Ericsson reports Q3 losses
October 17, 2023
Ericsson has reported that its Q3 net loss attributable to owners of the parent company was SEK 30.67 billion (€2.66bn) or SEK 9.21 per share compared to net income of SEK 5.21 billion or SEK 1.56 per share last year, impacted by SEK 31.9 billion impairment of goodwill related to the acquisition of Vonage.
Q3 group organic sales declined by -10 per cent YoY. Segment Networks organic sales declined by -16 per cent while Enterprise and Cloud Software and Services sales grew organically. Reported sales decreased by -5 per cent to SEK 64.5 billion (€5.59bn).
Börje Ekholm, President and CEO of Ericsson, commented: “In a challenging operating environment, Ericsson delivered third quarter results in line with our guidance. Consistent with the rest of our industry, we expect the macroeconomic uncertainty to persist into 2024, which impacts our customers’ investment ability. We are addressing these challenges with a focus on elements within our control, namely cost management and operational efficiency. We are on a journey to fundamentally reposition our business and we continue to execute on our strategy to extend our leadership in mobile networks, grow our enterprise business, and drive lasting cultural transformation.”
Q3 performance was in line with guidance, with an EBITA margin of 7.3 per cent and an EBITA of SEK 4.7 billion. Group organic sales declined by -10 per cent, with a -16 per cent organic decline in Networks partly offset by 5 per cent organic growth in Cloud Software and Services and 11 per cent in Enterprise.
Networks organic sales in North America were down by -60 per cent YoY from a record quarter in Q3 2022, due to customers‘ inventory adjustments and a slower deployment pace. Sequentially, Networks sales declined by -2 per cent in line with previous trends. The decline in North America was partly offset by growth in India as well as some early 5G markets resuming investments.
Our efforts to increase resiliency and reduce sensitivity to mix and volume changes pays off. Despite large market mix shifts in Networks, where North America declined YoY from 48 per cent to 23 per cent of sales, our gross margin remained as high as 40 per cent.
Future networks need to be increasingly resilient, open, sustainable, and intelligent. Open RAN plays an important role in achieving this vision, and we are leading the industrialisation of cloudification, open fronthaul and open management for network programmability. More than one million Ericsson radios in the field are hardware prepared for open fronthaul which underpins our support for openness across our Cloud RAN and radio portfolios.
Cloud Software and Services continued executing on the turnaround. With an EBITA of SEK 0.4 billion in Q3, we have now achieved a positive EBITA on a rolling four quarter basis. While results fluctuate between quarters due to the nature of this business, we are well on track to deliver at least break-even for full-year 2023 and improving from there on.
In Enterprise we saw continued strong growth in Enterprise Wireless Solutions, and we had a second consecutive quarter of positive EBITA in Global Communications Platform.
Last week, we announced a SEK -32 billion impairment of goodwill attributed to our acquisition of Vonage. Since the announcement of our acquisition in 2021, macroeconomic headwinds, including rising interest rates and changing demand trends, have significantly impacted the market capitalisation of Vonage’s publicly traded peers.
Vonage is key to our expansion in Enterprise where we are enabling the next wave of innovation in our industry. We recently announced a significant milestone, in partnership with Deutsche Telecom, to be the first in the industry to unlock a market opportunity estimated at $20 billion by 2028. By offering communication and network APIs to developers and enterprises, we are opening up new ways for operators to monetise their investments in mobile networks, and for developers to leverage network capabilities to create exciting new applications. We are seeing significant inbound interest from operators to further develop this market.
Free cash flow before M&A decreased to SEK -0.5 (2.5) billion, mainly due to increased working capital for large deployment projects such as in India. Next year, with reduced build-out pace in these projects, we expect working capital to taper off and free cash flow before M&A to start gradually approaching our long-term target of 9-12 per cent of net sales.
For Q4 we expect similar market trends as in Q3, while the cost-out impact will increase. We expect a group Q4 EBITA margin at around 10 per cent.
We expect the underlying uncertainty impacting our Mobile Networks business to persist into 2024. We are proactively addressing the challenges in the current environment and are focusing on what we can control, including reducing costs. Our cost-out actions are already impacting the P&L and we are now expecting to yield SEK 12 billion in run-rate savings by year end, which is an increase of SEK 1 billion compared with previous indication. We will continue to take decisive cost-out actions to ensure Ericsson is well positioned to deliver value for our shareholders. Key to our strategy execution is to keep investments in technology leadership and long-term transformation intact, while managing our balance sheet.
The mobile networks market has been flattish for two decades, but with cyclicality, and we expect that to continue. However, the high paced mobile data growth, further spurred by new use cases, is the underlying driver for the market to recover to a more normal level. We are also relatively early in the 5G cycle with 75 per cent of all radio base station sites, outside China, not yet updated with 5G mid-band. Competitive dynamics in our customer markets tend to lead to relatively sharp increase in investments when the market turns, and we are seeing some positive signs in early 5G markets.
Our long-term EBITA margin target of 15-18 per cent remains, and we aim to reach it as soon as possible, subject to market mix recovery. Given current uncertainty we will not give guidance beyond Q4, 2023. As timing for the market mix recovery is in our customers’ hands, we prudently plan for current market conditions to prevail into 2024. We are managing our business accordingly, with focus on cost management and operational efficiency. When the market recovers, we will have significant operating leverage following the actions we are taking.
While near-term dynamics are uncertain, we are convinced that the recovery will come. Our goal is to make Ericsson a more profitable company, returning to our cash flow target level and capturing the next major wave of networks innovation with a substantial platform business.”