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4G/3G/WiFi

Ericsson Reports Q1 2016

STOCKHOLM -- FIRST QUARTER HIGHLIGHTS:

  • Sales as reported decreased by -2% YoY. Sales, adjusted for comparable units and currency, decreased by -1% YoY.
  • Sales declined following weak development in Europe and a weak macro-economic environment in some emerging markets.
  • Sales grew in North America, Mainland China and in South East Asia.
  • IPR licensing revenues grew YoY, mainly driven by recently signed contracts which included certain one-time items.
  • Gross margin declined to 33.3% (35.4%), mainly due to lower margins in Global Services, higher share of mobile broadband coverage projects in parts of Asia and lower software sales in IP and core networks.
  • Operating margin increased to 6.7% (4.0%) YoY, driven by improvements in Networks, partly offset by lower profitability in Global Services.
  • In addition to the SEK 9 b. global cost and efficiency program, measures were started in the quarter to adapt the operations to current mobile broadband project volumes. Therefore, the estimate for 2016 restructuring charges increases to SEK 4-5 b. from previous SEK 3-4 b.
  • The company today announces structural changes to further accelerate strategy execution and drive efficiency and growth harder across the company.
  • Cash flow from operating activities was SEK -2.4 (-5.9) b.

    Table 1: Ericsson Q1 2016 Financials

    SEK b. Q1 Q1 YoY Q4 QoQ
    2016 2015 change 2015 change
     Net sales 52.2 53.5 -2% 73.6 -29%
       Sales growth adj. for comparable units and currency - - -1% - -28%
     Gross margin 33.30% 35.40% - 36.30% -
       Gross margin excluding restructuring charges 33.90% 36.30% - 36.60% -
     Operating income 3.5 2.1 63% 11 -69%
       Operating income excluding restructuring charges 4.1 2.7 50% 11.7 -65%
     Operating margin 6.70% 4.00% - 15.00% -
       Operating margin excluding restructuring charges 7.90% 5.10% - 16.00% -
     Net income 2.1 1.5 45% 7 -70%
     EPS diluted, SEK 0.6 0.4 50% 2.15 -72%
     EPS (Non-IFRS), SEK 1) 0.87 0.77 13% 2.5 -65%
     Cash flow from operating activities -2.4 -5.9 -60% 21.9 -111%
     Net cash, end of period 2) 36.5 39.7 -8% 41.2 -11%
    1) EPS, diluted, excl. amortizations and write-downs of acquired intangible assets, and restructuring.
    2) The definition of Net cash is changed to exclude post-employment benefits.

    Comments from Hans Vestberg, President and CEO of Ericsson
    Sales, adjusted for comparable units and currency, were stable YoY. Growth in North America, Mainland China and South East Asia was offset by weak development in Europe and some emerging markets. Profitability increased YoY, driven by improvements in Networks while Global Services had a challenging quarter.

    Business
    Segment Networks sales declined slightly YoY. A continued weak macro-economic environment impacted sales negatively in some emerging markets in the Middle East and Latin America. In addition, sales in Europe were down primarily driven by completion of mobile broadband projects in 2015.

    Mobile broadband sales in North America and South East Asia grew and the fast pace of 4G deployments in Mainland China continued. IPR licensing revenues grew YoY, mainly driven by recently signed contracts which included certain one-time items. Software sales in IP and core networks declined.

    Sales in segment Global Services declined YoY. This was mainly due to lower Network Rollout activities in Europe and Latin America. Professional Services sales were stable with growth in Consulting and Systems Integration driven by transformation projects and stable Managed Services sales with 21 contracts signed in the quarter.

    Sales in Support Solutions increased YoY due to higher IPR licensing revenues. The underlying demand remains strong in OSS and BSS as data growth and increased focus on customer experience drives operators to transform their OSS and BSS solutions.

    Profitability
    Gross margin declined despite higher IPR licensing revenues. The main reasons were lower margins in Global Services, a higher share of mobile broadband coverage projects in parts of Asia and lower software sales in IP and core networks. Operating margin increased YoY to 6.7% (4.0%), driven by reduced operating expenses and a positive currency effect.

    Segment Networks operating margin improved through higher profitability in Radio supported by growth in IPR licensing revenues. Global Services had a challenging quarter partly due to lower mobile broadband coverage activities, leading to temporarily larger losses in Network Rollout. In addition, Professional Services margin declined as a large number of systems integration transformation projects are in a start-up phase.

    Cash flow
    We ended the quarter with a negative cash flow from operating activities of SEK -2.4 b. which is a significant improvement compared with a year ago. As cash flow is volatile between quarters it should be viewed on a full-year basis. Our full-year cash conversion target of more than 70% remains.

    Focus 2016
    When announcing the year-end results 2015, we presented three focus areas for 2016. The first focus area relates to our Core business where we will capture business opportunities in 4G and extend our leadership in 5G. At the Mobile World Congress (MWC) in Barcelona in March, we demonstrated our 5G leadership both technically and commercially through 21 customer contracts as well as industry and academia research cooperation.

    The second focus area for 2016 is to improve profitability in the targeted growth areas. Sales in these areas showed growth mainly driven by professional services. We will continue to put stronger focus on software sales and recurring business to increase profitability.

    The third focus area for 2016 is to improve cost and efficiency in order to stay competitive across the entire business. The global cost and efficiency program is progressing according to plan and contributed with savings of SEK 0.5 b. in operating expenses in the quarter. We are confident in our ability to achieve net annual savings of SEK 9 b. during 2017 compared with 2014.

    In the quarter, we began to take additional measures beyond the SEK 9 b. cost and efficiency program. Hence, we are adapting our operations to current mobile broadband project volumes, which primarily impacts service delivery. The additional measures are reflected in an increased estimate for the 2016 restructuring charges.

    Structural changes
    We are today announcing structural changes to further accelerate strategy execution and drive efficiency and growth even harder across the company. We will create a leaner, more fit for purpose, organization to cater to the needs of different customer segments and to faster capture market opportunities. As 5G, the Internet of Things and Cloud drive the next phase of industry development, the time is right to make this change.

    The new structure will have five business units and one dedicated customer group for Industry & Society, in line with the company focus on core business, targeted growth areas and cost and efficiency. The changes will make it easier for our customers to do business with us, whether they are operators, media companies or other industries.

    We are not satisfied with our overall growth and profitability development over the past years and I am convinced this will make us more competitive and enable us to grow both our company and our earnings.

    Ericsson AB (Nasdaq: ERIC)

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