Ericsson Third quarter 2018 - Oct 18, 2018
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Ericsson Third quarter 2018 Oct 18, 2018 © Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 1
Peter Nyquist Vice President Investor Relations © Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 2
Third quarter 2018
This presentation contains forward-looking statements. Such statements are based on our
current expectations and are subject to risks and uncertainties that could materially affect
our business and results. Please read our earnings reports and our most recent annual report
for a better understanding of these risks and uncertainties and please see the last page in
this presentation for further information about forward-looking statements. Any forward-
looking statements made during this presentation speaks only as of the date of this
presentation and Ericsson expressly disclaim a duty to provide updates to these forward-
Oct 18, 2018 looking statements, and the estimates and assumptions associated with them.
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 3
Börje Ekholm President and CEO © Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 4
Key takeaways
— 5G a commercial reality
— Organic sales growth 1% YoY
• First quarter since Q3 2014
— Profitability at Group level restored – partly driven by cost-out
• Net income positive, first quarter since Q2 2016
• Despite substantial provisions
— Digital Services improving – but challenges in transformation projects
— Update on SEC and DOJ investigation
• Engaged in discussions with authorities to find resolution
— Confident in reaching our long-term target of at least 12% operating
margin beyond 2020
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 5
Q3 2018
Financial Performance, Q318
Excluding restructuring charges
SEK b. 18Q3 17Q3 18Q2 — Networks – Operating margin 16%
• Organic growth – continued strong sales growth in North
Net sales 53.8 49.4 49.8
America
Gross margin 36.9% 28.5% 36.7%
Operating income 3.8 -0.8 2.0 — Digital Services – reduced losses
Operating margin 7.0% -1.7% 4.1% • Provisions for digital transformation projects
• Increasing project turnaround efforts
Free cash flow excl. M&A 0.7 -0.8 -0.2
— Managed Services – improved margins
• Efficiency gains and contract reviews
Financial Targets, 2020 — Emerging Business & Other – disciplined investments
• Improvements driven by iconectiv
Group targets 2020
Net Sales SEK 190-200 b.
Gross margin 37-39%
Operating margin >10%
Free Cash Flow Positive
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 6 This slide contains forward-looking statements. Actual result may be materially different.
See the last page in this presentation for further information about forward-looking statementsMarket area sales Q318, YoY
Net Sales bridge, Q318 YoY
FX adjusted
-16% 10% — Middle East & Africa
• Challenging economic situation in certain markets in the
Middle East
— North East Asia
-8%
4% • Continued deployment of NB IoT in Mainland China
-3% • Digital Services sales declined
— South East Asia, Oceania & India
• Large 4G deployments same period last year
— Europe & Latin America
17Q3 Middle East North East SE Asia Europe & North 18Q3
• Continued sales growth in Brazil, Mexico and parts of
& Africa Asia Oceania & Latin America Europe
India America
— North America
Reported: -9% 2% 2% 10% 21% • Investments in 5G readiness across all major customers
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 7Update on SEC & DOJ investigations — Voluntarily cooperating since 2013 with an investigation by the SEC and, since 2015, an investigation by the DOJ into Ericsson’s compliance with the U.S. FCPA — Continued cooperation with the SEC and DOJ, discussions to find a resolution — Facts that are relevant to the inquiries of the SEC and DOJ identified as part of the investigations — While the length of these discussions cannot be determined, based on the facts that we have shared with the authorities, we believe that the resolution of these matters will likely result in monetary and other measures, the magnitude of which cannot be estimated currently but may be material. — As this is an ongoing matter, we cannot provide further details and will not speculate about the outcome © Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 8
Ethics & compliance timeline
External assessment of ethics &
compliance leading to increased efforts
Allegation
Code of Business Chief Compliance Ericsson Compliance Line
Personnel management
Ethics formalized officer appointed & Supplier/partner
remediation office being
Screening Tool established
Increased
Phase out of resources in
Agents begin compliance,
investigation Vetting process
organizations for senior leaders
2004 2012 2013 2015 2016 2017 2018
Ethics and MA Compliance Face-to-face
GRI voluntary Offices and training with all
Compliance
reporting on First inquiries from Business Partner Customer Units
Board
incidents starts US authorities Review Boards
established
established
Increased focus on Deployments of
99% of employees
Board level, incl. analytic tools to
Whistleblower Audit Committee acknowledged CoBE
changed reporting identify high-risk
process formally starts to
structure transactions
established review anti-corruption
program
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 9Strategy execution on track
Status Q3 2018
Networks Digital Services Managed Services Other
2020 target 2020 target 2020 target 2020 target
Net sales Operating margin Net sales Operating margin Net sales Operating margin Net sales Operating margin
SEK 128-134 b. 15-17% SEK 42-44 b. Low single digit SEK 20-22 b. 4-6% SEK 3-5 b. Break-even
Status Q3 2018 Status Q3 2018 Status Q3 2018 Status Q3 2018
— Ericsson Radio System – 86% — Losses reduced — 40 of 42 contracts addressed — Media Solutions - partnering
— Cost savings – Service delivery and — 19 of 45 contracts addressed — Annualized profit improvement of — Selective investments in Emerging
common costs — Cost savings – service delivery SEK 0.9 b. Business – IoT, UDN and Emodo
— Competitive 5G-ready portfolio efficiencies and lower R&D — Cost savings - Service delivery
— R&D investments up >30% YoY — Increasing efforts to turn around — Investing in artificial intelligence,
transformation projects automation and analytics
Capital Markets Day – New York, November 8
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 10 Operating margin target excludes restructuring charges This slide contains forward-looking statements. Actual result may be materially different.
See page [XX] for further information about forward-looking statements.Carl Mellander Chief Financial Officer © Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 11
Networks
Segment Networks – Financial performance
Excluding restructuring charges
SEK b. 18Q3 17Q3 18Q2 — Sales adjusted for FX: 5% YoY
• Strong growth in North America, growth in Europe and
Net sales 35.9 31.9 32.4
Latin America
Gross margin 41.5% 34.8% 40.2%
Operating income 5.8 3.8 4.3 — Solid gross margin increase YoY
Operating margin 16.1% 11.9% 13.3% • Increased hardware and services margins
Capitalization impact1 -0.1 -0.7 0.0 • Increased ERS share
12017 excluding xo-items
• Favorable market mix
• QoQ increase driven by software and capacity sales
16% 15-17% — Operating margin increased YoY and QoQ
14% 13% • Increased investments in R&D pay off with improved
Operating gross margin and sales
margin
— Strong Ericsson Radio System deliveries, 86% YTD
18Q1 18Q2 18Q3 Target
2020
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 12 This slide contains forward-looking statements. Actual result may be materially different.
See the last page in this presentation for further information about forward-looking statementsDigital Services
Segment Digital Services – Financial performance
Excluding restructuring charges
SEK b. 18Q3 17Q3 18Q2 — Sales adjusted for FX: -6% YoY
• Major contract in North East Asia further delayed
Net sales 9.0 8.9 8.8
• Good progress due to 5G and Virtualization acceleration
Gross margin 36.9% 32.0% 42.6%
Operating income -1.4 -2.7 -1.5 — Gross margin improved YoY but declined QoQ
Operating margin -15.9% -29.9% -16.9% • Increasing efforts to turn digital transformation projects
Capitalization impact1 -0.4 -0.7 -0.4 around – additional provisions led to sequential GM drop
12017 excluding xo-items — Operating income improved YoY and QoQ
• Cost reductions across service delivery, SG&A and R&D
Low single • Continued investments in 5G portfolio
digit
18Q1 18Q2 18Q3 • Additional 3 out of 45 critical or non-strategic customer
Operating contracts addressed in Q318 – 19 in total
margin Target
2020
-17% -16%
-28%
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 13 This slide contains forward-looking statements. Actual result may be materially different.
See the last page in this presentation for further information about forward-looking statementsManaged Services
Segment Managed Services – Financial performance
Excluding restructuring charges
SEK b. 18Q3 17Q3 18Q2 — Sales adjusted for FX: -8% YoY
• Lower sales due to contract exits
Net sales 6.5 6.6 6.5
• Growth in Managed Services IT and Network Design &
Gross margin 12.9% -4.0% 14.0%
Optimization
Operating income 0.4 -0.6 0.4
Operating margin 6.8% -9.5% 6.5%
— Gross margin improved significantly YoY
• Efficiency measures and contract reviews
— Operating income positive – stable sequentially
7% 7%
4-6% — Additional 7 out of 42 contracts addressed in Q3 –
40 in total
Operating 3% • Annualized profit improvement ~SEK 0.9 b.
margin • Ericsson Local Services AB (LSS) divested on Aug 31
18Q1 18Q2 18Q3 Target
2020
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 14 This slide contains forward-looking statements. Actual result may be materially different.
See the last page in this presentation for further information about forward-looking statementsEmerging Business & Other
Segment Other – Financial performance
Excluding restructuring charges
SEK b. 18Q3 17Q3 18Q2 — Sales adjusted for FX: 11% YoY
• Driven by iconectiv – number portability contract in US
Net sales 2.4 2.0 2.1
Gross margin 32.3% 21.1% 27.4% — Gross margin improved YoY and QoQ
Operating income -1.0 -1.3 -1.2 • Supported by iconectiv and Media business
Operating margin -41.5% -66.2% -57.4% — Operating income improved YoY and QoQ
Capitalization impact1 -0.1 -0.1 -0.1 • Improved income YoY in iconectiv and Media business
12017 excluding xo-items • Investments in Emerging Business – in line with strategy
• 51% of MediaKind will be transferred to external partner
Break- around year-end – increased costs short term
18Q1 18Q2 18Q3 even • Combined income1 for MediaKind and Red Bee Media
Operating SEK -0.4 (-0.6) b.
margin Target 1Excluding restructuring charges and corporate allocations
2020
-41%
-57%
-68%
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 15 This slide contains forward-looking statements. Actual result may be materially different.
See the last page in this presentation for further information about forward-looking statementsQ3 2018
Excluding restructuring charges
SEK b. 18Q3 17Q3 Change — YoY sales growth driven by Networks and FX
Net sales 53.8 49.4 +9% — Gross margin improved YoY and QoQ
Gross income 19.8 14.1 5.7 — Continued R&D investments in Networks
Gross margin 36.9% 28.5% +8.4 pp
— SG&A expenses impacted by revaluation of customer
R&D expenses -9.2 -8.6 -0.6
financing in Middle East
SG&A expenses -6.5 -5.6 -0.9
Imp. losses trade receivables -0.4 -1.1 0.7 — Impairment testing of trade receivables made
Other op. income and expenses 0.0 0.4 -0.4 continuously
Operating income 3.8 -0.8 4.6 — Gain from divestment of Power Modules in Q3 2017
Operating margin 7.0% -1.7% +8.7 pp — Income significantly improved YoY and QoQ
Restructuring charges -0.6 -2.8 2.3 • Cost reductions
• Other strategic initiatives
• Improvements in all segments
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 16SG&A and R&D Q318, YoY
SG&A bridge Q318 YoY (SEK b.) R&D bridge Q318 YoY (SEK b.)
Excluding restructuring charges Excluding restructuring charges
0.7 1.4
0.7 0.9
6.5 9.2
• Provisions for
5.6 0.1
variable 0.7
compensation 8.6
• Field trials
• FX
Mainly in
Digital Services
17Q3 Cost Revaluation of Other 18Q3 17Q3 Capitalized R&D Reductions Investments in 18Q3
reductions cust. financing Networks
Cost reductions in G&A Increased R&D in Networks
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 17Gross margin Q318, YoY
Adjusted for restructuring charges
Gross margin bridge Q318 YoY
40%
— Structural improvements YoY
• Cost reductions visible in all segments
30%
36.9%
• ERS ramp up
28.5% • Managed Services contract review
20% — Positive capitalization impact YoY, SEK 0.7 b.
Q317 Networks Digital Managed EB + Other Q318
Services Services — Positive market and business mix
— Gross margin stable QoQ
Underlying gross margin development from 2016
• Increased software and hardware capacity sales in
37% 37% Networks
36%
34% 33% • Increased IPR revenues
31% 30% 30% 30% • Digital Services negatively impacted by increased
29% 29%
provisions for digital transformation projects
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Target
2016 2017 2018 2020
2016 and 2017: adjusted as per 2017 reporting, before IFRS 15 restate
Continued strong gross margin – effects of strategy execution and control
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 18 This slide contains forward-looking statements. Actual result may be materially different.
See the last page in this presentation for further information about forward-looking statementsFree cash flow
Financial Performance
Debt maturity profile (SEK b.)
SEK b. Q318 Q317
Net income reconciled to cash 2.9 -0.8
Change operating net assets -0.9 0.8
Cash flow from operating activities 2.0 0.0
CAPEX -1.1 -0.7
Other -0.2 -0.1
Free cash flow excluding M&A 0.7 -0.8
M&A -0.4 0.4
Free cash flow 0.3 -0.5
Net cash end of period 32.0 24.1
Gross cash end of period 65.7 55.1
Solid balance sheet – Net cash improved to SEK 32.0 (24.1) b. YoY
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 19 This slide contains forward-looking statements. Actual result may be materially different.
See the last page in this presentation for further information about forward-looking statementsPlanning assumptions from the Q3 report
2018 Net Sales, SEK b. Gross margin % Operating expenses, SEK b.
Excluding restructuring charges Excluding restructuring charges
Q4 Q4 Q4
+17%
• Cost reductions
• Lower than normal • Regional sales mix • Seasonality
-2% 57.9 seasonality in Networks • Business mix • Increased investments
53.8 -18.5
• FX 36.9% in Networks R&D
50.3 49.4 49.8 36.7% -16.3 -16.1 • Field trials
43.4 35.9% -15.4 • MediaKind transaction
-14.8 -14.8
costs
30.9% • Cost reductions
28.5%
25.1%
Q2 Q3 Q4 Q1 Q2 Q3 Q2 Q3 Q4 Q1 Q2 Q3 Q2 Q3 Q4 Q1 Q2 Q3
17 18 17 18 17 18
Strong sequential sales growth Q2 to Q3 Impact from regional and business mix Seasonality, field trials and Networks R&D
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 20 Please see the Q3 report for the full planning assumptions This slide contains forward-looking statements. Actual result may be materially different.
See the last page in this presentation for further information about forward-looking statementsBörje Ekholm President and CEO © Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 21
Closing remarks
— Continued strong strategy execution
• Investments in technology leadership
• Strong cost control to safeguard competitiveness
— 5G now a commercial reality
• Continue to invest to secure 5G leadership
— Enhanced mobile broadband and fixed
wireless access first 5G use cases
— Artificial Intelligence and automation key
enablers for new business development
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 22Capital Markets Day New York, November 8 https://www.ericsson.com/en/investors/events-and-presentations/CMD2018 © Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 23
© Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 24
Forward-looking statements This presentation includes forward-looking statements, including statements reflecting management’s current views relating to the growth of the market, future market conditions, future events, financial condition, and expected operational and financial performance, including, in particular the following: - Our goals, strategies, planning assumptions and operational or financial performance expectations; - Industry trends, future characteristics and development of the markets in which we operate; - Our future liquidity, capital resources, capital expenditures, cost savings and profitability; - The expected demand for our existing and new products and services as well as plans to launch new products and services including R&D expenditures; - The ability to deliver on future plans and to realize potential for future growth; - The expected operational or financial performance of strategic cooperation activities and joint ventures; - The time until acquired entities and businesses will be integrated and accretive to income; and - Technology and industry trends including the regulatory and standardization environment in which we operate, competition and our customer structure. The words “believe,” “expect,” “foresee,” “anticipate,” “assume,” “intend,” “likely,” “projects,” “may,” “could,” “plan,” “estimate,” “forecast,” “will,” “should,” “would,” “predict,” “aim,” “ambition,” “seek,” “potential,” “target,” “might,” “continue,” or, in each case, their negative or variations, and similar words or expressions are used to identify forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. We caution investors that these statements are subject to risks and uncertainties many of which are difficult to predict and generally beyond our control that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements. Important factors that could affect whether and to what extent any of our forward-looking statements materialize include, but are not limited to, the factors described in the section Risk factors in the most recent Annual Report and in our quarterly reports. These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this presentation, to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events, whether as a result of new information, future events or otherwise, except as required by applicable law or stock exchange regulation. This presentation does not constitute an offer to sell, or the solicitation of an offer to buy, any of our securities. It does not constitute a prospectus or prospectus equivalent document and investors should not make any investment decision in relation to any shares referred to in this presentation. No offer of securities shall be made except by means of a prospectus meeting the requirements of the Securities Act and applicable European rules and regulations. © Telefonaktiebolaget LM Ericsson 2018 | Third quarter report 2018 | Oct 18, 2018 | Page 26
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