Fourth quarter highlightsSales as reported increased by 10% YoY and sales adjusted for comparable units and currency increased by 4%.
Networks sales adjusted for comparable units and currency grew by 6% YoY. Digital Services sales adjusted for comparable units and currency grew by 5% YoY.
Costs related to revised Business Support Systems (BSS) strategy of SEK -6.1 b., of which SEK -3.1 b. were restructuring charges, impacted Digital Services operating income in Q4.
Gross margin was 25.7% (21.6%). Gross margin, excluding restructuring charges and other costs related to revised BSS strategy, improved to 36.3%, supported by cost reductions, the ramp-up of Ericsson Radio System (ERS) and the contract review in Managed Services.
Operating margin was -2.9% (-33.3%). Operating margin, excluding restructuring charges and other costs related to revised BSS strategy, was 8.7%.
Networks operating margin excluding restructuring charges was 17.5% (8.6%). The increase was driven by cost reductions, the ERS ramp-up and reversal of provisions for impairment losses on trade receivables, partly offset by increased investments in R&D.
Digital Services operating income, excluding restructuring charges and costs related to revised BSS strategy, was SEK -0.6 b.
Managed Services operating margin excluding restructuring charges increased to 5.2% (-13.0%). The review of all 42 low-performing customer contracts has been completed.
Full-year highlights
Sales as reported increased by 3% and sales adjusted for comparable units and currency increased by 1%, with Networks growing by 3% the first year of organic growth for Ericsson since 2013.
Gross margin was 32.3% (23.3%). Gross margin excluding restructuring charges improved to 35.2% (25.9%), supported by cost reductions, the ramp-up of Ericsson Radio System (ERS) and the review of managed services contracts.
Operating income was SEK 1.2 (-34.7) b. Operating income excluding restructuring charges was SEK 9.3 (-26.2) b. driven by higher gross margin and sales as well as lower operating expenses.
Cash flow from operating activities was SEK 9.3 (9.6) b. Free cash flow excluding M&A amounted to SEK 4.3 (4.8) b. Net cash at year-end was SEK 35.9 (34.7) b.
The Board of Directors will propose a dividend for 2018 of SEK 1.00 (1.00) per share to the AGM.
SEK b. Q4
2018 Q4
2017 YoY
change Q3
2018 QoQ
change Full-year
2018 Full-year
2017 Full-year
change
Net sales 63.8 57.9 10% 53.8 19% 210.8 205.4 3%
Sales growth adj. for comparable units and currency - - 4% - 19% - - 1%
Gross margin 25.7% 21.6% - 36.5% - 32.3% 23.3% -
Operating income (loss) -1.9 -19.3 - 3.2 -157% 1.2 -34.7 -
Operating margin -2.9% -33.3% - 6.0% - 0.6% -16.9% -
Net income (loss) -6.5 -18.5 - 2.7 - -6.3 -32.4 -
EPS diluted, SEK -1.99 -5.63 - 0.83 - -1.98 -9.94 -
EPS (non-IFRS), SEK [1] -0.77 -1.09 - 1.03 -175% 0.27 -3.24 -
Cash flow from operating activities 4.3 11.2 -62% 2.0 110% 9.3 9.6 -3%
Free cash flow excluding M&A [2] 3.0 10.2 -71% 0.7 - 4.3 4.8 -12%
Net cash, end of period 35.9 34.7 4% 32.0 12% 35.9 34.7 4%
Gross margin excluding restructuring charges 32.0% 25.1% - 36.9% - 35.2% 25.9% -
Operating income (loss) excluding restructuring charges 2.6 -16.9 - 3.8 -33% 9.3 -26.2 -135%
Operating margin excluding restructuring charges 4.0% -29.1% - 7.0% - 4.4% -12.8% -
[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)
Our focused strategy has yielded clear results. Ericsson is today a stronger company. Increased investments in R&D for future growth, managed services contract reviews, combined with efficient cost control have proven to be successful, with improved competitiveness and profitability as a result. As the industry moves to 5G and IoT, we will now take the next step, focusing on profitable growth in a selective and disciplined way.
Sales have gradually improved during 2018, resulting in full-year organic sales growth[1] for the first time since 2013. This is partly due to an improved market, but also driven by market share gains in Networks as a result of a more competitive radio product portfolio. In parallel, gross margins[2] have improved across all segments, with full-year gross margin[2] of 35% (26%) and operating margin[2] of 4% (-13%).
Segment Networks had another strong quarter with high business activity across multiple regions. Networks organic sales[1] increased by 6% YoY, positively impacted by a recovering RAN market as well as strong performance in the product portfolio. Growth was partly due to a higher than anticipated activity level in North America driven by increased 5G demand among the US operators. Networks gross margin[2] improved to 41% (35%) YoY, mainly due to improved hardware margins driven by the successful shift to Ericsson Radio System (ERS). Strategic contracts and 5G field trials had a negative impact on operating margin in the quarter. R&D investments continued to grow in the quarter, but are now expected to flatten out.
In Managed Services, gross margin[2] improved to 12% (-5%) YoY, supported by efficiency gains and customer contract reviews. We have now addressed all 42 targeted contracts, resulting in an annualized profit improvement of SEK 0.9 b. During the year, we have i
