Third quarter highlights Sales as reported increased YoY by 9% and sales adjusted for comparable units and currency increased by 1%.
Segment Networks showed a sales growth adjusted for comparable units and currency of 5% YoY with strong sales growth in North America as well as in Europe and Latin America.
Gross margin was 36.5% (26.9%). Gross margin excluding restructuring charges improved to 36.9% (28.5%), driven mainly by cost reductions, the continued ramp-up of Ericsson Radio System (ERS) and good progress in reviewing Managed Services contracts.
Operating margin was 6.0% (-7.4%). Operating margin excluding restructuring charges was 7.0% (-1.7%).
Networks operating margin excluding restructuring charges was 16.1% (11.9%) driven by cost reductions and ERS ramp-up, partly offset by increased investments in R&D.
Digital Services operating margin excluding restructuring charges was -15.9% (-29.9%) supported by a gross margin excluding restructuring charges of 36.9% (32.0%). Sequentially, gross margin declined from 42.6% mainly due to increased provisions related to transformation projects.
Managed Services operating margin excluding restructuring charges improved to 6.8% (-9.5%) as a result of cost reductions and customer contract reviews.
Cash flow from operating activities was SEK 2.0 (0.0) b. and free cash flow excluding M&A was SEK 0.7 (-0.8) b. Net cash increased YoY to SEK 32.0 (24.1) b.
SEK b. Q3
2018 Q3
2017 YoY
change Q2
2018 QoQ
change 9 months
2018 9 months 2017
Net sales 53.8 49.4 9% 49.8 8% 147.0 147.5
Sales growth adj. for comparable units and currency - - 1% - 7% - -
Gross margin 36.5% 26.9% - 34.8% - 35.2% 24.0%
Operating income (loss) 3.2 -3.7 - 0.2 - 3.1 -15.5
Operating margin 6.0% -7.4% - 0.3% - 2.1% -10.5%
Net income (loss) 2.7 -3.5 - -1.8 - 0.2 -13.9
EPS diluted, SEK 0.83 -1.09 - -0.58 - 0.01 -4.31
EPS (non-IFRS), SEK [1] 1.03 -0.29 - -0.09 - 1.04 -2.15
Cash flow from operating activities 2.0 0.0 - 1.4 41% 5.1 -1.6
Free cash flow excluding M&A [2] 0.7 -0.8 - -0.2 - 1.3 -5.4
Net cash, end of period 32.0 24.1 33% 33.1 -3% 32.0 24.1
Gross margin excluding restructuring charges 36.9% 28.5% - 36.7% - 36.5% 26.2%
Operating income (loss) excluding restructuring charges 3.8 -0.8 - 2.0 85% 6.7 -9.4
Operating margin excluding restructuring charges 7.0% -1.7% - 4.1% - 4.6% -6.4%
[1] EPS diluted, excl. amortizations and write-downs of acquired intangible assets, and excluding restructuring charges. Potential ordinary shares are not considered when their conversion to ordinary shares would increase earnings per share.
[2] Free cash flow excluding M&A: See Alternative Performance Measures (APM) at the end of the report.
Non-IFRS financial measures are reconciled to the most directly reconcilable line items in the financial statements at the end of this report.
Comments from B rje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC)
We continue to execute on our focused strategy, tracking well towards our 2020 targets. We see improvements across our businesses resulting in a gross margin[1] of 36.9% (28.5%) and an operating margin[1] of 7.0% (-1.7%). Organic [2] sales growth was 1% for the Group, despite headwind from exited non-strategic contracts.
We continue to invest in our competitive 5G-ready portfolio to enable our customers to efficiently migrate to 5G. Operators around the world plan for launching 5G services, led by North America. The strong customer interest in 5G generates a gradual increase in costs for field trials. We expect the costs to remain on high levels, at least for the coming 12-18 months, and they are included in our 2020 profitability target of at least 10%.
Networks gross margin[1] improved to 41.5% (34.8%) with an organic[2] sales growth of 5%. The strong sales were mainly driven by a continued high activity level primarily in North America. Due to the strong sequential sales increase in the third quarter we expect lower effects from seasonality than normal in the fourth quarter in Networks.
Digital Services gross margin[1] improved to 36.9% (32.0%) YoY, but declined QoQ. We see clear results of our cost-out activities and good progress in large parts of the business. At the same time, provisions related to large digital transformation projects increased in the quarter, explaining the sequential drop in gross margin. We are not satisfied with the development in these digital transformation projects and are thus increasing our efforts to turn them around.
In Managed Services, gross margin[1] improved to 12.9% (-4.0%) supported by efficiency gains and customer contract reviews. We have finalized 40 of the targeted 42 contracts, with an annualized profit improvement of SEK 0.9 b. We are increasing our investments in R&D to reshape the offering based on automation and artificial intelligence. We see strong customer interest in the coming solutions, but sales are so far limited as we are in early stages.
In segment Emerging Business and Other, sales grew by 22% driven by growth in the iconectiv business. We continue to invest in strategic future growth areas such as Internet of Things (IoT) and saw increasing momentum with one important customer win with our connectivity platform solutions in the quarter. As parts of the portfolio in Emerging Business are in an early phase, sales are so far limited. We will remain disciplined in our investments in Emerging Business by tracking each venture against delivery milestones.
Even though the cost reduction program, announced in July 2017, has been completed, we continue our efforts to drive efficiency and cost reductions to further increase competitiveness. Our estimate for restructuring charges of SEK 5-7 b. f
