FIRST QUARTER HIGHLIGHTS
- Reported sales decreased by -11% YoY. Sales, adjusted for currency, decreased -16% YoY partly due to lower IPR licensing revenues which amounted to SEK 2.0 (3.8) b.
- Provisions and adjustments related to certain customer contracts of SEK -8.4 b., asset write-downs of SEK -3.3 b. and restructuring charges of SEK -1.7 b. were made in the quarter, in line with the announcement on March 28, 2017.
- Gross margin was 13.9%. Adjusted1) gross margin declined to 30.5% (33.9%) mainly due to lower IPR licensing revenues.
- Operating income was SEK -12.3 b. Adjusted1) operating income declined to SEK 1.1 (4.1) b. due to lower sales and lower gross margin.
- Networks operating margin was -2%. Networks adjusted1) operating margin was solid at 12%, despite lower sales including reduced IPR licensing revenues.
- IT & Cloud operating income was SEK -9.0 b. Adjusted1) operating income for IT & Cloud showed a significant negative development YoY with increased losses. Actions have been initiated to improve performance.
- Media operating income was SEK -2.8 b. Adjusted1) operating income was significantly reduced YoY. Strategic opportunities are being explored.
- Cash flow from operating activities was SEK -1.5 (-2.4) b.
1) Restructuring, write-down of assets as well as provisions and adjustments related to certain customer projects had a significant negative impact on the reported Q1 2017 result. Numbers excluding these items are referred to in the text as “adjusted”, please see page 3 for reconciliation.
| SEK b. | Q1 2017 |
Q1 2016 |
YoY change |
Q4 2016 |
QoQ change |
| Net sales | 46.4 | 52.2 | -11% | 65.2 | -29% |
| Sales growth adj. for comparable units and currency | – | – | -16% | – | -29% |
| Gross margin | 13.9% | 33.3% | – | 26.1% | – |
| Gross margin excluding restructuring charges and adjusted for items affecting comparability in Q1 2017 |
30.5% | 33.9% | – | 29.4% | – |
| Operating income | -12.3 | 3.5 | – | -0.3 | – |
| Operating income excluding restructuring charges and adjusted for items affecting comparability in Q1 2017 |
1.1 | 4.1 | -73% | 4.4 | -75% |
| Operating margin | -26.6% | 6.7% | – | -0.4% | – |
| Operating margin excluding restructuring charges and adjusted for items affecting comparability in Q1 2017 |
2.3% | 7.9% | – | 6.7% | – |
| Net income | -10.9 | 2.1 | – | -1.6 | – |
| EPS diluted, SEK | -3.29 | 0.60 | – | -0.48 | – |
| EPS (Non-IFRS), SEK2) | -2.42 | 0.87 | – | 0.62 | – |
| Cash flow from operating activities | -1.5 | -2.4 | -35% | 19.4 | -108% |
| Net cash, end of period | 28.3 | 36.5 | -22% | 31.2 | -9% |
2) 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, news, filings)
Our performance in the first quarter continued to be unsatisfactory. Segment Networks delivered a solid result despite lower sales, while losses in segments IT & Cloud and Media increased significantly. In the quarter a more focused business strategy and a new Executive Team were announced. The immediate priority is to improve profitability while also taking action to revitalize technology and market leadership.
Reported sales declined by -11%. Operating income was SEK -12.3 b., after provisions, write-downs and restructuring charges of SEK -13.4 b. Excluding these items the operating income amounted to SEK 1.1 b.
Despite lower sales, Networks delivered a solid result. Sales declined YoY due to lower investment levels in certain markets, lower IPR licensing revenues and the renewed managed services contract with reduced scope in North America. Networks adjusted1) operating margin improved sequentially and was supported by an improved business mix and a more competitive portfolio. The new Ericsson Radio System platform contributed to improving profitability and stabilizing the market share position, after several years of decline.
The concerning developments in IT & Cloud continued with significantly increased losses. IT & Cloud remains a strategic area for Ericsson as our customers will digitalize their operations and invest in a future network architecture based on software-defined logic. However, our performance in this area is not acceptable and the new management team is initiating actions to turn the business around. Actions include accelerating the introduction of the new products, streamlining the services organization and tightening the contract scoping. We will continue to sell complete solutions in telecom core, OSS and BSS, including hardware, software and services. However, we are seeking alternatives for our IT cloud infrastructure hardware business to gain necessary scale to ensure that we can offer competitive solutions to our customers. Tangible improvements in profitability are expected during 2018.
The accelerated losses in Media were caused by a faster than anticipated decline in legacy product sales, not offset by growth in the new portfolio. While continuing to develop our media solutions we are exploring strategic opportunities for Media to allow it to scale and succeed in the evolving media landscape.
Of the total adjustments1) of SEK -13.4 b., write-downs were SEK -3.3 b. and restructuring charges were SEK -1.7 b. Triggered by negative developments late in the quarter related to certain customer contracts, provisions and adjustments of SEK -8.4 b. were made of which SEK 5.8 b. is estimated to negatively affect cash flow over several years.
The provisions and adjustments of SEK -8.4 b. consist of the following items. Customer settlements and revaluation of customer discounts, due to lower projected customer volumes, reduced net sales by SEK -1.4 b. Operating expenses were impacted by SEK -1.5 b. due to reassessment of the value of trade receivables. The remaining SEK -5.5 b. is provisions for additional project costs, mainly related to certain transformation projects in IT & Cloud, which due to recent negative developments are not expected to be covered by future project revenues.
In light of the current market environment and company position we are taking a more prudent approach in assessing risk exposures. In this work we have identified certain large, complex transformation projects with challenging profitability and higher inherent risks, that we are focused on mitigating.
On March 28, 2017, we presented a more focused business strategy and a new Executive Team. The new strategy aims to revitalize technology and market leadership, improve group profitability and enable customer success.
The strategy builds on reallocating resources and investments to core portfolio areas, fully leveraging the potential of 5G, IoT and cloud. We will also refocus Managed Services and Network Roll-out to improve profitability. By addressing low-performing operations within Managed Services and optimizing the offering within Network Roll-out, full-year sales are expected to be negatively impacted by up to SEK 10 b. by 2019.
We are not satisfied with the cost structure of the company and the existing cost and efficiency program is not yielding sufficient results. Based on current profitability, we will intensify our efforts to reduce cost with focus on structural changes to generate lasting efficiency gains and increase cost competitiveness. Our target is to surpass previous ambitions. However, we need to increase investment in certain core areas to develop our product portfolio, which can temporarily increase cost levels.
The more focused business strategy is expected to result in a significantly improved profitability already in 2018. Beyond 2018, we believe that we can at least double the underlying 2016 operating margin.
Planning assumptions going forward
- Industry trends and business mix in mobile broadband from 2016 are expected to prevail in 2017.
- RAN equipment market in USD estimated to decline by -2% to -6% in 2017.
- The earlier communicated renewed managed services contract with reduced scope in North America will impact sales negatively YoY in Q2 and Q3 2017.
- Addressing low-performing operations in Managed Services and optimizing the offering within Network Rollout are expected to reduce full-year sales by up to SEK 10 b. by 2019.
- The baseline for current IPR licensing contract portfolio is approximately SEK 7 b. on an annual basis.
- The restructuring charges for 2017 are estimated to be SEK 6-8 b.
1) Restructuring, write-down of assets as well as provisions and adjustments related to certain customer projects had a significant negative impact on the reported Q1 2017 result. Numbers excluding these items are referred to in the text as “adjusted”, please see page 3 for reconciliation.
NOTES TO EDITORS
You find the complete report with tables in the attached PDF or by following this linkhttps://www.ericsson.com/assets/local/investors/documents/financial-reports-and-filings/interim-reports-archive/2017/3month17-en.pdf or on www.ericsson.com/investors
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