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Ericsson reports fourth quarter and full-year results 2021
[1] Non-IFRS financial measures are reconciled at the end of this report to the most directly reconcilable line items in the financial statements
Our strategy to invest in technology leadership and grow market share in our core business underpinned a robust financial performance in 2021 and ensured a good Q4 for Ericsson overall. Our commitment to pursue value from growth in wireless enterprise took a significant step forward with the announcement of our ambition to acquire Vonage, which will give us the foundation to develop a Global Network Platform to drive innovation on top of the 5G networks. This adds to already strong progress in 2021 in our organic enterprise portfolio - Dedicated Networks and IoT - and follows the successful integration of Cradlepoint. With a full-year EBIT margin[2] of 13.9%, we reached our 2022 target one year early, while absorbing significantly increased investments in R&D, Enterprise, cybersecurity and compliance. Fourth quarter organic sales[1] grew by 2%, gross margin[2] improved to 43.5% (40.6%), the EBIT margin[2] reached 17.3% (15.8%) and free cash flow before M&A amounted to SEK 13.5 (12.8) b .
Networks sales[1] grew organically by 3% in Q4, despite considerably lower volumes in Mainland China. Gross margin[2] improved to 46.4% (43.5%). The 2021 financial performance and continued market share gains outside of Mainland China are underpinned by our investments in technology leadership. We have so far been able to mitigate the inflationary pressure by continuously evolving our product portfolio. We strengthened our industry-leading portfolio during the year with ultra-light, energy-efficient Massive MIMO radios for enhanced network performance and our new Cloud RAN portfolio for 5G mid band.
In Q4, Digital Services organic sales[1] were stable YoY. Excluding sales in Mainland China, where we had considerably lower volumes, sales[1] increased by 3% YoY in the fourth quarter. Fourth quarter gross margin[2] improved to 43.4% (41.0%) with a positive EBIT[2] of SEK 0.4 b . During 2021 we continued to invest in R&D, particularly for the cloud native offerings and our portfolio is now substantially transformed compared with a few years ago. We will continue to increase investments in our 5G portfolio, including in our orchestration offerings, to further strengthen our long-term competitiveness and position us in an open world for future standards and technologies. We expect profitability to gradually improve and over time exceed our original EBIT margin[2] target of 10–12%.
Managed Services delivered a gross margin[2] of 18.9% (17.7%) in Q4. For the full year of 2021 organic sales[1] declined by -6% as new deals did not offset lower customer demand, contract rescoping and planned exits. To grow profits, we will accelerate the ongoing transformation towards a more software-driven offering with higher margin potential.
Emerging Business and Other delivered an improved gross margin[2] of 35.2% (33.8%) in Q4. For full-year 2021, gross margin[2] improved to 37.3% (28.0%), where Cradlepoint's performance is the main contributor. We are seeing increasing momentum for our 5G portfolio in Dedicated Networks and Cradlepoint.
IPR revenues amounted to SEK 2.4 (2.6) b ., including a new smaller agreement with retroactive impact. With our strong position in 5G and leading, broad patent portfolio we believe we are well positioned to conclude pending and future patent license renewals. Ericsson's IPR licensing revenues continue to be affected by several expiring patent license agreements pending renewal and 5G license negotiations. This will lead to estimated revenues from IPR licensing of SEK 1.0 - 1.5 b . in Q1, unless renewals are signed in the first quarter. The actual financial impact will depend on the timing as well as terms and conditions of new agreements.
In October, we received correspondence from the Department of Justice that we had breached our obligations under the Deferred Prosecution Agreement by failing to provide certain documents and factual information. At this point in time, we cannot provide further information or predict the outcome. We continue to invest in improving our Ethics and Compliance program in accordance with our strategy and objectives. We are firmly committed to continuously develop and improve in the years to come to ensure a sustainable compliance program.
Free cash flow before M&A was SEK 32.1 (22.3) b . for full-year 2021, the highest in Ericsson's history, further strengthening the net cash position to SEK 65.8 (41.9) b . During the last few years, our strategy has been to increase the flexibility of our business and reduce the capital tied up in the business. Consequently, we are now able to operate the Company with less capital than in the past. The Board will propose a dividend of SEK 2.50 (2.00) per share to the AGM, underlining the confidence in Ericsson's business going forward.
Based on current business momentum, we expect fundamentals to remain strong in our core mobile infrastructure business during 2022. We will continue to increase investments in R&D to sustain our technology leadership and strengthen our competitive position to take advantage of the rollout of 5G networks. At the same time, we will continue our efforts to expand our presence in the enterprise market. Over time, we expect the enterprise segment to provide higher growth and profitability than our mobile infrastructure business. The Group EBIT target[2] for 2022 of 12-14% remains, excluding the Vonage-related segment. With the different business mix compared to when we set the 2022 target back in 2018, the target becomes less relevant, and our key focus is therefore now to accelerate the pace towards reaching our long-term target of EBITA margin[2] of 15-18%. After delivering an EBITA margin[2] of 14.6% in 2021, our ambition is to reach the long-term target no later than in 2-3 years. At that time, we will have a higher growth profile as a company.
2021 was a successful year for Ericsson and I want to take this opportunity to thank all my colleagues who relentlessly delivered on customer commitments while navigating through supply chain challenges and a raging pandemic. I am 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
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/2021/12month21-en.pdf or on www.ericsson.com/investors
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