Ericsson Reports Third Quarter Results 2019

Investor Update key messages

Focused business strategy remains and the Company is tracking towards the new financial targets:

[1] Operating income excluding restructuring charges in all periods. Excluding cost provisions related to resolution of the SEC and DOJ investigations of SEK -11.5 b. and refund of social security costs of SEK 0.9 b. in Q3 2019. Excluding a capital gain related to the divestment of MediaKind of SEK 0.7 b. and a reversal of a provision for impairment of trade receivables of SEK 0.7 b. in Q1 2019.

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)

We continue to see strong momentum in our business, based on the strategy to increase our investments for technology leadership, including 5G. We saw organic sales growth[1] of 3% in the quarter, driven by the early adopters of 5G, in North America and North East Asia. Our operating income was SEK 6.5 b., corresponding to a margin of 11.4% excluding restructuring costs, the SEC and DOJ provision of USD -1.2 b. (SEK -11.5 b.) and the refund of social security costs of SEK 0.9 b. Free cash flow before M&A was SEK 5.5(0.7) b. adding to our strong financial position.

Our focused strategy, introduced in 2017, is aimed at building a stronger Ericsson longer term. With clear focus on our operator customers the strategy stands on a foundation of increased investments in R&D for technology and cost leadership, and growing market footprint. Increased R&D efforts, which will continue, have resulted in a competitive portfolio driving improved gross margin. In addition, we have been able to record several important wins improving market footprint for future business. We are disciplined in the deals we take and target opportunities where we have a clear competitive advantage through technology leadership, supported by our improved cost structure in hardware and software. While we believe the strategic contracts are attractive long term, the initial margins may be challenging. This is due to high associated costs as operators change vendors.

An important indicator for our execution of the strategy is the improvement in gross margin. The gross margin[2] in the quarter ended at 37.8% compared with 36.9% last year and 36.7% last quarter. Within the 0.8 percentage point[3] sequential decline in Networks gross margin, we have absorbed the margin impact and inventory provisions related to strategic contracts.

The largest market for 5G infrastructure will be China where deployments are expected to start near term. We have invested to increase our market share, however it is still too early to assess possible volumes and price levels. Based on historic experience we expect to have challenging margins initially but positive margins over the lifespan of a contract.

With an organic sales growth[1] of 4%, segment Networks delivered another solid quarter, with strong development in North America. Operating margin improved YoY, with continued good traction for the Ericsson Radio System.

The turnaround of Digital Services is on track for low single digit margins in 2020. Driven by strong improvement in the underlying business, the losses were substantially reduced QoQ, in spite of a negative impact from the remainder of the 45 critical contracts of SEK 0.5 b. (slightly more than in the second quarter). The negative impact of these contracts will continue to vary between quarters as they are addressed. We continue to focus on developing a full 5G and cloud-native portfolio. It is encouraging to see that the sales growth in our new product portfolio improved from 13% to 19% rolling 12 months.

5G is taking off faster than earlier anticipated and we see initial 5G buildout as a capacity enhancer in metropolitan areas. However, over time, new exciting innovations for 5G will come with industrial and IoT use cases, leveraging the speed, latency and security characteristics of 5G. This provides opportunities for our customers to capture new revenues as they provide additional benefits to consumers and businesses.

Our IoT business is growing almost twice as fast as the estimated market growth of 20-25% per year. We have more than 4,500 enterprises on our IoT platform and the number of connected devices on the platform has more than doubled year to date. To fully leverage our position and capture new recurring revenue streams we are increasing our investments in IoT within Emerging Business. With this investment, we do not expect to reach breakeven for the segment next year, and instead incur losses of SEK -1.5 to -2.0 b.

Investor Update

In conjunction with today's report we are hosting an Investor Update where we will discuss company strategy, including financial targets. Continued technology and market investments will remain key for long-term competitiveness and for reaching our targets for 2020 and 2022. A solid financial position and continued strong cash flow are important for our ability to deliver on our focused strategy. As a consequence of currency movements and a stronger 5G market, our sales ambition for 2020 is to reach SEK 230-240 b. compared with the previous estimate of SEK 210-220 b. Our 2020 target of reaching an operating margin of more than 10% remains. This includes the changed target for Emerging Business and Other, short-term dilutive impact from strategic contracts and the initially higher cost level for newly introduced 5G products. For 2022 the operating margin target is 12-14%[2] (previously >12%) based on an ambition to grow faster than the market in combination with leverage from investments in market position and R&D.

Börje Ekholm

President and CEO

[1] Organic sales growth: Sales growth adjusted for comparable units and currency.

[2] Excluding restructuring charges.

[3] Excluding restructuring. Networks gross margin adjusted for a license settlement cost in Q2 2019.

Planning assumptions going forward

Market related

Ericsson related

Net sales

Gross margin

Operating expenses

Restructuring charges

Currency exposure

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/2019/9month19-en.pdf or on www.ericsson.com/investors

Q3 conference call for journalists, analysts and investors 

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 CEST (8:00 AM BST London, 3:00 AM EDT New York).

To join the conference call, please phone one of the following numbers:

Sweden: +46(0)8-56642651 (Toll-free Sweden: 0200-883-685)

International/UK: +44(0)333-300-0804 (Toll-free UK: 0800-358-9473)

US: +1-631-913-1422 (Toll-free US: +1-855-85-70686)

PIN code: 24181250#

Please call in at least 15 minutes before the conference call starts.

A live audio webcast of the conference call will be available at www.ericsson.com/investors and www.ericsson.com/press 

A replay of the conference call will be available from about one hour after the conference call has ended until October 24, 2019.

Sweden replay number: +46(0)8-519-993-85

International replay number: +44(0)333-300-0819

US replay number: +1(866)931-1566

PIN code: 301300190#

Investor Update– online-only digital event 

The Investor Update on Ericsson's overall strategic direction and business development, presented by President and CEO Börje Ekholm and CFO Carl Mellander, will be held on the same date at 3:00 to 5:00 PM CEST (2:00 PM BST London, 9:00 AM EDT New York). The Investor Update will also include a brief summary of the third quarter results.

The link to the webcast will be available at www.ericsson.com/investors and www.ericsson.com/press before the event.

To join the Q&A session, please phone one of the following numbers:

Sweden: +46(0)8-566-42651 (Toll-free Sweden: 0200-883-685)

International/UK: +44(0)333-300-0804 (Toll-free UK: 0800-358-9473)

US: +1-631-913-1422 (Toll-free US: +1-855-85-70686)

PIN code: 42814345#

An on-demand webcast will be available at www.ericsson.com/investors approximately one hour after the webcast ended.

FOR FURTHER INFORMATION, PLEASE CONTACT

Contact person

Peter Nyquist, Head of Investor Relations

Phone: +46-10-714-64-99

E-mail: [email protected] 

Additional contacts

Stella Medlicott, Senior Vice President, Marketing and Corporate Relations

Phone: +46-10-713-65-39

E-mail: [email protected]

Investors

Stefan Jelvin, Director, Investor Relations

Phone: +46-10-714-20-39

E-mail: [email protected] 

Rikard Tunedal, Director, Investor Relations

Phone: +46-10-714-54-00

E-mail: [email protected]

Media

Ola Rembe, Vice President, Head of External Communications

Phone: +46-10-719-97-27

E-mail: [email protected] 

Corporate Communications

Phone: +46-10-719-69-92

E-mail: [email protected]

This information 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 CEST on October 17, 2019.  

This information was brought to you by Cision http://news.cision.com

https://news.cision.com/ericsson/r/ericsson-reports-third-quarter-results-2019,c2934562

The following files are available for download: