STOCKHOLM -- Fourth quarter highlights:
Comments from Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC):
Our focused strategy has yielded clear results. Ericsson is today a stronger company. Increased investments in R&D for future growth, managed services contract reviews, combined with efficient cost control have proven to be successful, with improved competitiveness and profitability as a result. As the industry moves to 5G and IoT, we will now take the next step, focusing on profitable growth in a selective and disciplined way.
Sales have gradually improved during 2018, resulting in full-year organic sales growth for the first time since 2013. This is partly due to an improved market, but also driven by market share gains in Networks as a result of a more competitive radio product portfolio. In parallel, gross margins have improved across all segments, with full-year gross margin of 35% (26%) and operating margin of 4% (-13%).
Segment Networks had another strong quarter with high business activity across multiple regions. Networks organic sales increased by 6% YoY, positively impacted by a recovering RAN market as well as strong performance in the product portfolio. Growth was partly due to a higher than anticipated activity level in North America driven by increased 5G demand among the US operators. Networks gross margin improved to 41% (35%) YoY, mainly due to improved hardware margins driven by the successful shift to Ericsson Radio System (ERS). Strategic contracts and 5G field trials had a negative impact on operating margin in the quarter. R&D investments continued to grow in the quarter, but are now expected to flatten out.
In Managed Services, gross margin improved to 12% (-5%) YoY, supported by efficiency gains and customer contract reviews. We have now addressed all 42 targeted contracts, resulting in an annualized profit improvement of SEK 0.9 b. During the year, we have increased our investments in automation, analytics and AI.
We continue to execute on our plan to turn the Digital Services business around. Focus has been on stabilizing top line, modernizing the portfolio and taking costs out. In Digital Services there has been solid progress in most portfolio areas. Underlying operating expenses in 2018 were SEK 2.6 b. lower than in 2017. However, the Business Support Systems (BSS) area has not shown satisfactory progress and we are now in the process of reshaping the business. To speed up restructuring of the BSS business, additional measures were communicated on January 10, 2019. These measures include provisions and restructuring charges of SEK -6.1 b., which were taken in Q4. The reshaped strategy will set Digital Services on a stronger path to achieve the 2020 financial targets. Organic sales in Digital Services grew by 5% YoY, driven by Cloud Core and OSS. Gross margin, adjusted for above mentioned provisions, improved to 38%. Operating income, excluding restructuring charges and other costs related to revised BSS strategy, was SEK -0.6 b. in the quarter.
In segment Emerging Business and Other, we invest in initiatives that aim to scale and help create future business for Ericsson. We manage Emerging Business initiatives for growth case by case, based on positive net present value (NPV), within 2022 Group targets. Organic segment sales grew by 1% YoY and operating income was SEK -1.5 (-7.6) b. Sales growth and operating income in the segment, excluding the media business, was 60% and SEK -0.9 (-0.8) b. respectively.
Free cash flow excluding M&A in 2018 was lower than in 2017, primarily due to the return to growth and strong sales development at the end of the fourth quarter. In addition, sale of trade receivables was further reduced. The Board will propose a dividend of SEK 1.00 (1.00) per share to the AGM.
As previously disclosed, we are voluntarily cooperating with an investigation into Ericsson’s compliance with the U.S. Foreign Corrupt Practices Act (FCPA). The discussions with US authorities continue and we will provide updates as appropriate.
Our R&D investments over the past two years have secured a highly competitive and industry-leading offering. We will continue to invest in 5G, automation and AI to create both customer and shareholder value. Even though costs related to strategic contracts and 5G field trials will impact margins short term, they will help reaching our targets for 2020 and 2022 as well as strengthen our business in the long term.
President and CEO
 Organic sales growth: Sales adjusted for comparable units and currency
 Excluding restructuring charges
 Excluding net impact from amortization and capitalization of development expenses, as well as of intangible assets, risk provisions and write-downs.
Planning assumptions going forward
The Radio Access Network (RAN) equipment market is estimated to increase by 2% for full-year 2019 with 2% CAGR for 2018-2023. (Source: Dell’Oro.)
Rule of thumb: A weakening by 10% of USD to SEK would have a negative impact of approximately -5% on net sales and approximately -1 percentage point on operating margin.
5-year average sales seasonality between Q4 and Q1 is -26%. The baseline for the current IPR licensing contract portfolio is approximately SEK 8 b. on an annual basis.
Strategic contracts in Networks, with initially lower margins, taken to strengthen the market position, will continue to have a negative impact on gross margin. The costs may vary between quarters, without jeopardizing 2020 financial targets.
Costs for 5G field trials mainly in Networks will continue in 2019. R&D expenses are expected to flatten out, starting in Q1.
Operating expenses typically decrease between Q4 and Q1 due to seasonality.
Restructuring charges for full-year 2019 are estimated to be SEK -3 to -5 b.
Cost reductions and efficiency improvements will continue in Digital Services aiming to significantly reduce losses in 2019.
The planned divestment of MediaKind is ongoing: 2018 financials Media Solutions business (MediaKind incl. transaction-related costs etc): Net sales 2018: SEK 2.7 b. and Q4: SEK 0.7 b., operating income excl. restructuring charges 2018: SEK -1.7 b. and Q4: SEK -0.5 b.
The estimated net impact of amortization and capitalization of development expenses and of recognition and deferral of hardware costs will be approximately SEK -1 b. for 2019, compared with SEK -2.6 b. in 2018.
Ericsson AB (Nasdaq: ERIC)