Third quarter highlights - in line with guidance
Group organic sales[1] declined by -10% YoY. Segment Networks organic sales[1] declined by -16% while Enterprise and Cloud Software and Services sales grew organically. Reported sales decreased by -5% to SEK 64.5 (68.0) b.
Gross margin excluding restructuring charges was 39.2% (41.4%) primarily impacted by changed business mix in Networks. Reported gross margin was 38.4% (41.4%).
Reported EBIT was SEK -28.9 (7.1) b. impacted by a SEK -31.9 b. impairment of goodwill related to the acquisition of Vonage.
EBITA excluding restructuring charges amounted to SEK 4.7 (7.7) b. with an EBITA margin of 7.3% (11.3%). Reported EBITA was SEK 3.8 (7.6) b. with restructuring charges amounting to SEK -0.9 (-0.1) b. The goodwill impairment does not impact EBITA.
Cloud Software and Services achieved EBITA[3] break-even on a rolling four quarter basis.
Net income (loss) was SEK -30.5 (5.4) b. EPS diluted was SEK -9.21 (1.56). Net income excluding impairment of goodwill was SEK 1.4 (5.4) b.
Free cash flow before M&A was SEK -0.5 (2.5) b. impacted by lower EBIT and higher working capital related to large deployment projects. Net cash on September 30, 2023, was SEK 1.6 b. compared with SEK 1.9 b. on June 30, 2023.
Long-term EBITA margin[3] target of 15-18% remains, and Ericsson aims to reach it as soon as possible, subject to market mix recovery.
+--------------+------+-----+------+-----+------+------+-----+------+
|SEK b.        |Q3    |Q3   |YoY   |Q2   |QoQ   |Jan   |Jan  |YoY   |
|              |2023  |2022 |change|2023 |change|-Sep  |-Sep |change|
|              |      |     |      |     |      |2023  |2022 |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|Net sales     |64.5  |68.0 |-5%   |64.4 |0%    |191.5 |185.6|3%    |
+--------------+------+-----+------+-----+------+------+-----+------+
| Sales growth |-     |-    |-10%  |-    |-     |-     |-    |-7%   |
|adj. for      |      |     |      |     |      |      |     |      |
|comparable    |      |     |      |     |      |      |     |      |
|units and     |      |     |      |     |      |      |     |      |
|currency[2]   |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|Gross         |38.4% |41.4%|-     |37.4%|-     |38.1% |41.9%|-     |
|margin[2]     |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|EBIT (loss)   |-28.9 |7.1  |-     |-0.3 |-     |-26.2 |19.2 |-     |
+--------------+------+-----+------+-----+------+------+-----+------+
|EBIT margin[2]|-44.8%|10.5%|-     |-0.5%|-     |-13.7%|10.3%|-     |
|              |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|EBITA[2]      |3.8   |7.6  |-50%  |0.5  |-     |8.2   |20.0 |-59%  |
+--------------+------+-----+------+-----+------+------+-----+------+
|EBITA         |5.9%  |11.2%|-     |0.8% |-     |4.3%  |10.8%|-     |
|margin[2]     |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|Net income    |-30.5 |5.4  |-     |-0.6 |-     |-29.5 |12.9 |-     |
|(loss)        |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|EPS diluted,  |-9.21 |1.56 |-     |-0.21|-     |-8.96 |3.80 |-     |
|SEK           |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|Measures excl.                                                     |
|restructuring                                                      |
|charges[2]                                                         |
+--------------+------+-----+------+-----+------+------+-----+------+
|Gross margin  |39.2% |41.4%|-     |38.3%|-     |39.1% |41.9%|-     |
|excluding     |      |     |      |     |      |      |     |      |
|restructuring |      |     |      |     |      |      |     |      |
|charges       |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|EBIT (loss)   |-28.0 |7.2  |-     |2.8  |-     |-21.2 |19.3 |-     |
|excluding     |      |     |      |     |      |      |     |      |
|restructuring |      |     |      |     |      |      |     |      |
|charges       |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|EBIT margin   |-43.5%|10.6%|-     |4.4% |-     |-11.1%|10.4%|-     |
|excluding     |      |     |      |     |      |      |     |      |
|restructuring |      |     |      |     |      |      |     |      |
|charges       |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|EBIT excluding|3.9   |7.2  |-46%  |2.8  |37%   |10.7  |19.3 |-45%  |
|restructuring |      |     |      |     |      |      |     |      |
|and goodwill  |      |     |      |     |      |      |     |      |
|impairments   |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|EBIT margin   |6.0%  |10.6%|-     |4.4% |-     |5.6%  |10.4%|-     |
|excluding     |      |     |      |     |      |      |     |      |
|restructuring |      |     |      |     |      |      |     |      |
|and goodwill  |      |     |      |     |      |      |     |      |
|impairments   |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|EBITA         |4.7   |7.7  |-39%  |3.7  |28%   |13.2  |20.2 |-35%  |
|excluding     |      |     |      |     |      |      |     |      |
|restructuring |      |     |      |     |      |      |     |      |
|charges       |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|EBITA margin  |7.3%  |11.3%|-     |5.7% |-     |6.9%  |10.9%|-     |
|excluding     |      |     |      |     |      |      |     |      |
|restructuring |      |     |      |     |      |      |     |      |
|charges       |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|Free cash flow|-0.5  |2.5  |-     |-5.0 |-     |-13.5 |5.3  |-     |
|before M&A    |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
|Net cash, end |1.6   |13.4 |-88%  |1.9  |-15%  |1.6   |13.4 |-88%  |
|of period     |      |     |      |     |      |      |     |      |
+--------------+------+-----+------+-----+------+------+-----+------+
[1]Sales adjusted for comparable units and currency
[2]Non-IFRS financial measures are reconciled at the end of this report to the most directly reconcilable line items in the financial statements.
[3] Excluding restructuring charges
Comments from Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC)
In a challenging operating environment, Ericsson delivered third quarter results in line with our guidance. Consistent with the rest of our industry, we expect the macroeconomic uncertainty to persist into 2024, which impacts our customers' investment ability. We are addressing these challenges with a focus on elements within our control, namely cost management and operational efficiency. We are on a journey to fundamentally reposition our business and we continue to execute on our strategy to extend our leadership in mobile networks, grow our enterprise business, and drive lasting cultural transformation.
Q3 in line with guidance
Q3 performance was in line with guidance, with an EBITA[2] margin of 7.3% and an EBITA[2] of SEK 4.7 b. Group organic sales[1] declined by -10%, with a -16% organic decline in Networks partly offset by 5% organic growth in Cloud Software and Services and 11% in Enterprise.
Networks organic sales[1] in North America were down by -60% YoY from a record quarter in Q3 2022, due to customers` inventory adjustments and a slower deployment pace. Sequentially, Networks sales declined by -2% in line with previous trends. The decline in North America was partly offset by growth in India as well as some early 5G markets resuming investments.
Our efforts to increase resiliency and reduce sensitivity to mix and volume changes pays off. Despite large market mix shifts in Networks, where North America declined YoY from 48% to 23% of sales, our gross margin remained as high as 40%.
Future networks need to be increasingly resilient, open, sustainable, and intelligent. Open RAN plays an important role in achieving this vision, and we are leading the industrialization of cloudification, open fronthaul and open management for network programmability. More than one million Ericsson radios in the field are hardware prepared for open fronthaul which underpins our support for openness across our Cloud RAN and radio portfolios.
Cloud Software and Services continued executing on the turnaround. With an EBITA[2] of SEK 0.4 b. in Q3, we have now achieved a positive EBITA on a rolling four quarter basis. While results fluctuate between quarters due to the nature of this business, we are well on track to deliver at least break-even for full-year 2023 and improving from there on.
In Enterprise we saw continued strong growth in Enterprise Wireless Solutions, and we had a second consecutive quarter of positive EBITA in Global Communications Platform.
Last week, we announced a SEK -32 b. impairment of goodwill attributed to our acquisition of Vonage. Since the announcement of our acquisition in 2021, macroeconomic headwinds, including rising interest rates and changing demand trends, have significantly impacted the market capitalization of Vonage's publicly traded peers.
Vonage is key to our expansion in Enterprise where we are enabling the next wave of innovation in our industry. We recently announced a significant milestone, in partnership with Deutsche Telecom, to be the first in the industry to unlock a market opportunity estimated at USD 20 b. by 2028[3]. By offering communication and network APIs to developers and enterprises, we are opening up new ways for operators to monetize their investments in mobile networks, and for developers to leverage network capabilities to create exciting new applications. We are seeing significant inbound interest from operators to further develop this market.
Free cash flow before M&A decreased to SEK -0.5 (2.5) b., mainly due to increased working capital for large deployment projects such as in India. Next year, with reduced build-out pace in these projects, we expect working capital to taper off and free cash flow before M&A to start gradually approaching our long-term target of 9-12% of net sales.
Looking ahead
For Q4 we expect similar market trends as in Q3, while the cost-out impact will increase. We expect a group Q4 EBITA margin[2] at around 10%.
We expect the underlying uncertainty impacting our Mobile Networks business to persist into 2024. We are proactively addressing the challenges in the current environment and are focusing on what we can control, including reducing costs. Our cost-out actions are already impacting the P&L and we are now expecting to yield SEK 12 b. in run-rate savings by year end, which is an increase of SEK 1 b. compared with previous indication. We will continue to take decisive cost-out actions to ensure Ericsson is well positioned to deliver value for our shareholders. Key to our strategy execution is to keep investments in technology leadership and long-term transformation intact, while managing our balance sheet.
The mobile networks market has been flattish for two decades, but with cyclicality, and we expect that to continue. However, the high paced mobile data growth, further spurred by new use cases, is the underlying driver for the market to recover to a more normal level. We are also relatively early in the 5G cycle with 75% of all radio base station sites, outside China, not yet updated with 5G mid-band. Competitive dynamics in our customer markets tend to lead to relatively sharp increase in investments when the market turns, and we are seeing some positive signs in early 5G markets.
Our long-term EBITA margin[2] target of 15-18% remains, and we aim to reach it as soon as possible, subject to market mix recovery. Given current uncertainty we will not give guidance beyond Q4, 2023. As timing for the market mix recovery is in our customers' hands, we prudently plan for current market conditions to prevail into 2024. We are managing our business accordingly, with focus on cost management and operational efficiency. When the market recovers, we will have significant operating leverage following the actions we are taking.
While near-term dynamics are uncertain, we are convinced that the recovery will come. Our goal is to make Ericsson a more profitable company, returning to our cash flow target level and capturing the next major wave of networks innovation with a substantial platform business.
Börje Ekholm
President and CEO
[1]Sales adjusted for comparable units and currency
[2]Excluding restructuring charges
[3]Network APIs Driving new revenue streams for telcos, STL Partners
NOTES TO EDITORS
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