Ericsson sees a further sales slump in Q1

Ericsson’s first-quarter revenues were down by 14% year on year as constrained telco spending continued to bite its top line, but investors liked the vendor’s improved margins.

Ericsson expects sales to stabilise in the second half of 2024 amid signs some customers are looking to spend again, as the telecoms equipment maker beat first-quarter profit forecasts helped by a one-off gain.

The Swedish group pointed to recent contract wins and normalising customer inventory levels in North America.

Its shares were up 6% in early trade, to levels last seen at the start of the month.

However, Ericsson also predicted the 5G Radio Access Network (RAN) market would keep falling at least through the end of the year.

First quarter highlights – Driving gross margin improvements and cost efficiencies.

• Sales declined organically[1] by -14% YoY, due to a -19% decline in Networks. Reported sales decreased to SEK 53.3 (62.6) b.
• Gross income excluding restructuring charges decreased to SEK 22.8 (24.9) b. as lower sales were partly offset by an improvement in gross margin. Reported gross income was SEK 22.7 (24.2) b.
• Gross margin excluding restructuring charges improved to 42.7% (39.8%) supported by a competitive product portfolio, cost actions, improved commercial discipline, as well as increased IPR licensing revenues. Reported gross margin was 42.5% (38.6%).
• EBITA excluding restructuring charges amounted to SEK 5.1 (4.8) b. with a margin of 9.6% (7.7%), which included a one-time gain of
• SEK 1.9 b. Reported EBITA was SEK 4.9 (3.8) b.
• Net income was SEK 2.6 (1.6) b. EPS diluted was SEK 0.77 (0.45).
• Free cash flow before M&A was SEK 3.7 (-8.0) b. reflecting improved management of working capital.
• Net cash on March 31, 2024, was SEK 10.8 b. compared with SEK 7.8 b. on December 31, 2023.

Comments from Börje Ekholm, President and CEO of Ericsson
In Q1, we continued to execute on our strategy to strengthen our leadership in mobile networks, drive a focused expansion in enterprise, and pursue cultural transformation. We maintained our leading market position, but as expected our customers continued to exercise caution with their investments. Against this tough market backdrop, we delivered solid expansion in gross margins. This underscores the competitiveness of our solutions, our commercial discipline, and our actions on costs.

We will continue to proactively optimize the business, including through strategic cost-saving measures, to ensure Ericsson is best positioned to increase shareholder value.

Q1 – Market headwinds and execution focus
While organic sales declined by -14%, we reached a gross margin of 42.7%, generated EBITA of SEK 5.1 billion and a 9.6% EBITA margin.

Networks sales decreased organically by -19% YoY as our customers continued to be cautious with their investments. Despite this, we generated a strong gross margin of 44.3% – a testament to our technology leadership, our competitive product portfolio, and the strategic actions we are taking, including on costs.

In Cloud Software and Services, we continued to execute on our strategy to strengthen delivery performance and commercial discipline. We delivered a gross margin of 37.4% and our EBITA margin improved year-on-year for a fifth consecutive quarter. The rolling four quarter EBITA margin was 3.0%.

In Enterprise, sales grew organically overall but declined in Global Communications Platform, impacted by a low-margin customer contract loss in Q4 and our decision to reduce our operations in some countries, with the impact expected to continue throughout the year. We continue to focus on leveraging the current business to support the build-out of our Global Network Platform for network APIs.

Our IPR revenues continued to grow, with a new 5G patent license agreement with a handset manufacturer. We are confident of delivering further growth in IPR revenues, benefiting from additional 5G agreements and an expansion into additional licensing areas. The timing of contracts will fluctuate, as we seek to optimize the value of new agreements.

We delivered SEK 3.7 billion of free cash flow in Q1, benefiting from our operational improvements, and lower working capital as we concluded an intense 5G roll-out phase in India.

We announced further measures in the quarter to improve our cost efficiency and streamline operations, including headcount reductions. This is a necessary action to position the Company for longer-term success.

In March, our independent Monitor certified our compliance program. This is an important step to conclude our plea agreement. Our focus on culture and integrity will continue.

Executing on our strategy
Our strategy is aimed at building a stronger and more profitable Ericsson in the long term, with a vision to capture the next major wave of networks innovation with a substantial platform business.

At Mobile World Congress in Barcelona, we showcased industry-leading hardware and software solutions required in order to build the high-performance and programmable networks necessary to digitalize society. Our industry is shifting from a vertically integrated architecture to a horizontal and cloud-based network architecture – and Ericsson is leading this development.

We also took critical steps in our strategy to build a Global Network Platform for network APIs, and announced three key partnerships with Verizon, AT&T and Amazon Web Services, as well as a communications API agreement with KDDI. Exposing network features through APIs will support the creation of new differentiated services and will be crucial in the next step of digitalization of enterprise and society.

Looking ahead
We expect a further decline in the RAN market, at least through the end of this year, as customers remain cautious with their investments and the pace of investment in India continues to normalize. Dell’Oro estimates the global RAN equipment market will decline by -4% in 2024, which may prove optimistic.

If current trends persist, we expect our sales to stabilize during the second half of the year, benefiting from recent contract wins and the normalization of customer inventory levels in North America. In Q2, we expect Networks gross margin excluding restructuring charges to be in the range of 42-44%. In the second half, our margins should benefit from improved business mix. We also remain highly focused on delivering stronger cash flow, based on our operating discipline.

Our enterprise strategy aims to leverage network capabilities to increase telecoms industry revenue growth above the level that traffic growth alone could deliver. We are creating new, differentiated, products and services, supporting our customers in this transformation. In turn, this will support industry investment levels in the longer term.

While near-term dynamics are challenging, we remain fully committed to our long-term targets, and we continue to be focused on increasing shareholder value.

CT Bureau