Ericsson reports fourth quarter and full-year results 2020

Fourth quarter highlights

• Sales adjusted for comparable units and currency grew by 13% YoY mainly driven by sales in North East Asia, Europe and North America. Reported sales were SEK 69.6 (66.4) b.
• Gross margin excluding restructuring charges improved to 40.6% (37.1%) with margin improvements in all segments. Reported gross margin improved to 40.6% (36.8%).
• Operating income excluding restructuring charges improved to SEK 11.0 b. (15.8% operating margin) from SEK 6.5 b. (9.7% operating margin) mainly driven by Networks. Reported operating income was SEK 11.0 (6.1) b.
• Networks sales increased by 20% YoY, adjusted for comparable units and currency. Operating margin excluding restructuring charges was 21.5% (14.5%).
• Reported net income was SEK 7.2 (4.5) b.
• Free cash flow before M&A was SEK 12.8 (-1.9) b. Q4 2019 included a payment of SEK 10.1 b. related to the resolution of the US SEC and DOJ investigations. Net cash Dec 31, 2020, was SEK 41.9 (34.5) b.

Full-year highlights

• Sales adj. for comp. units and currency grew by 5%, with Networks growing by 10%. Reported sales increased by 2% to SEK 232.4 b.
• Gross margin excl. restructuring charges was 40.6% (37.5%), with improvements in all segments.
• Reported operating income improved to SEK 27.8 (10.6) b.
• Reported net income was SEK 17.6 (1.8) b.
• Free cash flow before M&A amounted to SEK 22.3 (7.6) b. Full-year 2019 included a payment of SEK 10.1 b. related to the resolution of the US SEC and DOJ investigations.
• The Board of Directors will propose a dividend for 2020 of SEK 2.00 (1.50) per share to the AGM.

Planning assumptions highlights (please see the quarterly report for complete planning assumptions)

• Three-year average reported sales seasonality between Q4 and Q1 is -24%; however, the seasonal effect may be somewhat less pronounced due to 5G deployment in some of Ericsson’s markets.

SEK b.	Q4 2020	Q4 2019	YoY change	Q3 2020	QoQ change	Jan-Dec 2020	Jan-Dec 2019	YoY change
Net sales	69.6	66.4	5%	57.5	21%	232.4	227.2	2%
Sales growth adj. for comparable units and currency	–	–	13%	–	–	–	–	5%
Gross margin	40.6%	36.8%	–	43.1%	–	40.3%	37.3%	–
Operating income (loss)	11.0	6.1	80%	8.6	27%	27.8	10.6	163%
Operating margin	15.8%	9.2%	–	15.0%	–	12.0%	4.6%	–
Net income (loss)	7.2	4.5	60%	5.6	29%	17.6	1.8	–
EPS diluted, SEK	2.26	1.33	70%	1.61	40%	5.26	0.67	–
Measures excl. restructuring charges and other items affecting comparability[1]
Gross margin excluding restructuring charges	40.6%	37.1%	–	43.2%	–	40.6%	37.5%	–
Operating income excl. restr. charges & items affecting compar. in 2019[2]	11.0	5.7	92%	9.0	23%	29.1	22.1	32%
Operating margin excl. restr. charges & items affecting compar. in 2019[2]	15.8%	8.6%	–	15.6%	–	12.5%	9.7%	–
Free cash flow before M&A	12.8	-1.9	–	3.9	–	22.3	7.6	192%
Net cash, end of period	41.9	34.5	21%	41.5	1%	41.9	34.5	21%

[1]Non-IFRS financial measures are reconciled at the end of this report to the most directly reconcilable line items in the financial statements.

[2]Operating income excludes restructuring charges in all periods and cost provisions related to the resolution of the SEC and DOJ investigations of SEK -11.5 b. in Q3 2019 as well as a partial release of the same provision of SEK 0.7 b. in Q4 2019.

Comments from Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC, news, filings)

As we navigate through the pandemic, health and well-being of our colleagues, customers and partners is our number one priority. Despite the challenges, our people continued to deliver and to serve our customers with very limited disturbances. Our R&D investments have continued to drive both technology leadership and cost efficiency which have led to increased market share and improved financial performance. We are today a leader in 5G with 127 commercial contracts and 79 operating networks around the world. Organic[1] sales grew by 5% for the full year. Our operating margin[2] of 12.5% (5.0%) exceeded our 2020 target and reached the 2022 Group target range two years early.

Networks sales grew organically[1] by 20%, reporting a gross margin[2] of 43.5% (41.1%) for Q4. This reflects continued high activity levels in North America and North East Asia, and also in Europe where we further increased market share. Networks delivered an operating margin[2] of 19% for full-year 2020 – well above the 15%-17% target. Investing in R&D is fundamental to our strategy. Since 2017 we have increased R&D investment by SEK 10 b. and delivered SEK 16 b. of improved operating income. Our growth during 2020 is built on a strong and competitive 5G portfolio.

Digital Services gross margin[2] grew to 41.0% (38.1%) in Q4. From 2017 to 2020, gross margin excluding restructuring charges and items affecting comparability increased from 29% to 42%, as a result of streamlined product portfolio, fewer critical contracts, a growing portion of software sales and lower service delivery costs. We continue to execute on the turnaround plan and the operating income[2] of SEK 0.5 b. in Q4 is the best quarterly result to date. The cloud-native 5G portfolio has a high win ratio and significant new customer contracts will start to generate revenues during the next 12-18 months. By selective R&D investments to accelerate our growth portfolio, we aim to capture further opportunities.

Managed Services delivered a gross margin[2] of 17.7% (15.4%) in Q4. Sales declined on operator consolidation in the US during 2020. The full-year 2020 operating margin[2] was 8.1% – above the 5%-8% target. We expect the margin profile to improve further with increasing sales of our Operations Engine with its high value-added services, driven by R&D investments in AI and automation. We see increasingly positive response from customers to our new portfolio.

Emerging Business and Other sales are growing in enterprise offerings such as IoT Platforms, complemented by the acquisition of Cradlepoint. Gross margin[2] improved to 33.8% (15.1%) driven by operational leverage from growth and lower cost as a result of the exited Edge Gravity business. Cradlepoint drives new revenues for mobile service providers and strengthens our position in the 5G enterprise market, alongside our existing Dedicated Networks and IoT portfolio. The underlying business in Cradlepoint develops according to plan. However, reported sales and costs for Cradlepoint are impacted by purchase price allocations and during 2021 our operating margin is expected to be negatively impacted by approximately -1 percentage point due to amortization of intangibles and increased cost for market expansion.

Free cash flow before M&A was SEK 22.3 (7.6) b. in full-year 2020. The Board will propose a dividend of SEK 2.00 (1.50) per share to the AGM, underlining the confidence in Ericsson’s business and financial position. In this context it is worth noting that we decided early on not to apply for any pandemic-related government support.

Patent licensing revenues for the full year amounted to SEK 10 b. As communicated in December, we are approaching important contract renewals, which could negatively impact 2021 and 2022 earnings (see planning assumptions on operating income, page 6). We are confident in the long-term value of our patent portfolio, including a strong position in 5G. We will seek to maximize the net present value of this portfolio, established over many years on the back of R&D investments. The IPR standardization framework, based on FRAND terms, underpins the interoperability of global wireless communications with more than 8 billion mobile subscriptions.

The pandemic has fast forwarded the digitalization of societies, including remote working, by months if not years. A resilient digital infrastructure is critical. We see more signs that countries and enterprises see 5G as a key access technology, with increasing deployment speed in Australia, the Middle East, North East Asia and the US. The pandemic has exposed the digital divide and rapid deployment of 5G is a fast way to bridge the divide.

The Swedish telecom regulator’s decision to exclude Chinese vendors from 5G networks may create exposure for our operations in China. Our business in 180 markets today has been built on free trade and open, competitive markets. This has also ensured the development of a single global standard for mobile communication. It is critical that responses to the geopolitical situation safeguard the extraordinary value associated with those operating standards for 5G and beyond.

During 2020 we further reinforced our strong commitment to ethics and compliance. We increased the investment with the recruitment of additional dedicated resources and the deployment of new or revised processes and controls. As a vital cornerstone, we put focus on establishing a durable ethical culture that is built on individual accountability for responsible business practices. The ongoing independent monitorship is providing valuable contributions to achieving our ambition.

Long-term business fundamentals remain strong and we will continue to invest in further strengthening our portfolio and growing our global footprint. While we expect temporary negative impact during 2021 from IPR renewals, Cradlepoint and investments to strengthen our long-term business, we remain fully committed to the 2022 target as a milestone towards the long-term EBITA[3] target of 15%-18%.

I want to take this opportunity for a shout out to all my colleagues who have turned the business around including delivering on customer commitments during a raging pandemic. I’m proud to be part of this team!

Stay healthy and well.

Börje Ekholm
President and CEO

[1]Sales adjusted for comparable units and currency

[2]Excluding restructuring charges

[3]Excluding restructuring charges and amortization of intangible assets

NOTES TO EDITORS

You find the complete report with tables in the attached PDF or by following this link or on www.ericsson.com/investors

Conference call for analysts, investors and journalists

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 CET (8:00 AM GMT London, 3:00 AM EST New York).

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Contact person

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This 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 CET on January 29, 2021.