STOCKHOLM -- Ericsson reports first quarter results 2018. First quarter highlights (In 2017, certain items affecting comparability had a significant negative impact on the results.)
Comments from Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC):
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.
(Notes: 1) Excluding restructuring charges
2) Excluding restructuring charges and corporate allocations)
Ericsson AB (Nasdaq: ERIC)