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Ericsson sales slightly lower again in Q3, on China slowdown, supply chain problems

Third quarter highlights

  • Group organic sales declined by -1% YoY. Sales in Mainland China in Networks and Digital Services declined by SEK -3.6 b. impacting the growth rate by -6%. Some impact was seen from disturbances in the supply chain. Reported sales were SEK 56.3 (57.5) b.
  • Gross margin excl. restructuring charges improved to 44.0% (43.2%) mainly driven by increased and partly retroactive IPR revenues and the acquired Cradlepoint business. Operational leverage continued to be strong in Networks. Reported gross margin was 44.0% (43.1%).
  • EBIT margin excl. restructuring charges increased slightly to 15.7% (15.6%). Reported EBIT increased to SEK 8.8 b. (15.7%) from SEK 8.6 b. (15.0%). EBIT was supported by a market revaluation of investments and an impairment write-off, amounting to SEK 0.4 b.
  • Organic sales development in Networks was stable YoY. The quarter was impacted by market share loss in Mainland China. Reported EBIT margin was 23.7% (22.0%).
  • Reported net income was SEK 5.8 (5.6) b.
  • Free cash flow before M&A was SEK 13.0 (3.9) b. driven primarily by strong cash collection. Net cash per September 30, 2021 was SEK 55.7 b. compared with SEK 41.5 b. per September 30, 2020.
  • Investor Update (Nov. 9) will be postponed into next year with the intent to host a full-day, in-person CMD with the entire executive management present.
SEK b. Q3
Net sales 56.3 57.5 -2% 54.9 2% 161.0 162.8 -1%
 Sales growth adj. for comparable units and currency –  –  -1% –  –  –  –  6%
Gross margin 44.0% 43.1% 43.4% 43.4% 40.2%
EBIT 8.8 8.6 2% 5.8 52% 19.9 16.8 19%
EBIT margin 15.7% 15.0% 10.6% 12.4% 10.3%
Net income 5.8 5.6 4% 3.9 48% 12.8 10.4 23%
EPS diluted, SEK 1.73 1.61 7% 1.10 57% 3.79 3.00 26%
Measures excl. restructuring charges
Gross margin excluding restructuring charges 44.0% 43.2% 43.4% 43.5% 40.7%
EBIT excluding restructuring charges 8.8 9.0 -1% 5.8 52% 20.0 18.1 10%
EBIT margin excluding restructuring charges 15.7% 15.6% 10.6% 12.4% 11.1%
Free cash flow before M&A 13.0 3.9 229% 4.1 218% 18.6 9.5 96%
Net cash, end of period 55.7 41.5 34% 43.7 27% 55.7 41.5 34%

 Comments from Börje Ekholm, President and CEO of Ericsson

We continue to win footprint across our business by leveraging our competitive 5G portfolio. The 5G contracts now awarded by all three tier-1 US carriers are the largest in Ericsson’s history. Gross margin was further strengthened, both sequentially and year over year and reached 44.0% (43.2%). EBIT margin reached 15.7%, and free cash flow before M&A was SEK 13.0 b. Through continuous measures for global supply chain resilience, we avoided customer impact during the first half of the year. However, late in Q3 we saw some impact on sales from disturbances in the supply chain, and such issues will continue to pose a risk. While we continued to gain share in a growing market, the expected sales reduction in Mainland China, lower variable sales in Managed Services and some supply chain disturbances, led to a negative organic sales development of -1%.

Networks sales were stable YoY, despite considerably lower volumes from Mainland China, reflecting market share gains in other markets. Excluding sales in Mainland China, Networks sales increased by 8% in the third quarter compared to the same period last year. However, late in Q3 we experienced some impact on sales from disturbances in the supply chain, and such issues will continue to pose a risk. Gross margin improved to 47.8% (46.7%), driven by operational leverage and higher IPR revenues.

Digital Services sales grew by 1% despite a stark sales reduction in Mainland China. Excluding sales in Mainland China, Digital Services sales increased by 6% in the third quarter compared to the same period last year. We are starting to see initial revenues from 5G contracts, driving growth in our Core business. Gross margin was 42.3% (43.5%), impacted mainly by initial deployment costs in cloud native 5G Core projects. We continue to increase our R&D investments in the 5G portfolio, including Core and orchestration, further strengthening our competitive position. With increasing sales in combination with a higher share of software sales, we expect profitability to gradually improve and over time exceed our original target of EBIT margin of 10%-12%.

As a consequence of the reduced market share in Mainland China we are planning to resize our sales and delivery organization in the country, starting in Q4, adding to our restructuring charges.

We increased IPR revenues to SEK 2.6 (2.2) b. driven by new agreements, with retroactive impact, confirming our IPR position. With the significant value of our broad patent portfolio and strong position in 5G, reaffirmed by the recent agreement with Samsung, we believe we are well positioned to conclude pending and future patent license renewals. As communicated in the past, the timing of agreement renewals may cause temporary gaps in IPR revenues.

We continue to improve our Ethics and Compliance program in accordance with our strategy and activities based on input from our independent compliance monitor. Such initiatives and activities have enabled the strengthening of an integrity-based culture, compliance governance and anti-corruption internal controls. We are firmly committed to continuously develop and improve in the years to come to ensure a sustainable compliance program.

We continue to strengthen our sustainability work. Supporting our customers by improving energy efficiency in our products as well as reducing our own carbon emissions has been crucial for our success in recent years. In the quarter, we signed a USD 2 b. sustainability-linked revolving credit facility, further integrating our sustainability ambitions by linking our climate action targets to our financial activities.

We continue to see results of our strategy to improve flexibility, reduce sensitivity to business mix and lower the working capital. Free cash flow before M&A amounted to SEK 13.0 (3.9) b. in the third quarter, supported by strong cash collection including some customer pre-payments.

5G for Enterprise provides an exciting opportunity for Ericsson. The acquired Cradlepoint business is developing favorably, contributing to gross margin improvement for the Group in the quarter. Building on the strong foundations of our core business we will continue to invest in the Enterprise business, aiming at Enterprise becoming a sizeable part of Ericsson’s business in a few years.
CT Bureau

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