Ericsson reports first quarter results 2019

First quarter highlights

Sales were SEK 48.9 (43.4) b. Sales adjusted for comparable units and currency increased by 7% driven by strong growth in North America. Reported sales grew by 13%.

Gross margin was 38.4% (34.2%) driven by improvements in Networks and Managed Services.

Operating income was SEK 4.9 (-0.3) b. and operating margin was 10.0% (-0.7%). Operating income, excluding restructuring charges of SEK -0.2 b. and certain positive non-recurrent items[1] of SEK 1.6 b. was SEK 3.5 b., which equals to an operating margin of 7.2%.

Net income improved to SEK 2.4 (-0.7) b.

Free cash flow excluding M&A was SEK 4.1 (0.7) b. Net cash amounted to SEK 36.1 (35.6) b.

51% of MediaKind was divested February 1, 2019. The acquisition of antenna and filter assets from Kathrein is expected to close Q3.

SEK b. Q1

2019 Q1

2018 YoY

change Q4

2018 QoQ

change

Net sales 48.9 43.4 13% 63.8 -23%

Sales growth adj. for comparable units and currency - - 7% - -

Gross margin 38.4% 34.2% - 25.7% -

Operating income (loss) 4.9 -0.3 - -1.9 -

Operating margin 10.0% -0.7% - -2.9% -

Net income (loss) 2.4 -0.7 - -6.5 -

EPS diluted SEK 0.70 -0.25 - -1.99 -

EPS (non-IFRS) SEK[2] 0.80 0.11 - -0.77 -

Free cash flow excluding M&A 4.1 0.7 - 3.0 37%

Net cash. end of period 36.1 35.6 2% 35.9 1%

Gross margin excluding restructuring charges 38.5% 35.9% - 32.0% -

Operating income (loss) excluding restructuring charges 5.1 0.9 - 2.6 99%

Operating margin excluding restructuring charges 10.4% 2.0% - 4.0% -

[1]Certain non-recurrent items are; a capital gain related to the divestment of 51% of MediaKind (SEK 0.7 b.), divestment of certain assets in Red Bee Media (SEK 0.1 b.) and a reversal of an earlier provision for impairment of trade receivables following customer payment (SEK 0.7 b.)

[2]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.

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)

For the third consecutive quarter we showed organic sales growth[1], this quarter by 7%. Growth was mainly driven by North America. Our strategy, to work with lead customers in lead markets, is generating both 5G business and hands-on experience in 5G rollout and commercialization. To date we have publicly announced commercial 5G deals with 18 named operator customers, which, at the moment, is more than any other vendor.

5G services, including mobility, have been launched in South Korea and North America. While Switzerland has released spectrum allowing Swisscom to offer commercial 5G services, using our equipment, the development in other parts of Europe is considerably slower primarily due to lack of spectrum, poor investment climate and additional uncertainties related to future vendor market access.

Gross margin[2] improved to 38.5% (35.9%) YoY, driven by improvements in segments Networks and Managed Services, and also by the recently signed patent license agreement with OPPO.

Segment Networks had a strong quarter with an organic sales growth[1] of 10% YoY, driven by increased investments in North America. Networks gross margin[2] improved to 43.2% (40.4%) YoY, mainly due to higher hardware capacity sales and IPR revenues. In the quarter we announced our intent to acquire the German company Kathrein's antenna and filters business. This will further expand our capabilities in the advanced active and passive antenna domains, which are growing in importance as 5G evolves.

In Managed Services, sales fell organically[1] by -5% due to headwind from contract exits. In the quarter, our Operations Engine was launched with good response from our customers. Gross margin[2] improved to 17.7% (9.1%) YoY, supported by efficiency gains and customer contract reviews. Excluding a non-recurrent positive effect of SEK 0.7 b. from a customer settlement, the operating margin[2] was 8.6%, exceeding the higher range of our financial target for 2020.

Organic sales[1] in Digital Services were stable YoY. We continue to see a good business momentum for the new portfolio of 5G-ready and cloud-native products, with many important contract wins in the quarter. Gross margin excluding restructuring charges and the BSS provision in Q4 2018[3] was stable QoQ and operating income[2] improved YoY driven by reductions in operating expenses. Gross margin[2] declined YoY as Q1 2018 was supported by a favorable business mix. We continue to execute on our plan to turn the Digital Services business around. Implementation of the revised BSS strategy, announced in January 2019, is progressing well.

Organic sales growth[1] in segment Emerging Business and Other was 38% YoY driven by growth in iconectiv. Gross margin[2] was stable YoY. In the quarter 51% of MediaKind was divested, generating a gain of SEK 0.7 b. In segment Emerging Business and Other we invest in initiatives that aim to scale and help create future business for Ericsson. With the exception of iconectiv, the portfolio is still in an early phase. We are also incurring extra costs as we restructure some of the older innovation investments.

Driven by improved earnings, free cash flow excluding M&A amounted to SEK 4.1 (0.7) b. in the quarter and with a strong cash position we are well positioned to grow the company in a profitable way.

As previously disclosed, we have been voluntarily cooperating since 2013 with an investigation by the United States Securities and Exchange Commission (SEC) and, since 2015, with an inv

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