First quarter highlights (In 2017, certain items affecting comparability had a significant negative impact on the results.)
- Reported sales decreased by -9% YoY. Sales, adjusted for currency, decreased by -2% YoY with lower revenues in market areas North East Asia as well as in South East Asia, Oceania and India. The other market areas showed growth.
- Gross margin was 34.2% (15.7%) 1). Gross margin excluding restructuring charges improved YoY, to 35.9% (18.7%) 1), supported by cost reductions and the continued ramp-up of Ericsson Radio System (ERS).
- Operating income (loss) was SEK -0.3 (-11.3) b. Operating income (loss) excluding restructuring charges was SEK 0.9 (-9.5) b.
- Networks operating margin excluding restructuring charges was 13.5% (12.8%) 1) with strong gross margin and increased investments in R&D.
- Digital Services gross margin excluding restructuring charges improved YoY, to 41.4% (-25.5%) 1), driven by improved services margins as a result of cost reductions. Operating income (loss) excluding restructuring charges was SEK -2.0 (-8.8) b.
- Managed Services operating margin excluding restructuring charges was 1.9% (-28.7%) 1) as a result of cost reductions and customer contract reviews.
- Cash flow from operating activities was SEK 1.6 (-1.5) b. and free cash flow was SEK 0.3 (-3.2) b. Net cash increased YoY to SEK 35.6 (28.3) b.
1) Write-down of assets as well as provisions and adjustments related to certain customer projects had a significant negative impact on the 2017 results. In addition, a restate of 2016 and 2017 numbers has been made following IFRS 15 introduction.
|Sales growth adj. for comparable units and currency||–||–||-2%||–||-24%|
|Operating income (loss)||-0.3||-11.3||–||-19.3||–|
|Net income (loss)||-0.7||-10.0||–||-18.5||–|
|EPS diluted, SEK||-0.25||-3.08||–||-5.63||–|
|EPS (non-IFRS), SEK 1)||0.11||-2.19||–||-1.09||–|
|Cash flow from operating activities||1.6||-1.5||–||11.2||-86%|
|Free cash flow 2)||0.3||-3.2||–||10.1||-97%|
|Net cash, end of period||35.6||28.3||26%||34.7||3%|
|Gross margin excluding restructuring charges||35.9%||18.7%||–||25.1%||–|
|Operating income (loss) excluding restructuring charges||0.9||-9.5||–||-16.9||–|
|Operating margin excluding restructuring charges||2.0%||-19.9%||–||-29.1%||–|
1) EPS diluted, excl. amortizations and write-downs of acquired intangible assets, and excluding restructuring charges. When a company reports a loss, the number of shares used for calculating earnings diluted per share shall be the same as for basic calculation.
2) Free cash flow: Cash flow from operating activities less net capital expenditures and other investments, see APMs at the end of the report.
Non-IFRS financial measures are reconciled to the most directly reconcilable line items in the financial statements at the end of this report.
We have continued to execute on our focused business strategy creating solutions that help our customers improve their business. Our efforts to improve efficiency in service delivery and common costs are starting to pay off. The gross margin1)improved to 36% (19%) in the quarter, tracking well towards our Group target of 37-39% by 2020.
A cornerstone in our strategy is to invest in R&D for both technology leadership and cost leadership, which will allow us to generate higher gross margins. We continue to increase our R&D investments in Networks to lead in 5G. In Digital Services we continue to increase investments into our new cloud-native portfolio as well as changing our ways of working for better R&D efficiency. In Managed Services we continue to focus on machine intelligence, automation and analytics to further enhance user experience, improve efficiency and better manage the increasingly complex networks of tomorrow.
In Networks we have seen the portfolio becoming more competitive in the last three quarters of 2017, resulting in market share gains, as reported by external sources. In Networks the gross margin1) improved to 40% (35%). In Digital Services, the gross margin 1) improved to 41% (-25%), supported by cost reductions mainly in service delivery. However, operating income in Digital Services remains challenging. In Managed Services the gross margin1) improved to 9% (-7%) supported by efficiency gains in service delivery and customer contract reviews, resulting in a positive operating income1).
In segment Emerging Business and Other, we are gradually increasing investments in growth areas such as IoT and Unified Delivery Network (UDN). While the combined operating income of Media Solutions and Red Bee Media improved YoY, these businesses showed a loss2) of SEK -0.5 b. in the quarter. We expect to close the announced Media Solutions divestment by the end of the third quarter.
In the quarter we reduced the total workforce by more than 3,000. Since the reduction activities were launched in July last year, we have reduced the total workforce by almost 18,000. To date, the annual run-rate effect of cost savings is approximately SEK 8.5 b., compared with the target of SEK 10 b. for mid-2018. The run-rate reduction does not yet fully impact the quarterly results.
Free cash flow improved to SEK 0.3 (-3.2) b. – another step forward in improving our financial resilience. Net cash was SEK 35.6 (28.3)b.
The improvements in the quarter are encouraging. However, more work remains to be done. We have confidence in the strategic direction laid out and remain fully committed to our long-term targets.
Looking ahead, we expect the rapidly increasing focus on 5G to continue, with initial business discussions focusing on enhanced mobile broadband. We continue to work closely with customers to define the optimal business models to enable them to tap into new revenue streams and capture the full value of 5G.
1) Excluding restructuring charges
2) Excluding restructuring charges and corporate allocations
Planning assumptions going forward
- The Radio Access Network (RAN) equipment market is estimated to decline by -2% for full-year 2018 with 2% CAGR (2018-2022). In 2018, the Chinese market is expected to decline due to reduced LTE investments, while there is positive momentum in North America.
- Rule of thumb: A weakening by 10% of USD to SEK would have a negative impact of approximately -5% on net sales and approximately -1 percentage point on operating margin (based on 2017 full-year currency exposure). For historical rates, see www.ericsson.com/en/investors
- 5-year average sales seasonality between Q1 and Q2 is +9%
- Focusing the business and addressing low-performing operations are expected to reduce full-year sales by up to SEK 10 b. in 2019 compared with 2016.
- The current revenue baseline of the IPR licensing contract portfolio is approximately SEK 7 b. on an annual basis.
- The plan is to implement cost savings with an annual run-rate effect of at least SEK 10 b. by mid-2018, compared with the Q2 2017 annual run rate.
- Operating expenses typically vary between quarters due to seasonality.
- Restructuring charges for full-year 2018 are estimated to be SEK 5-7 b and slightly higher in Q2 vs Q1.
- Actual and estimated net impact from amortization and capitalization of development expenses and from recognition and deferral of hardware costs:
|SEK b.||Q1 2018
|Cost of sales||-0.3||-0.2||-0.4||-2.6||-1|
|Total impact||-0.7||-0.6||-0.3||-2.9||-3||-1 to -2|
- The divestment of Media Solutions is expected to be closed by the end of Q3 2018. Results will be reported as share of earnings according to the equity method. Ericsson’s holding will be 49% of the shares. Media Solutions sales were SEK 3.2 b. in 2017.
- Consequences of Q1 and Q2 changes in product responsibilities between segments are described in detail in Financial highlights, page 4 in the complete report.
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/2018/3month18-en.pdf or on www.ericsson.com/investors
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