STOCKHOLM -- Second quarter highlights:
Table 1: Ericsson Q2 2019
|Q2||Q2||YoY||Q1||QoQ||6 months||6 months|
|Sales growth adj. for comparable units and currency||-||-||7%||-||-||-||-|
|Operating income (loss)||3.7||0.2||-||4.9||-24%||8.6||-0.1|
|Net income (loss)||1.8||-1.8||-||2.4||-23%||4.3||-2.5|
|EPS diluted SEK||0.51||-0.58||-||0.7||-27%||1.21||-0.83|
|EPS (non-IFRS) SEK||0.59||-0.09||-||0.8||-26%||1.39||0.02|
|Free cash flow excluding M&A||2.2||-0.2||-||4.1||-45%||6.3||0.6|
|Net cash, end of period||33.8||33.1||2%||36.1||-7%||33.8||33.1|
|Gross margin excluding restructuring charges||36.70%||36.70%||-||38.50%||-||37.50%||36.30%|
|Operating income (loss) excluding restructuring charges||3.9||2||89%||5.1||-24%||9||2.9|
|Operating margin excluding restructuring charges||7.00%||4.10%||-||10.40%||-||8.60%||3.10%|
Comments from Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC)Organic sales growth was 7% in the quarter, mainly driven by sales in North America and North East Asia. We see strong momentum in our 5G business with both new contracts and new commercial launches as well as live networks. To date, we have provided solutions for almost two-thirds of all commercially launched 5G networks.
5G momentum is increasing. Initially, 5G will be a capacity enhancer in metropolitan areas. However, over time, new exciting innovations for 5G will come with IoT use cases, leveraging the speed, latency and security 5G can provide. This provides opportunities for our customers to capture new revenues as they provide additional benefits to consumers and businesses.
In the quarter, gross margin was unchanged YoY at 36.7%, with improvements in segment Networks being offset by lower margins in Digital Services and Managed Services.
Networks had another solid quarter with an organic sales growth of 11% YoY, driven by 4G and 5G investments in North America and North East Asia as well as increased volumes related to strategic contracts. While the strategic contracts will be margin accretive in the long term, the impact on near-term profitability is negative. In the quarter we had a negative impact on gross margin and expect this impact to increase during the second half of the year. In addition, costs related to the previously announced license settlement agreement impacted margins negatively. Despite this, gross margin improved to 41.4% (40.2%) YoY mainly due to increased IPR revenues.
To ensure we meet customer requirements for fast and agile deliveries, we have decided to invest in a state-of-the-art 5G production site in the US to complement our global supply chain.
In Digital Services we continue to execute on the plan to reach low single-digit margins for 2020. The improvements are not linear and will vary between quarters. Organic sales in Digital Services were down by -3% YoY as a result of rapid decline in legacy products.
Gross margin was 37.1% (42.6%). The decline in gross margin was mainly driven by a change in sales mix. The mix may vary between quarters. Our 5G and Cloud native portfolio is gaining customer traction and we are increasing related R&D investments to ensure portfolio readiness. The reshaped BSS strategy is gaining momentum and contracts were signed with several new customers in the quarter.
The share of recurrent business is increasing, we are tracking towards having 75% of the 45 critical and non-strategic contracts addressed by year-end and we have cost efficiency programs in place throughout Digital Services.
In Managed Services the strategy is to enhance the customer offering by relying more on automation, machine learning and AI, which will longer-term change and improve the margin profile of the business. Near-term margins are negatively impacted by the increase in R&D investments. Organic sales declined by -6%, mainly explained by the negative effect from the customer contract reviews. Gross margin declined to 12.3% (14.0%) YoY, negatively impacted by timing of costs.
Organic sales growth in Emerging Business and Other was 24% driven by a continued growth in iconectiv. Operating income improved YoY to SEK -0.7 (-1.2) b. supported by increased profits in iconectiv and the divestment of MediaKind. In this segment we invest in initiatives that aim to scale and help create future business for Ericsson. With the exception of iconectiv, the portfolio is still in an early investment phase.
Driven by improved earnings, free cash flow excluding M&A improved to SEK 2.2 (-0.2) b.
We are in ongoing settlement negotiations with the United States Securities and Exchange Commission (SEC) and the United States Department of Justice (DOJ) in connection with their previously reported investigation under the U.S. Foreign Corrupt Practices Act (FCPA). We are not able to estimate the length of these settlement discussions. Further, as this is an ongoing legal matter we cannot provide any detail. However, it is our current assessment that the resolution of these matters will result in material financial and other measures, the magnitude and impact of which cannot be reliably estimated or ascertained at this time.
We continue to take strategic contracts and the large-scale network deployments expected to commence in parts of Asia, will gradually impact margins negatively in the short term but strengthen our position in the long term. Continued technology and market investments, especially in 5G, automation and AI, are fundamental for long-term competitiveness and a key part of our focused strategy to strengthen our long-term business and path to reaching our targets for 2020 and 2022.
President and CEO
Planning assumptions going forward
• The Radio Access Network (RAN) equipment market is estimated to increase by 3% for full-year 2019 with 2% CAGR for 2018-2023. (Source: Dell’Oro.)
Ericsson AB (Nasdaq: ERIC)