SECOND QUARTER 2017 July 18, 2017 - Ericsson
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SECOND QUARTER 2017 July 18, 2017
Peter Nyquist Vice President Investor Relations
SECOND QUARTER
2017
This presentation contains forward-looking statements.
Such statements are based on our current expectations
and are subject to certain risks and uncertainties that
could negatively affect our business. Please read our
earnings reports and our most recent annual report for
July 18, 2017 a better understanding of these risks and uncertainties.Börje Ekholm President and CEO
Focused business strategy
› Focused and technology led approach › Significant cost reductions to restore
– Invest in R&D for competitiveness in Networks profitability
– Stabilize IT & Cloud roadmaps and focus on new – At least SEK 10 b. run rate improvement over 12
portfolio months
– Invest in automation and review contracts in – Primarily in service delivery and common costs
Managed Services
› Increase pace of innovation and new
› RAN market estimated to decline high single business development
digit percentage in 2017
› Increased risk of market and customer project
adjustments
– Estimated negative impact on operating income of
SEK 3-5 b. coming 12 months
At least double the 2016 operating margin, excluding restructuring charges, beyond 2018
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 5Second quarter 2017
› Challenging underlying performance › Initial signs of traction in strategy
– Sales adjusted for FX -13% YoY execution
– Networks margin decline due to lower – Break-through contract with Vodafone UK
software sales – Positive customer feedback on ERS
– Continued significant losses in IT & Cloud competitiveness
› Operating cash flow SEK 0.0 (-0.7) b. – Agreement signed to divest Power Modules
– Successful review of Managed Services
contracts – 9 of 42 completed
– Plan in place to improve performance in IT
& Cloud – focus on product roadmaps for
new portfolio and project execution
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 6Q2 Market Area sales
› Europe and Latin America (-11% YoY)
YoY
SEK 54.1 b. -11% – Continued reduced mobile broadband investments
– Slowdown in Mexico; growth in Brazil
12.5%
-17% › Middle East and Africa (-17% YoY)
18.5% – Some, still limited, signs of recovery in
-7%
macroeconomic environment
-3% 0% 0% SEK 49.9 b.
› North America (-7% YoY)
13%
– Reduced scope in managed services contract
29%
› North East Asia (-3% YoY)
– Mainland China decline partly offset by growth in
27% Japan and Korea
16Q2 Europe &
Latin
Middle
East &
North North SE Asia
America East Asia Oceania &
Other 17Q2
› South East Asia, Oceania and India (flat YoY)
America Africa India – Continued mobile broadband investments in South
East Asia offset decline in services
– Operator consolidations in India
› Other (flat YoY)
– IPR revenues SEK 2.0 (2.2) b.
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 7Segment summary
Numbers exclude provisions, write-downs and restructuring charges in 17Q1. 16Q2 and 17Q2 exclude restructuring.
Networks IT & Cloud Other
SEK b. 17Q2 16Q2 17Q1 SEK b. 17Q2 16Q2 17Q1 SEK b. 17Q2 16Q2 17Q1
Sales 36.8 40.2 36.2 Sales 10.9 11.5 9.6 Sales 2.2 2.4 2.0
GM 30% 32% 31% GM 28% 36% 28% GM 37% 39% 31%
Op. income 3.5 5.3 4.3 Op. income -2.4 -1.1 -2.2 Op. income -0.8 -0.4 -1.0
OM 10% 13% 12% OM -22% -9% -23% OM -38% -17% -51%
› Sales adj. for FX -14% YoY › Sales adj. for FX -10% YoY › Sales adj. for FX -11% YoY
‒ Lower mobile broadband investments ‒ Lower legacy product sales ‒ Lower legacy products sales
‒ Reduced scope in MS contract
› Op income SEK -2.4 (-1.1) b. › Op income SEK -0.8 (-0.4) b.
› Op margin 10% (13%) ‒ Lower gross margin ‒ Lower sales
‒ Lower sales and gross margins ‒ Negative impact from net cap dev ‒ Sequential margin improvement, partly
expenses, SEK -0.8 b. YoY from cost reductions
› Focused Radio R&D investments
› Turn around plan ‒ Negative impact on OI from net cap dev
started expenses, SEK -0.2 b. YoY
‒ Stability: Roadmaps, underperforming
› Ericsson Radio System tracking projects and scoping › Exploring strategic opportunities
towards 100% of deliveries in 2018 ‒ Profitability: Delivery efficiency, R&D
‒ 49% of deliveries YTD efficiency, reduced G&A
‒ Growth: Scale new SW platforms
Tangible improvements expected 2018
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 8Carl Mellander Chief Financial Officer
Gross margin
17Q1 excludes provisions, write-downs and restructuring charges. Other quarters exclude restructuring.
› As anticipated, gross margin declined QoQ following 40%
seasonally stronger software sales in Q1
› YoY gross margin negatively impacted by lower 35%
34% 33%
Networks software sales and by reduced margins in IT
31%
& Cloud 30%
30%
› Un-seasonally strong software sales in the second 29% 29%
quarter last year
25%
› Some negative impact from lower IPR revenues YoY Q1
2016
Q2 Q3 Q4 Q1
2017
Q2
We will accelerate actions to reduce costs and increase efficiency
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 10Operating income
Q2 YoY
SEK b.
OM 7%
Hedge loss of
SEK -0.5 b.
in Q216 Net impact
Q216 +0.7
Hedge gain Q217 Gross margin
Q217 -0.4
SEK 0.5 b. from 33% to 30%
3,8 reported as
financial net Sales -8% YoY
OM 1%
0,3
Q216 excl Hedge Capitalized R&D Volume Gross R&D SG&A Q217 excl
restructuring impact margin expenses Expenses restructuring
Lower sales, reduced gross margin and less capitalization of R&D main drivers for reduced result
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 11Operating expenses
› YoY negatively impacted by FX, appr -2% Operating expenses excl. restr., SEK b.
14.8
› Significant impact from less capitalization of R&D 14.0
13.7 0,4
– Driven by focused strategy, technology and portfolio shifts
– No cash impact
› SG&A 7,7 7,1 7,9
– YoY reduced, despite negative FX impact
› R&D
– YoY increase with higher investments in Networks
– QoQ increase mainly due to seasonality 6,7 6,7 6,6
– SEK 1.1 b. negative impact from capitalized development
expenses YoY -0,5 -0,2
Q216 Q117** Q217
› Will implement cost savings with an annual run
rate effect of at least SEK 10 b. by mid-2018
SG&A underlying R&D underlying Other*
* Net of: capitalized and depreciated development expenses, and amortized intangible assets.
** 17Q1 exclude provisions, write-downs and restructuring charges. Other quarters exclude restructuring.
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 12 This slide contains forward-looking statements. Actual result may be materially different.SEK 10 b cost reductions
› At least SEK 10 b. net reduction of annual run rate by
mid 2018
– 50% common costs, 50% service delivery
– Baseline: Current run rate, i.e. annualized Q2 2017
› Reductions in addition to
– Supply, i.e. closing manufacturing sites
– Rightsizing due to lower business volumes
– Other strategic opportunities
› Restructuring charges
– 2017 estimated in the higher end of the range SEK 6-8 b.
– 2018 restructuring charges to be communicated
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 13Change in Gross cash Q2
Operating cash flow Investing1 Financing FX on cash
0.0 b -1.8 b -8.9 b -0.6 bb
-0.8 +1.9 -1.1 -1.0 -0.8
-5.6
-3.3 -0.6
65,6
54,3
Change in gross cash SEK -11.3 b.
Gross cash Net Income Change Net Restructuring CAPEX Acquisitions, Other Dividend FX on cash Gross cash
1703A reconciled to operating divestments & financing 1706A
cash assets Other activities
Change in net cash SEK -4.3 b. 1) Excluding Interest-bearing securities
Repayment of Eurobond, SEK 5.1 b.
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 14Additional project risks
reducing capitalization
› Increased risk of market and customer project adjustments
– Focused strategy, current market and company position continued risk assessment
– Estimated negative impact on operating income of SEK 3-5 b. in the coming 12 months
• 30% estimated to impact cash
• Payment risks, challenging projects, exit costs
• Estimated to impact all business segments
› Reducing capitalization
– Due to technology & portfolio shifts
– Reducing capitalization of product platform R&D, software release R&D and hardware costs
– Together resulting in net negative impact on operating income of SEK -2.9 (1.3) b. in 2H17,
with no impact on cash
• Total impact on operating income in Q2 was SEK -0.3 (1.2) b.
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 15Reducing capitalization –
background
1. Product platform R&D capitalization
– Example: The new OSS and BSS platforms
– Product platform R&D is capitalized and depreciated over 24-36 months as R&D expenses
– Capitalization is reduced as a consequence of; cyclical product platform development and the focused business
strategy
2. Software release R&D capitalization
– Example: Expenses related to radio software releases 16A and 16B
– Certain R&D expenses, related to specific software releases, are capitalized as inventories and depreciated as cost of
sales over 6 months
– No longer relevant due to more continuous deployment and a differentiated release pace between different
technologies
3. Hardware cost capitalization
– Example: Parts of the Radio portfolio
– A portion of the up-front hardware cost is capitalized as inventories and depreciated over 24 months as cost of sales to
match revenue with cost
– Capitalization levels are adapted to fit the new portfolio, driven by technology and product development, with the
introduction of the Ericsson Radio System
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 16Planning assumptions
From the Q2 report
Market related
› RAN equipment market outlook for 2017 estimated at high single-digit percent. Previous estimate: -2% to -6%.
Ericsson focused strategy related
› Addressing low-performing operations in MS and optimizing NRO offering expected to reduce FY19 sales up to SEK 10 b.
› Cost reductions with annual run rate of at least SEK 10 b. by mid-2018, split 50/50 between service delivery and common costs
› The company aims to increase R&D efficiency. However, R&D expenses will increase short term, primarily in Networks
› Less capitalization is expected to result in a net negative impact on operating income of SEK -2.9 (1.3) b. in second half 2017,
with no impact on cash.
› Restructuring charges for 2017 are estimated to be in the higher end of the range of SEK 6-8 b.
› Increased risk of further market and customer project adjustments, with a negative impact on results, estimated to SEK 3-5 b. for
the coming 12 months, of which 30% is estimated to impact cash
Other Ericsson related
› The earlier communicated rescoped managed services contract in North America will impact sales negatively YoY in Q3 2017
› Industry trends and business mix in mobile broadband in 2016 are expected to prevail in 2017
Based on current visibility, assessments and FX rates
This presentation contains forward-looking statements. Such statements are based on our current expectations
and are subject to certain risks and uncertainties that could negatively affect our business. Please read our
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 17 earnings reports and our most recent annual report for a better understanding of these risks and uncertainties.cash flow impact
Activity Total cost Cash impact Timing
SEK b. SEK b.
2016 restructuring charges, balance Dec 31 2016 3 3 2017
2017 restructuring charges 6-8 6-8 50% 2017
50% 2018
Q1 2017 provisions and customer project 8.4 5.8 Over several
adjustments years
Customer and market risks identified in Q2 2017 3-5 30% Over several
years
2018 restructuring charges To be confirmed To be confirmed 2018-2019
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 18Börje Ekholm President and CEO
Focused
strategy
› Plan in place – execution started
› Strong commitment across
organization
› Positive response from customers
At least double the 2016 operating margin, excluding restructuring charges, beyond 2018
© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 20© Telefonaktiebolaget LM Ericsson 2017 | SECOND QUARTER REPORT 2017 | July 18, 2017 | Page 21
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