First quarter highlightsSales were SEK 49.8 (48.9) b. A decline by -2% adjusted for comparable units and currency.
The Covid-19 pandemic had limited impact on operating income and cash flow in the quarter.
Gross margin excluding restructuring charges improved to 40.4% (38.5%). Gross margin improved QoQ in all segments.
Operating income excluding restructuring charges was SEK 4.6 b. (9.3% operating margin). Q1 2019 operating income excluding restructuring charges and items affecting comparability was SEK 3.5 b. (7.2% operating margin).
Networks sales adjusted for comparable units and currency were flat YoY and operating margin improved to 16.6% (16.3%).
Digital Services operating income was SEK -1.4 (-1.8) b. Gross margin improved driven mainly by higher software sales. Sales adjusted for comparable units and currency declined by -9% due to lower services and legacy hardware sales, and negative impact from Covid-19.
Net income was SEK 2.3 (2.4) b.
Free cash flow before M&A was SEK 2.3 (3.5) b. further strengthening the net cash position to SEK 38.4 b. from SEK 34.5 b. in Q4 2019.
SEK b. Q1
2020 Q1
2019 YoY
change Q4
2019 QoQ
change
Net sales 49.8 48.9 2% 66.4 -25%
Sales growth adj. for comparable units and currency - - -2% - -
Gross margin 39.8% 38.4% - 36.8% -
Gross margin excluding restructuring charges 40.4% 38.5% - 37.1% -
Operating income 4.3 4.9 -12% 6.1 -30%
Operating margin 8.7% 10.0% - 9.2% -
Operating income excl. restr. charges & items affecting comparability in 2019[1] 4.6 3.5 30% 6.0 -23%
Operating margin excl. restr. charges & items affecting comparability in 2019[1] 9.3% 7.2% - 9.0% -
Net income 2.3 2.4 -5% 4.5 -49%
EPS diluted, SEK 0.65 0.70 -7% 1.33 -51%
Free cash flow before M&A 2.3 3.5 -33% -1.9 -
Net cash, end of period 38.4 36.1 6% 34.5 11%
[1] Excludes restructuring charges in all periods. No other adjustments made in Q1 2020. Q4 2019 excludes a provision reversal related to the SEC and DOJ investigations (SEK 0.7 b.) and costs related to wind-down of the ST-Ericsson legal structure (SEK -0.3 b.). Q1 2019 excludes 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.).
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 are going through unprecedented times with Covid-19 which has impacted everyone around the world either directly or indirectly. Throughout this crisis, we guide our decisions by putting the safety and health of our employees, customers and partners as a first priority. Ericsson delivered a solid result during the first quarter, with limited impact from the Covid-19 pandemic. An important indicator of our strategy execution is the improvement in gross margin. The Q1 gross margin[1] increased to 40.4% (38.5%) YoY, driven by improvements across segments. We expect our industry to show resilience throughout the pandemic and we are well positioned with a competitive 5G product offering and cost structure. There is near-term uncertainty around sales volumes due to Covid-19 and the macroeconomic situation, but with current visibility we have no reason to change our financial targets for 2020 and 2022.
In segment Networks, the gross margin[1] increased to 44.6% (43.2%) reflecting the strong business fundamentals with high activity across multiple regions. A favorable business mix more than compensated for an increased portion of strategic contracts and the expected negative effect from the acquired antenna and filter business. The operating margin[1] reached 16.8%.
We see strong underlying customer momentum in segment Digital Services. We are confident about our offering and market position. Leading operators have awarded us several 5G Core contracts, which are expected to start generating material revenues from 2021. While the rationalization of the legacy portfolio will continue, we are increasing R&D investments in our 5G and cloud-native portfolio to capture the new opportunities. Execution of the turnaround follows the plan, but earnings will vary between quarters. In the first quarter, currency adjusted sales declined by -9% due to fewer project completions and a somewhat negative impact from Covid-19 as access to some customer networks was limited. In addition, legacy hardware sales declined in line with our strategy. However, fundamental to our strategy, sales of software increased and gross margin[1] reached 40%, despite a SEK -0.2 b. negative impact from one of the few remaining critical contracts.
In Managed Services our investments in automation and AI continue to contribute to improving the gross margin. There will be quarterly variations depending on timing of add-on sales and costs, but underlying margins have been established at a higher level.
Our cash position has further strengthened driven by free cash flow before M&A of SEK 2.3 b. in the quarter. This further solidified our resilience which enables us to continue to invest in our technology leadership. At the same time, we will continue our efforts to drive efficiency and cost reductions to further increase competitiveness.
Underlying business fundamentals remain strong. With growth in data in general and with working from home as the new normal in many countries, good connectivity is more important than ever. For 2020 we estimate the RAN[2] market to grow by 4%, however for Q2 we expect somewhat lower than normal sequential sales growth as there are uncertainties impacting short-te
