SECOND QUARTER HIGHLIGHTS
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Sales as reported decreased by -11% YoY. Sales, adjusted for comparable units and currency, decreased by -7% YoY. Mobile broadband sales continued to decline particularly in markets impacted by a weak macro-economic environment.
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Sales grew in South East Asia and Oceania. 4G sales in Mainland China and Networks sales in North America were stable.
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The current sales trends and business mix are expected to prevail for the second half of the year.
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Gross margin declined to 32.3% (33.2%) YoY, mainly due to a larger share of mobile broadband coverage business with lower hardware margins, and a higher share of services business.
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Operating margin decreased to 5.1% (5.9%) YoY, mainly due to negative revaluation effects of currency hedge contracts and a lower gross margin, partly offset by lower operating expenses and restructuring charges.
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Further actions are initiated to reduce cost, targeting a new annual run rate of operating expenses, excluding restructuring charges, of SEK 53 b. in the second half of 2017.
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Cash flow from operating activities was SEK -0.7 (3.1) b. Cash flow from operating activities for the first six months was SEK -3.1 (-2.8) b. Full-year cash conversion target of more than 70% remains.
| SEK b. | Q2 2016 |
Q2 2015 |
YoY change |
Q1 2016 |
QoQ change |
6 months 2016 | 6 months 2015 |
| Net sales | 54.1 | 60.7 | -11% | 52.2 | 4% | 106.3 | 114.2 |
| Sales growth adj. for comparable units and currency | – | – | -7% | – | 6% | -4% | -6% |
| Gross margin | 32.3% | 33.2% | – | 33.3% | – | 32.8% | 34.2% |
| Gross margin excluding restructuring charges | 33.2% | 35.1% | – | 33.9% | – | 33.6% | 35.7% |
| Operating income | 2.8 | 3.6 | -22% | 3.5 | -20% | 6.2 | 5.7 |
| Operating income excluding restructuring charges | 3.8 | 6.3 | -40% | 4.1 | -8% | 7.9 | 9.1 |
| Operating margin | 5.1% | 5.9% | – | 6.7% | – | 5.9% | 5.0% |
| Operating margin excluding restructuring charges | 7.0% | 10.4% | – | 7.9% | – | 7.4% | 7.9% |
| Net income | 1.6 | 2.1 | -26% | 2.1 | -26% | 3.7 | 3.6 |
| EPS diluted, SEK | 0.48 | 0.64 | -25% | 0.60 | -20% | 1.08 | 1.04 |
| EPS (Non-IFRS), SEK 1) | 0.83 | 1.45 | -43% | 0.87 | -5% | 1.70 | 2.22 |
| Cash flow from operating activities | -0.7 | 3.1 | -123% | -2.4 | -70% | -3.1 | -2.8 |
| Net cash, end of period 2) | 21.0 | 28.0 | -25% | 36.5 | -43% | 21.0 | 28.0 |
| 1) EPS, diluted, excl. amortizations and write-downs of acquired intangible assets, and excluding restructuring charges. | |||||||
| 2) The definition of Net cash is changed to exclude post-employment benefits, see accounting policies. | |||||||
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 Hans Vestberg, President and CEO of Ericsson (NASDAQ:ERIC, news, filings)
The negative industry trends from the first quarter have intensified impacting demand for mobile broadband, especially in markets with a weak macro-economic environment. We are delivering on ongoing cost reduction activities. However, in light of market development, management has, with the support of the Board of Directors, initiated significant actions to further reduce cost.
Business
Sales declined by -11% YoY. Sales, adjusted for comparable units and currency, declined by -7%. Mobile broadband sales continued to decline particularly in markets impacted by a weak macro-economic environment such as Brazil, Russia and the Middle East. In Europe, completion of mobile broadband projects in 2015 continued to have a negative effect on sales growth YoY. 4G sales in Mainland China were stable YoY as the fast pace of deployments continued.
Network sales in North America were stable YoY driven by continued mobile broadband capacity investments. Global Services sales declined in North America as activities in Professional Services were lower.
The transition from 3G to 4G continued primarily in parts of Asia, contributing to solid sales growth in region South East Asia and Oceania.
Sales in the targeted growth areas were 20% of total sales and grew by 5% in the quarter in constant currencies. We continue to focus on increasing software sales and recurrent business to improve profitability over time.
In the strategic partnership with Cisco we have engaged in more than 200 customer opportunities, spanning all major geographies. To date more than 30 deals have been closed forming a good start to reach the targeted sales of USD 1 b. for 2018.
The current sales trends and business mix are expected to prevail for the second half of the year.
Profitability
Actions have been implemented to restore Global Services profitability, primarily to rightsize the service delivery operations. Losses in Network Rollout have been significantly reduced and the operating margin, excluding restructuring charges, for Professional Services has gradually improved to 10% in the quarter.
The Networks business was impacted by lower sales and an increased share of coverage business with a lower hardware margin. The margin decline for Support Solutions was mainly due to lower OSS and BSS software sales.
Profitability declined sequentially mainly due to lower IPR licensing revenues. IPR licensing revenues in the quarter were SEK 2.2 b., representing current IPR licensing contract portfolio. Revenues in Q1 2016 were SEK 3.8 b. and included certain one-time items.
We are delivering on ongoing cost reduction activities. Operating expenses, excluding restructuring charges, have been reduced by SEK 2.1 b. to SEK 14.0 (16.1) b. YoY, mainly as a result of actions related to the global cost and efficiency program.
Actions to further reduce cost
To manage the lower demand for mobile broadband investments, a set of significant actions has been initiated to further drive efficiency improvements and reduce cost.
The cost and efficiency program targeting savings of SEK 9 b. during 2017, is progressing according to plan. In addition, we will reduce R&D investments in IP and capture efficiency gains from the new company structure. Together, these activities are expected to reduce the annual run rate of operating expenses, excluding restructuring charges, to SEK 53 b. in the second half of 2017. This is to be compared with SEK 63 b. for full-year 2014 and equates to double the previously targeted savings in operating expenses.
The new company structure was implemented as of July 1 to accelerate strategy implementation, to mirror customer ways of working and increase end-to-end accountability for business owners. The new structure will also support cost reductions and efficiency improvements, including removal of existing duplications within product development.
Given current industry trends, we will intensify our activities to reduce cost of sales and adapt our operations to a weaker mobile broadband market.
We will focus on maintaining a strong net cash position through structural improvements in working capital and profitability. In addition, the capital expenditure level will decline as the investments in the global ICT centers have peaked.
Our Networked Society strategy comprises three key elements; leverage of our installed base, investments in new revenue base for sustainable profitable growth (targeted growth areas) and generation of strong cash flow enabling long-term investments and securing a strong balance sheet. Digitalization creates new opportunities with both existing and new customers and I am confident that our strategy and the actions we now take will create future value for our shareholders.
NOTES TO EDITORS
You find the complete report with tables in the attached PDF or by following this linkhttps://www.ericsson.com/res/investors/docs/q-reports/2016/06month16-en.pdf or onwww.ericsson.com/investors
Ericsson invites media, investors and analysts to a briefing at the Ericsson Studio, Grönlandsvägen 8, Stockholm, at 09.00 (CET), July 19, 2016.
A conference call for analysts, investors and media will begin at 14.00 (CET).
Live webcast of the briefing and conference call details, as well as supporting slides, will be available at www.ericsson.com/press and www.ericsson.com/investors
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