Ericsson Third quarter 2018 - Oct 18, 2018

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Ericsson Third quarter 2018 - Oct 18, 2018
Ericsson
Third quarter 2018

Oct 18, 2018

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 1
Ericsson Third quarter 2018 - Oct 18, 2018
Peter Nyquist
Vice President Investor Relations

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 2
Ericsson Third quarter 2018 - Oct 18, 2018
Third quarter 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-
Oct 18, 2018                                                                                 looking statements, and the estimates and assumptions associated with them.

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 3
Ericsson Third quarter 2018 - Oct 18, 2018
Börje Ekholm
President and CEO

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 4
Ericsson Third quarter 2018 - Oct 18, 2018
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 5
Ericsson Third quarter 2018 - Oct 18, 2018
Q3 2018
     Financial Performance, Q318
     Excluding restructuring charges

    SEK b.                                                18Q3            17Q3               18Q2    — Networks – Operating margin 16%
                                                                                                        • Organic growth – continued strong sales growth in North
    Net sales                                               53.8            49.4              49.8
                                                                                                          America
    Gross margin                                          36.9%           28.5%              36.7%
    Operating income                                          3.8            -0.8              2.0   — Digital Services – reduced losses
    Operating margin                                        7.0%           -1.7%              4.1%      • Provisions for digital transformation projects
                                                                                                        • Increasing project turnaround efforts
    Free cash flow excl. M&A                                  0.7            -0.8             -0.2
                                                                                                     — Managed Services – improved margins
                                                                                                        • Efficiency gains and contract reviews
     Financial Targets, 2020                                                                         — Emerging Business & Other – disciplined investments
                                                                                                        • Improvements driven by iconectiv
    Group targets                                                                            2020
    Net Sales                                                          SEK 190-200 b.
    Gross margin                                                             37-39%
    Operating margin                                                           >10%
    Free Cash Flow                                                           Positive

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 6                            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
Market area sales Q318, YoY
     Net Sales bridge, Q318 YoY
                                                  FX adjusted
                         -16%                                                           10%            — Middle East & Africa
                                                                                                          • Challenging economic situation in certain markets in the
                                                                                                            Middle East
                                                                                                       — North East Asia
                                         -8%
                                                                         4%                               • Continued deployment of NB IoT in Mainland China
                                                         -3%                                              • Digital Services sales declined
                                                                                                       — South East Asia, Oceania & India
                                                                                                          • Large 4G deployments same period last year
                                                                                                       — Europe & Latin America
          17Q3        Middle East North East           SE Asia        Europe &         North    18Q3
                                                                                                          • Continued sales growth in Brazil, Mexico and parts of
                       & Africa     Asia              Oceania &         Latin         America               Europe
                                                        India         America
                                                                                                       — North America
    Reported:            -9%               2%              2%            10%           21%                • Investments in 5G readiness across all major customers

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 7
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 8
Ethics & compliance timeline
                                                                                                         External assessment of ethics &
                                                                                                      compliance leading to increased efforts

                                                                                                                                                                                     Allegation
  Code of Business                             Chief Compliance                               Ericsson Compliance Line
                                                                                                                                                         Personnel                   management
  Ethics formalized                            officer appointed                              & Supplier/partner
                                                                                                                                                         remediation                 office being
                                                                                              Screening Tool                                                                         established
                                                                                                                                     Increased
                        Phase out of                                                                                                 resources in
                        Agents begin                                                                                                 compliance,
                                                                                                                                     investigation          Vetting process
                                                                                                                                     organizations          for senior leaders

2004                                                     2012             2013                2015          2016          2017                                            2018

                                                                                                            Ethics and                MA Compliance              Face-to-face
                                      GRI voluntary                                                                                   Offices and                training with all
                                                                                                            Compliance
                                      reporting on                       First inquiries from                                         Business Partner           Customer Units
                                                                                                            Board
                                      incidents starts                   US authorities                                               Review Boards
                                                                                                            established
                                                                                                                                      established

                                                                                                                                                         Increased focus on            Deployments of
                                                                                                                                99% of employees
                                                                                                                                                         Board level, incl.            analytic tools to
                      Whistleblower                            Audit Committee                                                  acknowledged CoBE
                                                                                                                                                         changed reporting             identify high-risk
                      process                                  formally starts to
                                                                                                                                                         structure                     transactions
                      established                              review anti-corruption
                                                               program

 © Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 9
Strategy execution on track
 Status Q3 2018
               Networks                                                 Digital Services                                           Managed Services                                                                Other

                  2020 target                                                    2020 target                                                    2020 target                                                      2020 target
   Net sales                 Operating margin                      Net sales                  Operating margin                   Net sales                  Operating margin                       Net sales                Operating margin
 SEK 128-134 b.                  15-17%                           SEK 42-44 b.                 Low single digit                 SEK 20-22 b.                     4-6%                             SEK 3-5 b.                  Break-even

               Status Q3 2018                                                  Status Q3 2018                                                 Status Q3 2018                                                  Status Q3 2018
— Ericsson Radio System – 86%                                 — Losses reduced                                               — 40 of 42 contracts addressed                                 — Media Solutions - partnering
— Cost savings – Service delivery and                         — 19 of 45 contracts addressed                                 — Annualized profit improvement of                             — Selective investments in Emerging
  common costs                                                — Cost savings – service delivery                                SEK 0.9 b.                                                     Business – IoT, UDN and Emodo
— Competitive 5G-ready portfolio                                efficiencies and lower R&D                                   — Cost savings - Service delivery
— R&D investments up >30% YoY                                 — Increasing efforts to turn around                            — Investing in artificial intelligence,
                                                                transformation projects                                        automation and analytics

                                                                   Capital Markets Day – New York, November 8
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 10        Operating margin target excludes restructuring charges       This slide contains forward-looking statements. Actual result may be materially different.
                                                                                                                                                                See page [XX] for further information about forward-looking statements.
Carl Mellander
Chief Financial Officer

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 11
Networks
     Segment Networks – Financial performance
  Excluding restructuring charges

    SEK b.                                                  18Q3             17Q3             18Q2    — Sales adjusted for FX: 5% YoY
                                                                                                         •   Strong growth in North America, growth in Europe and
    Net sales                                                 35.9             31.9            32.4
                                                                                                             Latin America
    Gross margin                                           41.5%             34.8%            40.2%
    Operating income                                            5.8              3.8            4.3   — Solid gross margin increase YoY
    Operating margin                                       16.1%             11.9%            13.3%      •   Increased hardware and services margins
    Capitalization impact1                                     -0.1              -0.7           0.0      •   Increased ERS share
    12017   excluding xo-items
                                                                                                         •   Favorable market mix
                                                                                                         •   QoQ increase driven by software and capacity sales
                                                                      16%             15-17%          — Operating margin increased YoY and QoQ
                                 14%               13%                                                   •   Increased investments in R&D pay off with improved
     Operating                                                                                               gross margin and sales
     margin
                                                                                                      — Strong Ericsson Radio System deliveries, 86% YTD

                                18Q1              18Q2               18Q3              Target
                                                                                        2020

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 12                            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
Digital Services
     Segment Digital Services – Financial performance
  Excluding restructuring charges

    SEK b.                                                  18Q3             17Q3             18Q2     — Sales adjusted for FX: -6% YoY
                                                                                                          •   Major contract in North East Asia further delayed
    Net sales                                                   9.0              8.9             8.8
                                                                                                          •   Good progress due to 5G and Virtualization acceleration
    Gross margin                                           36.9%             32.0%            42.6%
    Operating income                                           -1.4             -2.7            -1.5   — Gross margin improved YoY but declined QoQ
    Operating margin                                      -15.9%           -29.9%             -16.9%      •   Increasing efforts to turn digital transformation projects
    Capitalization impact1                                     -0.4              -0.7           -0.4          around – additional provisions led to sequential GM drop
    12017   excluding xo-items                                                                         — Operating income improved YoY and QoQ
                                                                                                          •   Cost reductions across service delivery, SG&A and R&D
                                                                                Low single                •   Continued investments in 5G portfolio
                                                                                  digit
                                18Q1             18Q2             18Q3                                    •   Additional 3 out of 45 critical or non-strategic customer
     Operating                                                                                                contracts addressed in Q318 – 19 in total
     margin                                                                        Target
                                                                                    2020

                                                 -17%              -16%

                               -28%

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 13                              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
Managed Services
     Segment Managed Services – Financial performance
  Excluding restructuring charges

    SEK b.                                                  18Q3             17Q3             18Q2    — Sales adjusted for FX: -8% YoY
                                                                                                         •   Lower sales due to contract exits
    Net sales                                                   6.5              6.6            6.5
                                                                                                         •   Growth in Managed Services IT and Network Design &
    Gross margin                                           12.9%             -4.0%            14.0%
                                                                                                             Optimization
    Operating income                                            0.4             -0.6            0.4
    Operating margin                                          6.8%           -9.5%             6.5%
                                                                                                      — Gross margin improved significantly YoY
                                                                                                         •   Efficiency measures and contract reviews
                                                                                                      — Operating income positive – stable sequentially
                                                     7%                 7%
                                                                                         4-6%         — Additional 7 out of 42 contracts addressed in Q3 –
                                                                                                        40 in total
     Operating                    3%                                                                     •   Annualized profit improvement ~SEK 0.9 b.
     margin                                                                                              •   Ericsson Local Services AB (LSS) divested on Aug 31

                                18Q1               18Q2               18Q3              Target
                                                                                         2020

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 14                            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
Emerging Business & Other
     Segment Other – Financial performance
  Excluding restructuring charges

    SEK b.                                                  18Q3             17Q3             18Q2     — Sales adjusted for FX: 11% YoY
                                                                                                          •     Driven by iconectiv – number portability contract in US
    Net sales                                                   2.4              2.0             2.1
    Gross margin                                           32.3%             21.1%            27.4%    — Gross margin improved YoY and QoQ
    Operating income                                           -1.0             -1.3            -1.2      •     Supported by iconectiv and Media business
    Operating margin                                      -41.5%           -66.2%             -57.4%   — Operating income improved YoY and QoQ
    Capitalization impact1                                     -0.1              -0.1           -0.1      •     Improved income YoY in iconectiv and Media business
    12017   excluding xo-items                                                                            •     Investments in Emerging Business – in line with strategy
                                                                                                          •     51% of MediaKind will be transferred to external partner
                                                                                   Break-                       around year-end – increased costs short term
                                18Q1              18Q2             18Q3             even                  •     Combined income1 for MediaKind and Red Bee Media
     Operating                                                                                                  SEK -0.4 (-0.6) b.
     margin                                                                        Target                     1Excluding   restructuring charges and corporate allocations
                                                                                    2020

                                                                   -41%
                                                 -57%
                               -68%

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 15                                        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
Q3 2018
   Excluding restructuring charges

     SEK b.                                                             18Q3           17Q3          Change    — YoY sales growth driven by Networks and FX
     Net sales                                                            53.8            49.4         +9%     — Gross margin improved YoY and QoQ
     Gross income                                                         19.8            14.1           5.7   — Continued R&D investments in Networks
     Gross margin                                                       36.9%          28.5%         +8.4 pp
                                                                                                               — SG&A expenses impacted by revaluation of customer
     R&D expenses                                                          -9.2           -8.6          -0.6
                                                                                                                 financing in Middle East
     SG&A expenses                                                         -6.5           -5.6          -0.9
     Imp. losses trade receivables                                         -0.4           -1.1           0.7   — Impairment testing of trade receivables made
     Other op. income and expenses                                          0.0            0.4          -0.4     continuously
     Operating income                                                       3.8           -0.8           4.6   — Gain from divestment of Power Modules in Q3 2017
     Operating margin                                                     7.0%          -1.7%        +8.7 pp   — Income significantly improved YoY and QoQ
     Restructuring charges                                                  -0.6              -2.8       2.3      •   Cost reductions
                                                                                                                  •   Other strategic initiatives
                                                                                                                  •   Improvements in all segments

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 16
SG&A and R&D Q318, YoY
      SG&A bridge Q318 YoY (SEK b.)                                                                  R&D bridge Q318 YoY (SEK b.)
      Excluding restructuring charges                                                                Excluding restructuring charges

                                                                              0.7                                                                            1.4

                                    0.7                  0.9
                                                                                               6.5                                                                       9.2
                                                                       • Provisions for
             5.6                                                                                                         0.1
                                                                         variable                                                          0.7
                                                                         compensation                    8.6
                                                                       • Field trials
                                                                       • FX

                                                                                                                                        Mainly in
                                                                                                                                     Digital Services

            17Q3                  Cost            Revaluation of             Other            18Q3      17Q3       Capitalized R&D     Reductions       Investments in   18Q3
                               reductions         cust. financing                                                                                         Networks

                                    Cost reductions in G&A                                                            Increased R&D in Networks

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 17
Gross margin Q318, YoY
 Adjusted for restructuring charges

     Gross margin bridge Q318 YoY

  40%
                                                                                                              — Structural improvements YoY
                                                                                                                 • Cost reductions visible in all segments
  30%
                                                                                               36.9%
                                                                                                                 • ERS ramp up
               28.5%                                                                                             • Managed Services contract review
  20%                                                                                                         — Positive capitalization impact YoY, SEK 0.7 b.
                Q317          Networks          Digital       Managed        EB + Other            Q318
                                               Services       Services                                        — Positive market and business mix
                                                                                                              — Gross margin stable QoQ
     Underlying gross margin development from 2016
                                                                                                                 • Increased software and hardware capacity sales in
                                                                                   37% 37%                         Networks
                                                                          36%
   34%       33%                                                                                                 • Increased IPR revenues
                                        31% 30% 30% 30%                                                          • Digital Services negatively impacted by increased
                        29% 29%
                                                                                                                   provisions for digital transformation projects
       Q1       Q2      Q3       Q4      Q1       Q2       Q3       Q4      Q1       Q2       Q3     Target
      2016                              2017                               2018                       2020

    2016 and 2017: adjusted as per 2017 reporting, before IFRS 15 restate

                                          Continued strong gross margin – effects of strategy execution and control
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 18                                    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
Free cash flow
     Financial Performance
                                                                                                       Debt maturity profile (SEK b.)
 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

                                                  Solid balance sheet – Net cash improved to SEK 32.0 (24.1) b. YoY
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 19                      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
Planning assumptions from the Q3 report
2018 Net Sales, SEK b.                                                                Gross margin %                                                                       Operating expenses, SEK b.
                                                                                       Excluding restructuring charges                                                     Excluding restructuring charges

                                                  Q4                                                                                          Q4                                                                                  Q4
         +17%
                                                                                                                                        • Cost reductions
                                           • Lower than normal                                                                          • Regional sales mix                                                                • Seasonality
   -2%      57.9                             seasonality in Networks                                                                    • Business mix                                                                      • Increased investments
                                 53.8                                                                                                                                                     -18.5
                                           • FX                                                                           36.9%                                                                                               in Networks R&D
50.3 49.4                 49.8                                                                                   36.7%                                                                                    -16.3 -16.1       • Field trials
                   43.4                                                                                       35.9%                                                               -15.4                                     • MediaKind transaction
                                                                                                                                                                          -14.8                   -14.8
                                                                                                                                                                                                                              costs
                                                                                       30.9%                                                                                                                                • Cost reductions

                                                                                         28.5%

                                                                                                   25.1%

Q2 Q3 Q4 Q1 Q2 Q3                                                                   Q2        Q3    Q4      Q1      Q2      Q3                                             Q2 Q3 Q4 Q1 Q2 Q3
17       18                                                                         17                      18                                                             17       18

Strong sequential sales growth Q2 to Q3                                             Impact from regional and business mix                                              Seasonality, field trials and Networks R&D

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 20        Please see the Q3 report for the full planning assumptions   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
Börje Ekholm
President and CEO

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 21
Closing remarks

— 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

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 22
Capital Markets Day
New 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 23
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 24
Forward-looking statements
This 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.
The words “believe,” “expect,” “foresee,” “anticipate,” “assume,” “intend,” “likely,” “projects,” “may,” “could,” “plan,” “estimate,” “forecast,” “will,” “should,” “would,”
“predict,” “aim,” “ambition,” “seek,” “potential,” “target,” “might,” “continue,” or, in each case, their negative or variations, and similar words or expressions are used to
identify forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events or circumstances, including any
underlying assumptions, are forward-looking statements.
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.

© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 26
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