STOCKHOLM -- THIRD QUARTER HIGHLIGHTS:
Table 1: Ericsson Third Quarter 2017
|SEK b.||Q3 2017||Q3 2016||YoY change||Q2 2017||QoQ change||9 months 2017||9 months 2016|
|Net sales adjusted for certain items affecting comparability in 2017||47.7||51.1||-7%||49.9||-5%||145.4||157.4|
|Sales growth adj. for comparable units and currency||-||-||-3%||-||1%||-11%||-8%|
|Gross margin excluding restructuring charges and adjusted for certain items affecting comparability in 2017||30.0%||29.4%||-||29.8%||-||30.1%||32.2%|
|Operating income excluding restructuring charges and adjusted for certain items affecting comparability in 2017||0.0||1.6||-102%||0.3||-114%||1.3||9.5|
|Operating margin excluding restructuring charges and adjusted for certain items affecting comparability in 2017||-0.1%||3.1%||-||0.6%||-||0.9%||6.0%|
|EPS diluted, SEK||-1.34||-0.07||-||-0.3||-||-4.93||1.01|
|EPS (non-IFRS), SEK3)||-0.55||0.34||-262%||0.17||-||-2.8||2.04|
|Cash flow from operating activities||0||-2.3||-99%||0||-||-1.6||-5.4|
|Net cash, end of period||24.1||16.3||48%||24||0%||24.1||16.3|
Comments from Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC):
We continue to execute on our focused business strategy. While more remains to be done we are starting to see some encouraging improvements in our performance despite a continued challenging market. Networks showed a slight sales growth year over year, adjusted for the rescoped managed services contract in North America and for currency. Networks adjusted1) operating margin was 11%. While losses continue in IT & Cloud, we see increased stability in product roadmaps and projects.
The general market conditions continue to be tough. Sales adjusted for comparable units and currency declined by -3% YoY. Sales in North America, adjusted for comparable units, currency and the rescoped managed services contract were stable. We also saw growth returning in several countries as operators are increasing their investments in network capacity. Sales in Mainland China declined as the market is normalizing following a period of significant 4G deployments, representing more than 60% of global 4G volumes in the industry. We have managed to increase our LTE market shares in Mainland China to position Ericsson in 5G. However, this will have a dilutive effect on gross margin in Mainland China in Q4 2017, but the ambition is to continue to deliver double digit adjusted operating margin in Networks in Q4 2017.
Reported operating income was negative at SEK -4.8 (0.3) b. in the quarter while the operating income, adjusted for restructuring, additional provisions and adjustments as well as a gain from divestment of the power modules business, was SEK 0.0 (1.6) b. Operating income was negatively impacted by higher amortization than capitalization of development expenses and higher recognition than deferral of hardware costs of SEK -1.5 (0.5) b. As described in the second quarter report, we have reduced capitalization of development expenses and deferral of hardware costs due to technology and portfolio shifts.
As communicated in the Q2 2017 report we have identified an increased risk of further market and customer project adjustments, considering the current market environment and our focused strategy. In total, the negative impact on results was then estimated to be SEK 3-5 b. until mid-2018. In the quarter, costs of SEK 2.3 b. impacted the result, with limited effect on cash flow. With current visibility, we believe we will be in the higher end of the range of the risk estimate.
Restructuring charges in the quarter were SEK -2.8 b. including a write-down of SEK -1.6 b. related to one of our global ICT centers, as rapid technology development allows us to consolidate test activities to the two remaining centers. For full-year 2017 we expect restructuring charges to be approximately SEK 9-10 b.
In the quarter, we have accelerated cost and efficiency measures, which are key in our focused strategy. Activities to reduce the workforce have been initiated in many markets. In the quarter, there was a net reduction of 3,000 employees despite 1,100 new recruitments in R&D. We expect efficiency improvements to accelerate in the fourth quarter to reach an annual run-rate effect of at least SEK 10 b. by mid-2018.
Sales in Networks grew, adjusted for currency and the previously communicated rescoped managed services contract in North America. Higher hardware capacity sales and a more competitive product portfolio resulted in an adjusted1) operating margin of 11% (9 %). The Ericsson Radio System portfolio, accounting for 55% of total radio volumes year to date, is proving competitive, contributing both to improved earnings and a stronger market position.
The work to focus the managed services business and to review under-performing contracts continues. To date we have either exited, renegotiated or transformed 13 out of the 42 contracts, resulting in an annualized profit improvement of SEK 0.4 b.
In IT & Cloud, sales declined and losses increased in the quarter. The increase in QoQ losses is largely due to higher amortization than capitalization of development expenses of SEK -0.7 (0.4) b. Our turn-around plan builds on stability, profitability and growth in that order. The initial focus has been on stabilizing both product roadmaps and challenging contracts. We have made good progress in the quarter. However, securing deliveries on large transformation projects puts pressure on gross margin in the near term.
The IT & Cloud business is of strategic importance as our customers are preparing for 5G and will digitalize their operations and invest in a future network architecture based on software-defined logic.
We now expand our focus to improve profitability through increased efficiency in service delivery. In addition, we will scale the software part of the business mix and increase the level of pre-integration services, which will lead to a higher gross margin but lower services sales. Positive effects on gross margin are expected in 2018.
Despite continued decline in legacy product sales there is good traction in our new media portfolio with several important wins in the quarter. We have accelerated our efficiency measures and continue to pursue strategic opportunities for this business.
Managing our cash is a top priority. Free cash flow2) in the quarter was SEK -0.5 (-5.0) b., driven by reductions in working capital and lower CAPEX. Our net cash position remained solid at SEK 24.1b.
We remain fully committed to our focused business strategy. We continue to invest to secure technology leadership and year to date we have recruited more than 1,000 R&D employees in Networks. Customers give positive feedback on both our long-term strategy and on our current 5G-ready portfolio.
Planning assumptions going forward
Ericsson AB (Nasdaq: ERIC)