contracts.
Operating expenses
- Operating expenses typically increase between Q3 and Q4 due to
seasonality.
Restructuring charges
- Restructuring charges for full-year 2019 are estimated to be
~1% of sales.
Currency exposure
- Rule of thumb: A change by 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/2019/9month19-en.pdf
or on www.ericsson.com/investors
Q3 conference call for journalists, analysts and
investors
President and CEO Börje Ekholm and CFO Carl Mellander will comment on the report and
take questions. The conference call will begin at 9:00 AM CEST (8:00 AM
BST London, 3:00 AM EDT New
York).
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: 24181250#
Please call in at least 15 minutes before the conference call
starts.
A live audio webcast of the conference call will be available at
www.ericsson.com/investors and www.ericsson.com/press
A replay of the conference call will be available
from about one hour after the conference call has ended until
October 24, 2019.
Sweden replay number:
+46(0)8-519-993-85
International replay number: +44(0)333-300-0819
US replay number: +1(866)931-1566
PIN code: 301300190#
Investor Update – online-only digital
event
The Investor Update on Ericsson's overall strategic direction
and business development, presented by President and CEO Börje
Ekholm and CFO Carl Mellander, will
be held on the same date at 3:00 to 5:00 PM
CEST (2:00 PM BST London,
9:00 AM EDT New York). The Investor
Update will also include a brief summary of the third quarter
results.
The link to the webcast will be available at
www.ericsson.com/investors and www.ericsson.com/press before the
event.
To join the Q&A session, please phone one of the following
numbers:
Sweden: +46(0)8-566-42651
(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: 42814345#
An on-demand webcast will be available at
www.ericsson.com/investors approximately one hour after the webcast
ended.
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 Corporate Relations
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. The information was submitted for publication, through
the agency of the contact person set out above, at 07:00 AM CEST on October
17, 2019.
This information was brought to you by Cision
http://news.cision.com
https://news.cision.com/ericsson/r/ericsson-reports-third-quarter-results-2019,c2934562
The following files are available for download:
https://mb.cision.com/Main/15448/2934562/1124772.pdf
|
Ericsson third
quarter report 2019
|