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© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 1
EricssonThird quarter 2018
Oct 18, 2018
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 2
Peter NyquistVice President Investor Relations
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 3
Third quarter 2018
Oct 18, 2018
This presentation contains forward-looking statements. Such statements are based on our current expectations and are subject to risks and uncertainties that could materially affect our business and results. Please read our earnings reports and our most recent annual report for a better understanding of these risks and uncertainties and please see the last page in this presentation for further information about forward-looking statements. Any forward-looking statements made during this presentation speaks only as of the date of this presentation and Ericsson expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them.
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 4
Börje EkholmPresident and CEO
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 5
Key takeaways
— 5G a commercial reality
—Organic sales growth 1% YoY• First quarter since Q3 2014
—Profitability at Group level restored – partly driven by cost-out• Net income positive, first quarter since Q2 2016
• Despite substantial provisions
—Digital Services improving – but challenges in transformation projects
—Update on SEC and DOJ investigation• Engaged in discussions with authorities to find resolution
—Confident in reaching our long-term target of at least 12% operating margin beyond 2020
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 6
— Networks – Operating margin 16%• Organic growth – continued strong sales growth in North
America
— Digital Services – reduced losses• Provisions for digital transformation projects• Increasing project turnaround efforts
— Managed Services – improved margins• Efficiency gains and contract reviews
— Emerging Business & Other – disciplined investments• Improvements driven by iconectiv
Q3 2018
SEK b. 18Q3 17Q3 18Q2
Net sales 53.8 49.4 49.8
Gross margin 36.9% 28.5% 36.7%
Operating income 3.8 -0.8 2.0
Operating margin 7.0% -1.7% 4.1%
Free cash flow excl. M&A 0.7 -0.8 -0.2
Excluding restructuring charges
Group targets 2020
Net Sales SEK 190-200 b.
Gross margin 37-39%
Operating margin >10%
Free Cash Flow Positive
Financial Performance, Q318
Financial Targets, 2020
This slide contains forward-looking statements. Actual result may be materially different. See the last page in this presentation for further information about forward-looking statements
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 7
— Middle East & Africa• Challenging economic situation in certain markets in the
Middle East
— North East Asia• Continued deployment of NB IoT in Mainland China• Digital Services sales declined
— South East Asia, Oceania & India• Large 4G deployments same period last year
— Europe & Latin America• Continued sales growth in Brazil, Mexico and parts of
Europe
— North America• Investments in 5G readiness across all major customers
Market area sales Q318, YoY
17Q3 Middle East& Africa
North EastAsia
SE AsiaOceania &
India
Europe &Latin
America
NorthAmerica
18Q3
-16%
4%-8%
Reported: 21%2%-9%
-3%
FX adjusted
2% 10%
10%
Net Sales bridge, Q318 YoY
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 8
Update on SEC & DOJ investigations
— Voluntarily cooperating since 2013 with an investigation by the SEC and, since 2015, an investigation by the DOJ into Ericsson’s compliance with the U.S. FCPA
— Continued cooperation with the SEC and DOJ, discussions to find a resolution
— Facts that are relevant to the inquiries of the SEC and DOJ identified as part of the investigations
— While the length of these discussions cannot be determined, based on the facts that we have shared with the authorities, we believe that the resolution of these matters will likely result in monetary and other measures, the magnitude of which cannot be estimated currently but may be material.
— As this is an ongoing matter, we cannot provide further details and will not speculate about the outcome
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 9
2004 2012 2015 2016 2017
Code of Business Ethics formalized
Whistleblower process established
Phase out of Agents begin
GRI voluntary reporting on incidents starts
Chief Compliance officer appointed
Audit Committee formally starts to review anti-corruption program
Ericsson Compliance Line & Supplier/partner Screening Tool
99% of employees acknowledged CoBE
External assessment of ethics & compliance leading to increased efforts
Ethics and Compliance Board established
MA Compliance Offices and Business Partner Review Boards established
Increased resources in compliance, investigation organizations
Increased focus on Board level, incl. changed reporting structure
2018
Personnel remediation
Vetting process for senior leaders
Face-to-face training with all Customer UnitsFirst inquiries from
US authorities
2013
Ethics & compliance timeline
Allegation management office being established
Deployments of analytic tools to identify high-risk transactions
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 10
Strategy execution on trackStatus Q3 2018
Networks
Net salesSEK 128-134 b.
Operating margin15-17%
Digital Services
Net salesSEK 42-44 b.
Operating marginLow single digit
Managed Services
Net salesSEK 20-22 b.
Operating margin4-6%
Other
Net salesSEK 3-5 b.
Operating marginBreak-even
Operating margin target excludes restructuring charges
— Ericsson Radio System – 86%
— Cost savings – Service delivery and common costs
— Competitive 5G-ready portfolio
— R&D investments up >30% YoY
— Losses reduced
— 19 of 45 contracts addressed
— Cost savings – service delivery efficiencies and lower R&D
— Increasing efforts to turn around transformation projects
— 40 of 42 contracts addressed
— Annualized profit improvement of SEK 0.9 b.
— Cost savings - Service delivery
— Investing in artificial intelligence, automation and analytics
— Media Solutions - partnering
— Selective investments in Emerging Business – IoT, UDN and Emodo
2020 target
Status Q3 2018
2020 target
Status Q3 2018
2020 target 2020 target
Status Q3 2018 Status Q3 2018
Capital Markets Day – New York, November 8
This slide contains forward-looking statements. Actual result may be materially different. See page [XX] for further information about forward-looking statements.
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 11
Carl MellanderChief Financial Officer
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 12
— Sales adjusted for FX: 5% YoY• Strong growth in North America, growth in Europe and
Latin America
— Solid gross margin increase YoY• Increased hardware and services margins• Increased ERS share• Favorable market mix• QoQ increase driven by software and capacity sales
— Operating margin increased YoY and QoQ• Increased investments in R&D pay off with improved
gross margin and sales
— Strong Ericsson Radio System deliveries, 86% YTD
Networks
Operatingmargin
18Q1 18Q2 18Q3 Target2020
14%
15-17%
SEK b. 18Q3 17Q3 18Q2
Net sales 35.9 31.9 32.4
Gross margin 41.5% 34.8% 40.2%
Operating income 5.8 3.8 4.3
Operating margin 16.1% 11.9% 13.3%
Capitalization impact1 -0.1 -0.7 0.0
Excluding restructuring charges
13%
Segment Networks – Financial performance
12017 excluding xo-items
16%
This slide contains forward-looking statements. Actual result may be materially different. See the last page in this presentation for further information about forward-looking statements
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 13
SEK b. 18Q3 17Q3 18Q2
Net sales 9.0 8.9 8.8
Gross margin 36.9% 32.0% 42.6%
Operating income -1.4 -2.7 -1.5
Operating margin -15.9% -29.9% -16.9%
Capitalization impact1 -0.4 -0.7 -0.4
Excluding restructuring charges
Segment Digital Services – Financial performance
— Sales adjusted for FX: -6% YoY• Major contract in North East Asia further delayed • Good progress due to 5G and Virtualization acceleration
— Gross margin improved YoY but declined QoQ• Increasing efforts to turn digital transformation projects
around – additional provisions led to sequential GM drop
— Operating income improved YoY and QoQ• Cost reductions across service delivery, SG&A and R&D• Continued investments in 5G portfolio• Additional 3 out of 45 critical or non-strategic customer
contracts addressed in Q318 – 19 in total
Digital Services
Target2020
Low singledigit
18Q1
-28%
Operatingmargin
18Q2
-17%
12017 excluding xo-items
-16%
18Q3
This slide contains forward-looking statements. Actual result may be materially different. See the last page in this presentation for further information about forward-looking statements
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 14
Excluding restructuring charges
Segment Managed Services – Financial performance
— Sales adjusted for FX: -8% YoY• Lower sales due to contract exits• Growth in Managed Services IT and Network Design &
Optimization
— Gross margin improved significantly YoY• Efficiency measures and contract reviews
— Operating income positive – stable sequentially
— Additional 7 out of 42 contracts addressed in Q3 –40 in total• Annualized profit improvement ~SEK 0.9 b.• Ericsson Local Services AB (LSS) divested on Aug 31
Managed Services
18Q1 18Q2 18Q3 Target2020
4-6%
3%Operating margin
SEK b. 18Q3 17Q3 18Q2
Net sales 6.5 6.6 6.5
Gross margin 12.9% -4.0% 14.0%
Operating income 0.4 -0.6 0.4
Operating margin 6.8% -9.5% 6.5%
7% 7%
This slide contains forward-looking statements. Actual result may be materially different. See the last page in this presentation for further information about forward-looking statements
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 15
Excluding restructuring charges
Segment Other – Financial performance
— Sales adjusted for FX: 11% YoY• Driven by iconectiv – number portability contract in US
— Gross margin improved YoY and QoQ• Supported by iconectiv and Media business
— Operating income improved YoY and QoQ• Improved income YoY in iconectiv and Media business• Investments in Emerging Business – in line with strategy• 51% of MediaKind will be transferred to external partner
around year-end – increased costs short term• Combined income1 for MediaKind and Red Bee Media
SEK -0.4 (-0.6) b.
Emerging Business & Other
SEK b. 18Q3 17Q3 18Q2
Net sales 2.4 2.0 2.1
Gross margin 32.3% 21.1% 27.4%
Operating income -1.0 -1.3 -1.2
Operating margin -41.5% -66.2% -57.4%
Capitalization impact1 -0.1 -0.1 -0.112017 excluding xo-items
Target2020
Break-even
-68%
Operatingmargin
18Q1
-57%
18Q2 18Q3
-41%
1Excluding restructuring charges and corporate allocations
This slide contains forward-looking statements. Actual result may be materially different. See the last page in this presentation for further information about forward-looking statements
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 16
SEK b. 18Q3 17Q3 Change
Net sales 53.8 49.4 +9%
Gross income 19.8 14.1 5.7
Gross margin 36.9% 28.5% +8.4 pp
R&D expenses -9.2 -8.6 -0.6
SG&A expenses -6.5 -5.6 -0.9
Imp. losses trade receivables -0.4 -1.1 0.7
Other op. income and expenses 0.0 0.4 -0.4
Operating income 3.8 -0.8 4.6
Operating margin 7.0% -1.7% +8.7 pp
Restructuring charges -0.6 -2.8 2.3
Excluding restructuring charges
— YoY sales growth driven by Networks and FX
— Gross margin improved YoY and QoQ
— Continued R&D investments in Networks
— SG&A expenses impacted by revaluation of customer financing in Middle East
— Impairment testing of trade receivables made continuously
— Gain from divestment of Power Modules in Q3 2017
— Income significantly improved YoY and QoQ• Cost reductions• Other strategic initiatives• Improvements in all segments
Q3 2018
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 17
SG&A and R&D Q318, YoY
Excluding restructuring charges
8.6
9.2
0.10.7
1.4
17Q3 Capitalized R&D Reductions Investments inNetworks
18Q3
Mainly inDigital Services
R&D bridge Q318 YoY (SEK b.)
Increased R&D in Networks
5.6
6.50.7 0.9
0.7
17Q3 Costreductions
Revaluation ofcust. financing
Other 18Q3
Excluding restructuring charges
SG&A bridge Q318 YoY (SEK b.)
• Provisions for variable compensation
• Field trials• FX
Cost reductions in G&A
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 18
— Structural improvements YoY• Cost reductions visible in all segments• ERS ramp up• Managed Services contract review
— Positive capitalization impact YoY, SEK 0.7 b.
— Positive market and business mix
— Gross margin stable QoQ• Increased software and hardware capacity sales in
Networks• Increased IPR revenues• Digital Services negatively impacted by increased
provisions for digital transformation projects
Gross margin Q318, YoY
Continued strong gross margin – effects of strategy execution and control
28.5%
36.9%
20%
30%
40%
Q317 Networks DigitalServices
ManagedServices
EB + Other Q318
2016 and 2017: adjusted as per 2017 reporting, before IFRS 15 restate
34% 33%
29% 29%
31% 30% 30% 30%
36%37% 37%
Q12016
Q2 Q3 Q4 Q12017
Q2 Q3 Q4 Q12018
Q2 Q3 Target2020
Gross margin bridge Q318 YoY
Underlying gross margin development from 2016
Adjusted for restructuring charges
This slide contains forward-looking statements. Actual result may be materially different. See the last page in this presentation for further information about forward-looking statements
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 19
Free cash flow
Solid balance sheet – Net cash improved to SEK 32.0 (24.1) b. YoY
SEK b. Q318 Q317
Net income reconciled to cash 2.9 -0.8
Change operating net assets -0.9 0.8
Cash flow from operating activities 2.0 0.0
CAPEX -1.1 -0.7
Other -0.2 -0.1
Free cash flow excluding M&A 0.7 -0.8
M&A -0.4 0.4
Free cash flow 0.3 -0.5
Net cash end of period 32.0 24.1
Gross cash end of period 65.7 55.1
Financial Performance
Debt maturity profile (SEK b.)
This slide contains forward-looking statements. Actual result may be materially different. See the last page in this presentation for further information about forward-looking statements
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 20
Planning assumptions from the Q3 report
2018 Net Sales, SEK b.
Strong sequential sales growth Q2 to Q3
Gross margin % Operating expenses, SEK b.Excluding restructuring charges Excluding restructuring charges
Impact from regional and business mix Seasonality, field trials and Networks R&D
50.3 49.4
57.9
43.4
49.853.8
Q217
Q3 Q4 Q118
Q2 Q3
30.9%
28.5%
25.1%
35.9%
36.7%36.9%
Q217
Q3 Q4 Q118
Q2 Q3
-14.8-15.4
-18.5
-14.8
-16.3 -16.1
Q217
Q3 Q4 Q118
Q2 Q3
+17%
Please see the Q3 report for the full planning assumptions
• Lower than normal seasonality in Networks
• FX
• Cost reductions• Regional sales mix• Business mix
• Seasonality• Increased investments
in Networks R&D• Field trials• MediaKind transaction
costs• Cost reductions
-2%
This slide contains forward-looking statements. Actual result may be materially different. See the last page in this presentation for further information about forward-looking statements
Q4 Q4 Q4
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 21
Börje EkholmPresident and CEO
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 22
— Continued strong strategy execution• Investments in technology leadership
• Strong cost control to safeguard competitiveness
— 5G now a commercial reality• Continue to invest to secure 5G leadership
— Enhanced mobile broadband and fixed wireless access first 5G use cases
— Artificial Intelligence and automation key enablers for new business development
Closing remarks
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 23
Capital Markets DayNew York, November 8
https://www.ericsson.com/en/investors/events-and-presentations/CMD2018
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 24
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 26
Forward-looking statementsThis presentation includes forward-looking statements, including statements reflecting management’s current views relating to the growth of the market, future market conditions, future events, financial condition, and expected operational and financial performance, including, in particular the following:- Our goals, strategies, planning assumptions and operational or financial performance expectations; - Industry trends, future characteristics and development of the markets in which we operate; - Our future liquidity, capital resources, capital expenditures, cost savings and profitability; - The expected demand for our existing and new products and services as well as plans to launch new products and services including R&D expenditures; - The ability to deliver on future plans and to realize potential for future growth;- The expected operational or financial performance of strategic cooperation activities and joint ventures; - The time until acquired entities and businesses will be integrated and accretive to income; and - Technology and industry trends including the regulatory and standardization environment in which we operate, competition and our customer structure.
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We caution investors that these statements are subject to risks and uncertainties many of which are difficult to predict and generally beyond our control that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.
Important factors that could affect whether and to what extent any of our forward-looking statements materialize include, but are not limited to, the factors described in the section Risk factors in the most recent Annual Report and in our quarterly reports.
These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this presentation, to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events, whether as a result of new information, future events or otherwise, except as required by applicable law or stock exchange regulation.
This presentation does not constitute an offer to sell, or the solicitation of an offer to buy, any of our securities. It does not constitute a prospectus or prospectus equivalent document and investors should not make any investment decision in relation to any shares referred to in this presentation. No offer of securities shall be made except by means of a prospectus meeting the requirements of the Securities Act and applicable European rules and regulations.