Ericsson reports second quarter results 2018

Second quarter highlights

Sales as reported and sales adjusted for comparable units and currency both decreased by -1% YoY. Segment Networks showed a sales growth of 2% YoY, both in reported sales and sales adjusted for comparable units and currency, with strong sales growth in North America.

Gross margin was 34.8% (29.1%). Gross margin excluding restructuring charges improved to 36.7% (30.9%), driven mainly by cost reductions and the continued ramp-up of Ericsson Radio System (ERS).

Operating expenses were SEK 17.2 (15.4) b. Operating expenses excluding restructuring charges increased to SEK 16.3 (14.8) b. Cost reductions in SG&A were offset by increased investments in R&D, higher provision for variable compensation and an increase in provision for overdue trade receivables.

Operating income was SEK 0.2 (-0.5) b. Operating income excluding restructuring charges was SEK 2.0 (1.0) b.

Networks operating margin excluding restructuring charges was 13.3% (13.4%), with an improved gross margin offset by increased investments in R&D.

Digital Services operating income (loss) excluding restructuring charges improved to SEK -1.5 (-1.8) b. due to improved gross margin to 42.6% (35.7%), mainly driven by cost reductions.

Managed Services operating margin excluding restructuring charges improved to 6.5% (-2.1%) as a result of cost reductions and customer contract reviews.

Cash flow from operating activities was SEK 1.4 (0.0) b. and free cash flow was SEK -0.6 (-1.3) b. Net cash increased to SEK 33.1 (24.0) b.

SEK b. Q2

2018 Q2

2017 YoY

change Q1

2018 QoQ

change 6 months

2018 6 months 2017

Net sales 49.8 50.3 -1% 43.4 15% 93.2 98.1

Sales growth adj. for comparable units and currency - - -1% - 9% - -

Gross margin 34.8% 29.1% - 34.2% - 34.5% 22.6%

Operating income (loss) 0.2 -0.5 - -0.3 - -0.1 -11.8

Operating margin 0.3% -1.1% - -0.7% - -0.2% -12.0%

Net income (loss) -1.8 -0.5 - -0.7 - -2.5 -10.5

EPS diluted, SEK -0.58 -0.14 - -0.25 - -0.83 -3.22

EPS (non-IFRS), SEK 1) -0.09 0.33 - 0.11 - 0.02 -1.86

Cash flow from operating activities 1.4 0.0 - 1.6 -8% 3.0 -1.5

Free cash flow 2) -0.6 -1.3 -54% 0.3 - -0.3 -4.6

Net cash, end of period 33.1 24.0 38% 35.6 -7% 33.1 24.0

Gross margin excluding restructuring charges 36.7% 30.9% - 35.9% - 36.3% 25.0%

Operating income (loss) excluding restructuring charges 2.0 1.0 109% 0.9 138% 2.9 -8.6

Operating margin excluding restructuring charges 4.1% 1.9% - 2.0% - 3.1% -8.7%

1) EPS diluted, excl. amortizations and write-downs of acquired intangible assets, and excluding restructuring charges. When a company reports a loss, the number of shares used for calculating earnings diluted per share shall be the same as for basic calculation.

2) Free cash flow: Cash flow from operating activities less net capital expenditures and other investments, 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 business strategy and are tracking well towards our 2020 target of an operating margin1) of at least 10%. The investments in technology leadership have resulted in increased gross margin1) to 37% (31%) and growth in segment Networks.

Customers turn to new technology in order to manage growing demand for data with sustained quality and without increasing costs. This, together with fixed wireless access, represent the first business cases for 5G. We will continue to invest in securing leadership in 5G. This includes further investments in R&D, to solidify our complete 5G portfolio, and investments in field trials. We also intend to selectively capture new business opportunities, through our 5G-ready 4G portfolio, to extend our footprint as operators prepare for 5G. We provide solutions for all frequency bands for 5G, which strengthens our global competitiveness.

We have good market traction in Networks, with a sales growth of 2%, particularly in North America where all major operators are preparing for 5G. Networks gross margin1) improved to 40% (36%). Digital Services is tracking towards a turnaround and gross margin1) improved to 43% (36%) YoY, and was stable QoQ. However, while losses decreased both YoY and QoQ, we still have a lot of work to do. The top priority is to turn around performance in the segment, but we are in parallel accelerating investments to make the portfolio 5G ready and cloud native. In Managed Services, gross margin1) improved to 14% (2%) supported by continued efficiency gains and customer contract reviews, resulting in a positive operating income. We have also on-boarded several new contracts in the quarter.

In segment Emerging Business and Other, we invest in strategic future growth areas such as Internet of Things (IoT). We see increasing momentum with several important customer wins with our connectivity platform in the quarter. However, sales are still low. Our media business generated a loss of SEK -0.4 b. in the quarter. We expect to close the announced divestment of Media Solutions, recently renamed MediaKind, by the end of the third quarter.

The SEK 10 b. cost reduction program, launched in Q2 2017, has been successfully completed. We reduced the total workforce by more than 2,000 in the quarter and by 20,500 in total as part of the program. These are tough but necessary actions to ensure competitiveness. Run-rate savings to date amount to more than SEK 10 b., and the effect is gradually becoming visible in the earnings, mainly through lower service delivery costs and common costs. Even though the cost reduction pro

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