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Ericsson Q2 sales dip

July 14, 2023

Ericsson has reported that group organic sales in Q2 declined by -9 per cent YoY. Segment Networks sales declined by -13 per cent, while segment Enterprise sales grew by 20 per cent. Reported sales was SEK 64.4 (€5.6bn).

The sharp decline in sales in North America was partly offset by strong sales development in India.

Commenting on the results, Börje Ekholm, President and CEO of Ericsson, said: “Building on our strong position and despite challenging market conditions we delivered a solid quarter – meeting expectations. We continue to execute with discipline and focus without losing sight of the long term. We are leveraging our 5G technology, growing our enterprise business and driving our cultural transformation to accelerate our growth trajectory and shape the communications industry landscape. 

Performance in Q2 was in line with our expectations, despite the uncertain macro backdrop and significant changes in market mix. This is a testament to our strategy, the excellence of our portfolio, and our ability to adapt and execute. 

Group organic sales declined by -9 per cent, as a Networks decline of -13 per cent was partly mitigated by a 20 per cent organic growth in Enterprise. Group EBITA excluding restructuring charges was SEK 3.7 (7.5) b. or 5.7 per cent (12 per cent) of sales. 

In Networks, we saw strong execution with record build-out speed in India, where we now have a leading market share. Sales growth in India partly offset the expected softening we saw in other markets, notably in North America, where build-out pace moderated and customer inventory levels were reduced. Despite the business mix change and several large rollout contracts, Networks had a gross margin of over 39 per cent. 

In Cloud Software and Services, we continue to execute on the turnaround, including exiting subscale business and improving delivery efficiency. We are on track to deliver an EBITA of at least break-even for the full year 2023. 

In Enterprise we saw continued strong growth in Enterprise Wireless Solutions, and we recorded positive EBITA in the Global Communications Platform business. 

We landed another important 5G licensing agreement with a device vendor, further validating our IPR portfolio strength, positioning us well for continued IPR growth as we license vendors previously unlicensed for 5G. 

We are well on track to reduce our annual run rate by at least SEK 11 b. by year-end, which will positively impact the P&L over the coming quarters with full effect during 2024. 

Free cash flow before M&A was SEK -5.0 (4.4) b. primarily driven by lower EBIT and increased working capital including the payment to the US Department of Justice. We expect an improvement in cash flow during the second part of the year and gradually move towards our long-term target of 9-12 per cent of Net sales. 

Ericsson is shaping the industry landscape by leveraging the full value of 5G and creating the world’s most powerful innovation platform. We remain focused on three priorities: i) bolstering our leadership in mobile networks; ii) growing our enterprise business; and iii) driving our cultural transformation. 

Leadership in mobile networks is the cornerstone of our success. Our competitive advantage is clear – we deliver leading performance, energy efficiency and cost optimisation. Our radios carry about half of the world’s 5G traffic outside China. 

Building on this position and our market leading technologies, we are expanding into the fast-growing enterprise segment, substantially increasing our addressable market and diversifying our portfolio. 5G offers advanced capabilities such as Quality of Service, speed, latency, and location, and our platform allows these capabilities to be monetised in new ways by exposing them through network APIs. Operators and enterprises are showing great interest, as our platform will enable operators to offer differentiated performance levels and allow developers to integrate these capabilities into both existing and innovative new use cases. 

We continue our relentless focus on enhancing our ethics and compliance programme. Our compliance program and controls have been significantly enhanced since 2019 and our monitorship is entering its final year. We conduct testing to ensure our compliance program is effective and fully embedded across the company. 

For Q3 we expect similar market mix and trends as in Q2. In addition, Q3 will benefit from an early impact of our strong focus on cost-out execution. Overall, we thus expect Q3 EBITA margin to be in line with or slightly higher than Q2, followed by a seasonally stronger Q4. 

As we look ahead, a fundamental driver of network capex is the continued rapid data traffic growth. Average smartphone usage is expected to exceed 20 GB/month in 2023 with strong growth. 240 operators have launched 5G, bringing new revenue growth with pricing model innovation. We forecast 5G subscriptions to top 1.5 billion by end-2023 and reach 4.6 billion by 2028. Fixed Wireless Access (FWA) also grows quickly, driving further traffic growth. 

Traffic growth and operators’ desire to meet expectations for network quality with cost and energy efficiency, will stimulate investments. We estimate 75 per cent of all base station sites outside China are not yet updated with 5G mid-band, and migration to 5G standalone will continue in order to deliver on 5G’s full potential. 

We are confident that the market will recover as a consequence of these fa4ctors, and Ericsson is well positioned to benefit from increased investments. The exact timing of these increased network investments is, of course, in the hands of our customers, but we expect that the market will see a gradual recovery in late 2023 and improve in 2024. 

Our technology leadership, solid performance and growth potential, position us well for the future. We are navigating the current environment with discipline and focus, and we tackle areas within our control. We execute on the Cloud Software and Services turnaround, portfolio adjustments, enhanced R&D productivity, IPR growth and cost reductions. Based on the expected recovery of the mobile networks market towards the end of the year, we remain focused on reaching the lower end of the 15-18 per cent EBITA margin long-term target range in 2024.”

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