Ericsson reports third quarter results 2020

Third quarter highlights

Sales adjusted for comparable units and currency increased by 7% YoY mainly driven by 5G sales in Mainland China. Reported sales were SEK 57.5 (57.1) b.

Gross margin excluding restructuring charges improved to 43.2% (37.8%) with margin improvement in all segments. Reported gross margin improved to 43.1% (37.7%).

Operating income excluding restructuring charges and items affecting comparability in Q3 2019, improved to SEK 9.0 b. (15.6% operating margin) from SEK 6.5[1] b. (11.4% operating margin) driven by Networks. Reported operating income SEK 8.6 (-4.2) b.

Networks reported sales increased by 6% YoY, with an increase of 13% adjusted for comparable units and currency. Operating margin excluding restructuring charges was 22.7% (18.4%).

Net income was SEK 5.6 (-6.9[1]) b.

Free cash flow before M&A was SEK 3.9 (4.5) b., including a capital injection into the Swedish Pension Trust of SEK -2 b. in the quarter. Net cash Sep 30, 2020, was SEK 41.5 (37.4) b.

[1] Q3 2019 was impacted by cost provisions of SEK -11.5 b. related to the investigation by the United States Securities and Exchange Commission (SEC) and the United States Department of Justice (DOJ) as well as a refund of social security costs of SEK 0.9 b.

Planning assumptions highlights (please see the quarterly report for complete planning assumptions)

The YTD results strengthen the Company's confidence in delivering the Group targets for 2020. The financial targets for 2022 remain.

SEK b. Q3

2020 Q3

2019 YoY

change Q2

2020 QoQ

change Jan-Sep

2020 Jan-Sep

2019

Net sales 57.5 57.1 1% 55.6 3% 162.8 160.8

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

Gross margin 43.1% 37.7% - 37.6% - 40.2% 37.5%

Operating income (loss) 8.6 -4.2 - 3.9 124% 16.8 4.4

Operating margin 15.0% -7.3% - 6.9% - 10.3% 2.8%

Net income (loss) 5.6 -6.9 - 2.6 115% 10.4 -2.6

EPS diluted, SEK 1.61 -1.89 - 0.74 118% 3.00 -0.67

Measures excl. restructuring charges and other items affecting comparability[1]

Gross margin excluding restructuring charges 43.2% 37.8% - 38.2% - 40.7% 37.6%

Operating income excl. restr. charges & items affecting comparability in 2019[2] 9.0 6.5 38% 4.5 98% 18.1 13.9

Operating margin excl. restr. charges & items affecting comparability in 2019[2] 15.6% 11.4% - 8.2% - 11.1% 8.6%

Free cash flow before M&A 3.9 4.5 -12% 3.2 22% 9.5 9.5

Net cash, end of period 41.5 37.4 11% 37.5 11% 41.5 37.4

[1] Non-IFRS financial measures are reconciled at the end of this report to the most directly reconcilable line items in the financial statements.

[2] Excludes restructuring charges in all periods. No other adjustments made in 2020. 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.). Q3 2019 excludes cost provisions (SEK -11.5 b.) related to the investigation by the United States Securities and Exchange Commission and the United States Department of Justice and a refund of social security costs (SEK 0.9 b.).

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

Amid the continuing global Covid-19 pandemic and with more than 80% of our people working from home, we keep on executing on our focused strategy. We continue to win footprint in several markets leveraging our competitive 5G portfolio. The gross margin[1] improved in all segments in the third quarter and reached 43.2% (37.8%), the highest since 2006. With the acquisition of Cradlepoint, expected to close in Q4, we are making further progress in our strategy to build an enterprise business. Covid-19 has so far had limited impact on our business, but we are closely monitoring any signs of a change in the situation. The year to date results strengthen our confidence in delivering on the 2020 Group target.

Networks grew organically[2] by 13% and reported a gross margin[1] of 46.7% (41.6%). This reflects high activity levels in North East Asia and North America. Underlying business fundamentals remain strong in North America driven by consolidation in the US operator market, pending spectrum auctions, and increased demand for 5G. The 5G contracts in Mainland China have developed according to plan, contributing positively to profits in Q3 and are expected to improve further. Our business in Europe grew based on several footprint gains. While the pandemic has hurt revenues for several of our customers, and in some cases this has led to a reduction of capex, we have not seen any negative impact on our business, largely due to footprint gains. However, the pandemic negatively impacted our sales in Latin America and Africa.

Digital Services continued to make good progress on the execution of the turnaround plan, transforming the business and increasing software sales. The gross margin[1] improved to 43.5% (38.3%), supported by increased software sales and improvements in the underlying business. Our cloud-native 5G core portfolio shows very positive momentum with a high win-ratio and a significant number of new customer contracts. We are selectively increasing R&D investments to accelerate our growth portfolio to capture market opportunities. However, sales in our legacy portfolio is declining faster than earlier predicted. In the short term, this shortfall will not be compensated by the growth in new offerings and therefore our sales volume is lower than expected. With weaker sales in combination with higher R&D investments, there is a risk of further delay in reaching the 2020 operating margin target for Digital Services.

Managed Services delivered a gro

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