Ericsson reports third-quarter results 2022

Third quarter highlights

• Group organic sales[1] grew by 3% YoY driven primarily by Networks in North America. Reported sales were SEK 68.0 (56.3) b., of which Vonage contributed SEK 2.9 b. since July 21.
• Gross income increased to SEK 28.1 (24.8) b. driven by higher sales primarily in Networks, and the consolidation of Vonage.
• Gross margin was 41.4% (44.0%) impacted by lower IPR revenues of SEK -1.1 b YoY, supply chain costs and larger share of services following footprint expansion in Networks.
• EBITA amounted to SEK 7.6 (9.3) b. with an EBITA margin of 11.2% (16.5%). EBITA was primarily impacted by increased investments in technology, selling expenses in segment Enterprise (mainly from consolidation of Vonage) and one-off costs of SEK -0.5 b.
• EBIT amounted to SEK 7.1 (8.8) b. with an EBIT margin of 10.5% (15.7%).
• Significant contracts with further increased geographic footprint have been signed. These and earlier signed contracts will continue to increase sales in Q4 and are expected to contribute with considerable volumes in 2023.
• Net income was SEK 5.4 (5.8) b.
• Free cash flow before M&A was SEK 2.5 (13.0) b. Cash flow was lower mainly due to working capital buildup. Net cash on September 30, 2022, was SEK 13.4 b. compared with SEK 70.3 b. on June 30, 2022.
• Vonage transaction completed on July 21. Vonage EBITA was positive, excluding one-off acquisition cost and acquisition accounting.

Comments from Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC)

We see robust underlying performance and strong momentum in the business as we continue to execute on our strategy. This includes leadership in mobile networks by growing market share. Since 2017 we have increased RAN market share, excluding Mainland China, from 33% to 39% and we have had multiple contract wins across geographies in this quarter. We continue to solidify our strong position in 5G to capture the considerable opportunities presented by the fastest scaling mobile generation. Our expansion into the exciting high-growth Enterprise space is gaining momentum with the acquisition of Vonage, providing us with access to a powerful range of cloud communication services.

Group Net Sales[1] in the quarter grew by 3% organically, driven by strong performance from Networks. EBITA[2] of SEK 7.7 b. corresponded to a margin of 11.3%, where higher gross income from business growth was offset by increased technology investments and the consolidation of Vonage with acquisition accounting and one-time acquisition costs.

Our Networks business saw strong organic sales[1] growth of 7% excluding IPR (4% including IPR), with growth driven by our market leading portfolio primarily in North America where operators continue to forcefully drive 5G deployment. After expected record operator capex in 2022 in North America, we anticipate RAN capex to hold up well in 2023, albeit at a lower level than this year. We continue to further strengthen our position by increasing our global footprint which we expect will lead to overall growth in 2023. As previously observed, footprint gains with large-scale projects in early stages tend to have a dilutive impact on gross margins. However, the growing gross income will allow continued investment for technology leadership. We are excited by the opportunities presented by our network offering underscored by our portfolio strength.

To fully benefit from the performance and features of 5G it is crucial to leverage on mid-band frequencies. The global 5G build-out is still in its early stages with less than a quarter of global LTE nodes upgraded with mid-band. We expect to see many new use cases for 5G where we already see Fixed Wireless Access gaining increasing traction. The broader consumer and enterprise applications of 5G will also boost demand for network performance, hence we predict a longer investment cycle than for previous mobile generations.

One cornerstone in our expansion into Enterprise is Vonage. 5G offers unique capabilities such as high speed and low latency. We expect to see these capabilities be exposed, consumed and paid for through network APIs. We are intensively working with frontrunner operators to enable further monetization of their network investments through our global network platform. More broadly, we expect the acquisition to be highly accretive, enabling us to help customers accelerate their digital transformations while also significantly shaping how 5G networks are monetized. This will give the operators new revenue sources driving further investments in the network. In the Enterprise Wireless Solutions business, we have almost doubled sales in Q3 compared with Q3 2021.

In the new Cloud Software & Services segment, revenues were impacted by lower managed services sales and IPR revenues. Gross income was stable after offsetting ongoing 5G Core deployment costs. We have an ambition to unleash the great potential that we believe is present in this business. Our new management team is taking further actions to turn around the business and establish a satisfactory profitability. This includes strong focus on driving down costs, including realizing synergies from combining two business areas, while solidifying our technology and market leadership position. Improvements in performance will be gradual.

In the current inflationary environment, we are making pricing adjustments as well as leveraging product substitution to manage margins. We are also simplifying operations across the company and will continue to be proactive in reviewing options to reduce costs, whilst continuing to develop best-in-class products and services. We are fundamentally strengthening cost competitiveness through an intense focus on internal end-to-end efficiency gains and structural costs. We are dedicated to our long-term target of EBITA margin of 15-18% no later than 2024 and we will take out costs to secure delivery of this target. In order to deliver on the cost reductions, we expect restructuring costs to increase and be more in line with our long-term guidance of 1% of net sales, albeit varying by quarter. Cost efficiency is also crucial to allow investments in technology leadership and to strengthen our resilience in an uncertain market.

Strengthening the Ericsson culture is a key part of our strategic priorities. We are dedicated to acting with integrity in everything we do and have taken significant steps in developing our ethics and compliance program, while enhancing our risk management framework. We have changed, but we have more to do. We continue to engage with the Department of Justice and the Securities and Exchange Commission in relation to the 2019 Iraq investigation report and the DPA breach notices and are fully committed to cooperating with government authorities.

In summary, the focused strategy, which is built on the strength of our mobile networks business and supported by investment in R&D driving technology leadership, is leading to increased market share and delivery of robust financial performance. This is complemented by our high-growth Enterprise market strategy.

I want to thank all of our fantastic team around the world for their hard work and dedication. We look forward to discussing our strategy and execution at our upcoming Capital Markets Day in December.

Börje Ekholm

President and CEO