Ericsson Q3 reports 6% decline in sales

Ericsson’s third quarter sales has declined by 6 per cent YoY whereas sales adjusted for comparable units and currency declined by 3 per cent.

The networks sales declined by 4 per cent YoY. Sales adjusted for comparable units, currency and the rescoped managed services contract in North America, increased slightly.

Borje Ekholm, President and CEO of Ericsson said, “We continue to execute on our focused business strategy. While more remains to be done as we are starting to see some encouraging improvements in our performance despite a continued challenging market. Networks showed a slight sales growth year over year, adjusted for the rescoped managed services contract in North America and for currency. Networks adjusted operating margin was 11%. While losses continue in IT & Cloud, we see increased stability in product roadmaps and projects.”

Sales in North America, adjusted for comparable units, currency and the re-scoped managed services contract were stable. Sales in Mainland China declined as the market is normalizing following a period of significant 4G deployments, representing more than 60% of global 4G volumes in the industry. We have managed to increase our LTE market shares in Mainland China to position Ericsson in 5G.

Restructuring charges in the quarter were SEK -2.8 billion. including a write-down of SEK -1.6 billion. related to one of our global ICT centers, as rapid technology development allows us to consolidate test activities to the two remaining centers. For full-year 2017 we expect restructuring charges to be approximately SEK 9-10 billion.

In the quarter, there was a net reduction of 3,000 employees despite 1,100 new recruitments in R&D. We expect efficiency improvements to accelerate in the fourth quarter to reach an annual run-rate effect of at least SEK 10 billion by mid-2018.

The Ericsson Radio System portfolio, accounting for 55 per cent of total radio volumes year to date, is proving competitive, contributing both to improved earnings and a stronger market position. The work to focus the managed services business and to review under-performing contracts continues. To date we have either exited, renegotiated or transformed 13 out of the 42 contracts, resulting in an annualized profit improvement of SEK 0.4 b.

The IT & Cloud business is of strategic importance as our customers are preparing for 5G and will digitalize their operations and invest in a future network architecture based on software-defined logic.

We now expand our focus to improve profitability through increased efficiency in service delivery. In addition, we will scale the software part of the business mix and increase the level of pre-integration services, which will lead to a higher gross margin but lower services sales. Positive effects on gross margin are expected in 2018.

We remain fully committed to our focused business strategy. We continue to invest to secure technology leadership and year to date we have recruited more than 1,000 R&D employees in Networks. Customers give positive feedback on both our long term strategy and on our current 5G-ready portfolio.

In line with previous estimate and that of external sources, the Radio Access Network (RAN) equipment market outlook is estimated to decline by -8% for full-year 2017. Restructuring charges for Q4 2017 are estimated to be SEK 3-4 billion.

To position Ericsson in 5G in Mainland China, the company has managed to increase its market shares. However, this will have a dilutive effect on gross margin in Mainland China in Q4 2017, but the ambition is to continue to deliver double digit adjusted operating margin in Networks in Q4 2017.