Ericsson Q1: Profits grow despite sales drop
April 16, 2024
Ericsson has reported that sales declined organically by 14 per cent YoY in Q1, attributed to a 19 per cent decline in Networks. Reported sales decreased to SEK 53.3 billion (€4.59bn). Gross income excluding restructuring charges decreased to SEK 22.8 billion as lower sales were partly offset by an improvement in gross margin. Reported gross income was SEK 22.7 billion.
Ericsson’s operating profit excluding restructuring charges rose unexpectedly, beating etimates, to SEK 4.3 billion crowns from 4 billion a year earlier, despite the sales drop.
Börje Ekholm, President and CEO of Ericsson, commented: “In Q1, we continued to execute on our strategy to strengthen our leadership in mobile networks, drive a focused expansion in enterprise, and pursue cultural transformation. We maintained our leading market position, but as expected our customers continued to exercise caution with their investments. Against this tough market backdrop, we delivered solid expansion in gross margins. This underscores the competitiveness of our solutions, our commercial discipline, and our actions on costs. We will continue to proactively optimize the business, including through strategic cost-saving measures, to ensure Ericsson is best positioned to increase shareholder value.”
Q1 – Market headwinds and execution focus
Ekholm continued: “While organic sales declined by -14 per cent, we reached a gross margin of 42.7 per cent, generated EBITA of SEK 5.1 billion and a 9.6 per cent EBITA margin. Networks sales decreased organically by -19 per cent YoY as our customers continued to be cautious with their investments. Despite this, we generated a strong gross margin of 44.3 per cent – a testament to our technology leadership, our competitive product portfolio, and the strategic actions we are taking, including on costs.”
“In Cloud Software and Services, we continued to execute on our strategy to strengthen delivery performance and commercial discipline. We delivered a gross margin of 37.4 per cent and our EBITA margin improved year-on-year for a fifth consecutive quarter. The rolling four quarter EBITA margin was 3 per cent.”
“In Enterprise, sales grew organically overall but declined in Global Communications Platform, impacted by a low-margin customer contract loss in Q4 and our decision to reduce our operations in some countries, with the impact expected to continue throughout the year. We continue to focus on leveraging the current business to support the build-out of our Global Network Platform for network APIs.”
“Our IPR revenues continued to grow, with a new 5G patent license agreement with a handset manufacturer. We are confident of delivering further growth in IPR revenues, benefiting from additional 5G agreements and an expansion into additional licensing areas. The timing of contracts will fluctuate, as we seek to optimise the value of new agreements.”
“We delivered SEK 3.7 billion of free cash flow in Q1, benefiting from our operational improvements, and lower working capital as we concluded an intense 5G roll-out phase in India. We announced further measures in the quarter to improve our cost efficiency and streamline operations, including headcount reductions. This is a necessary action to position the Company for longer-term success. In March, our independent Monitor certified our compliance programme. This is an important step to conclude our plea agreement. Our focus on culture and integrity will continue.”
Executing on our strategy
Looking at the company’s current output, Ekholm said: “Our strategy is aimed at building a stronger and more profitable Ericsson in the long term, with a vision to capture the next major wave of networks innovation with a substantial platform business.”
“At Mobile World Congress in Barcelona, we showcased industry-leading hardware and software solutions required in order to build the high-performance and programmable networks necessary to digitalize society. Our industry is shifting from a vertically integrated architecture to a horizontal and cloud-based network architecture – and Ericsson is leading this development.
“We also took critical steps in our strategy to build a Global Network Platform for network APIs, and announced three key partnerships with Verizon, AT&T and Amazon Web Services, as well as a communications API agreement with KDDI. Exposing network features through APIs will support the creation of new differentiated services and will be crucial in the next step of digitalization of enterprise and society.”
Looking ahead
“We expect a further decline in the RAN market, at least through the end of this year, as customers remain cautious with their investments and the pace of investment in India continues to normalise. Dell’Oro estimates the global RAN equipment market will decline by -4 per cent in 2024, which may prove optimistic.”
“If current trends persist, we expect our sales to stabilise during the second half of the year, benefiting from recent contract wins and the normalization of customer inventory levels in North America. In Q2, we expect Networks gross margin excluding restructuring charges to be in the range of 42-44 per cent. In the second half, our margins should benefit from improved business mix. We also remain highly focused on delivering stronger cash flow, based on our operating discipline. Our enterprise strategy aims to leverage network capabilities to increase telecoms industry revenue growth above the level that traffic growth alone could deliver. We are creating new, differentiated, products and services, supporting our customers in this transformation. In turn, this will support industry investment levels in the longer term. While near-term dynamics are challenging, we remain fully committed to our long-term targets, and we continue to be focused on increasing shareholder value,” Ekholm concluded.