SECOND QUARTER HIGHLIGHTS
- Reported sales decreased by -8% YoY. Sales, adjusted for comparable units and currency, decreased by -13% YoY. The RAN equipment market for 2017 is estimated to show a high single-digit percentage decline compared with previous estimate of -2% to -6%.
- Gross margin was 27.9% (32.3%). Gross margin, excluding restructuring charges, was 29.8% (33.2%).
- Operating income was SEK -1.2 b. Operating income, excluding restructuring charges was SEK 0.3 b., with a YoY decline in all segments.
- Networks operating margin was 7%. Operating margin, excluding restructuring charges, declined to 10% (13%) negatively impacted by continued lower software sales.
- IT & Cloud operating income was negatively impacted by less capitalization of development expenses QoQ and YoY.
- Planned cost reduction activities will be accelerated, due to current market environment, to achieve an annual run rate reduction of at least SEK 10 b. by mid-2018.
- The company sees an increased risk of further market and customer project adjustments with an estimated negative impact on operating income of SEK 3-5 b. for the coming 12 months.
- Due to technology and portfolio shifts capitalization of costs will be reduced and is estimated to result in a net negative impact on operating income of SEK -2.9 (1.3) b. in the second half 2017, with no impact on cash.
- Cash flow from operating activities was SEK 0.0 (-0.7) b.
|Net sales adjusted for items affecting comparability in Q1 2017||49.9||54.1||-8%||47.8||4%||97.7||106.3|
|Sales growth adj. for comparable units and currency||–||–||-13%||–||9%||-15%||-4%|
|Gross margin excluding restructuring charges and adjusted for items affecting comparability in Q1 2017||29.8%||33.2%||–||30.5%||–||30.1%||33.6%|
|Operating income excluding restructuring charges and adjusted for items affecting comparability in Q1 2017||0.3||3.8||-93%||1.1||-74%||1.4||7.9|
|Operating margin excluding restructuring charges and adjusted for items affecting comparability in Q1 2017||0.6%||7.0%||–||2.3%||–||1.4%||7.4%|
|EPS diluted, SEK||-0.30||0.48||-163%||-3.29||-91%||-3.59||1.08|
|EPS (non-IFRS), SEK 1)||0.17||0.83||-80%||-2.42||-107%||-2.25||1.70|
|Cash flow from operating activities||0.0||-0.7||-100%||-1.5||-100%||-1.5||-3.1|
|Net cash, end of period||24.0||21.0||14%||28.3||-15%||24.0||21.0|
1) 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.
We are not satisfied with our underlying performance with continued declining sales and increasing losses in the quarter. Execution of our focused business strategy is gaining traction. However, in light of current market conditions, we are accelerating the planned actions to reduce costs.
Sales adjusted for comparable units and currency declined by -13%. Based on the development in the first half of the year, our current view of the Radio Access Network (RAN) equipment market outlook is in line with external estimates of a high single-digit percentage decline for the full year 2017.
Considering the current market environment, the company position, and the more focused business strategy, we continue to assess risk exposure in ongoing contracts. Depending on the outcome, we see an increased risk of further market and customer project adjustments, which would have a negative impact on results, estimated to SEK 3-5 b. for the coming 12 months, of which 30% is estimated to impact cash.
Due to technology and portfolio shifts we will reduce the capitalization of product platform, software release development expenses and hardware costs. Together this is estimated to result in a net negative impact on operating income of SEK -2.9 (1.3) b. in the second half of 2017, with no impact on cash. This is to be compared with SEK -0.3 (1.2) b. of total impact on operating income in the quarter.
One key component in our focused business strategy is to reduce costs and increase efficiency. In light of the current market outlook, we will accelerate our actions to ensure that we can meet our target of doubling the 2016 operating margin beyond 2018. Actions will be taken primarily in service delivery and common costs and do not include R&D. Our plan is to implement cost savings with an annual run rate effect of at least SEK 10 b. by mid-2018, of which approximately half will be related to common costs.
The decline in the Networks result in the quarter was mainly caused by lower software sales, driven by two key factors; unusually strong software sales in the second quarter last year and cautious mobile broadband investment levels. On the positive side, we were ranked number one in radio by a leading global operator.
Performance improvements in Networks will be generated through both the continued ramp-up of Ericsson Radio System (ERS) and cost reductions, mainly in service delivery. The ERS continues to prove its competitiveness and now represents 49% of radio unit deliveries in the quarter. During the quarter, we announced a break-through contract to support Vodafone UK to evolve its 4G network and to provide 5G radio technology. To safeguard a future leading portfolio, we have started to increase R&D investments in Networks with a total increase of SEK 0.2 b. in the quarter. In line with our more focused strategy, we signed an agreement in the quarter to divest the power modules business.
The work to refocus our Managed Services business to improve profitability is well underway. So far, we have identified 42 contracts, with sales of SEK 7 b. in 2016, which we will either exit, renegotiate or transform. To date, we have either exited, renegotiated or transformed nine of these contracts resulting in an annualized profit improvement of approximately SEK 140 million going forward.
IT & Cloud had another challenging quarter with significant losses. The sequential increase in losses is largely explained by lower capitalization of R&D expenses. Gross margin continued to be negatively impacted by large digital transformation projects.
Our 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. A key driver of performance in the business is the success of our new product portfolio, for which the rolling 12 month sales have grown 7%.
We are taking firm actions to improve performance in IT & Cloud, including stabilizing product roadmaps, addressing underperforming customer projects, improving new project delivery scoping and reducing costs, primarily in service delivery.
The operating income in our Media business improved sequentially as a result of increased sales, improved business mix and reduced costs. We continue the work to explore strategic opportunities for the Media business.
In this report, we have included a table on page 4 to track progress in the execution of our focused business strategy.
In light of current market environment and company performance, we are accelerating actions to reduce costs. Our focused business strategy is designed to take us back to technology and market leadership and improve company performance, also in a tough market. We see initial signs of traction in strategy execution including increased investments in R&D in Networks and ramp up of deliveries of Ericsson Radio System, increasing our competitiveness in the market.
Planning assumptions going forward
- Based on the development in the first half of the year, the company’s current view of the Radio Access Network (RAN) equipment market outlook is in line with external estimates of a high single-digit percentage decline for the full year 2017. This is to be compared with the company’s previous estimate of -2% to -6%.
Ericsson focused strategy related
- Addressing low-performing operations in Managed Services and optimizing the offering in Network Rollout are expected to reduce full-year sales by up to SEK 10 b. by 2019.
- The plan is to implement cost savings with an annual run rate effect of at least SEK 10 b. by mid-2018, split 50/50 between service delivery and common costs (G&A, IT, real estate etc).
- The company aims to increase R&D efficiency. However, R&D expenses will increase short term, primarily in Networks.
- Restructuring charges for 2017 are estimated to be in the higher end of the range SEK 6-8 b.
- The company sees an increased risk of further market and customer project adjustments, which would have a negative impact on results, estimated to SEK 3-5 b. for the coming 12 months, of which 30% is estimated to impact cash.
- Reduced capitalization of development expenses and hardware costs is expected to result in a net negative impact on operating income of SEK -2.9 (1.3) b. in second half 2017, with no impact on cash.
Other Ericsson related
- The earlier communicated rescoped managed services contract in North America will impact sales negatively YoY in Q3 2017.
- Industry trends and business mix in mobile broadband in 2016 are expected to prevail in 2017.
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/2017/6month17-en.pdf or on www.ericsson.com/investors
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