STOCKHOLM, October 18, 2018
STOCKHOLM, October 18, 2018 /PRNewswire/ --
Third quarter highlights
Q3 Q3 YoY Q2 QoQ 9 months 9 months SEK b. 2018 2017 change 2018 change 2018 2017 Net sales 53.8 49.4 9% 49.8 8% 147.0 147.5 Sales growth adj. for comparable units and currency - - 1% - 7% - - Gross margin 36.5% 26.9% - 34.8% - 35.2% 24.0% Operating income (loss) 3.2 -3.7 - 0.2 - 3.1 -15.5 Operating margin 6.0% -7.4% - 0.3% - 2.1% -10.5% Net income (loss) 2.7 -3.5 - -1.8 - 0.2 -13.9 EPS diluted, SEK 0.83 -1.09 - -0.58 - 0.01 -4.31 EPS (non-IFRS), SEK  1.03 -0.29 - -0.09 - 1.04 -2.15 Cash flow from operating activities 2.0 0.0 - 1.4 41% 5.1 -1.6 Free cash flow excluding M&A  0.7 -0.8 - -0.2 - 1.3 -5.4 Net cash, end of period 32.0 24.1 33% 33.1 -3% 32.0 24.1 Gross margin excluding restructuring charges 36.9% 28.5% - 36.7% - 36.5% 26.2% Operating income (loss) excluding restructuring charges 3.8 -0.8 - 2.0 85% 6.7 -9.4 Operating margin excluding restructuring charges 7.0% -1.7% - 4.1% - 4.6% -6.4%
 EPS diluted, excl. amortizations and write-downs of acquired intangible assets, and excluding restructuring charges. Potential ordinary shares are not considered when their conversion to ordinary shares would increase earnings per share.
 Free cash flow excluding M&A: See Alternative Performance Measures (APM) at the end of the report.
Non-IFRS financial measures are reconciled to the most directly reconcilable line items in the financial statements at the end of this report.
Comments from Börje Ekholm, President and CEO of Ericsson (NASDAQ:ERIC)
"We continue to execute on our focused strategy, tracking well towards our 2020 targets. We see improvements across our businesses resulting in a gross margin of 36.9% (28.5%) and an operating margin of 7.0% (-1.7%). Organic  sales growth was 1% for the Group, despite headwind from exited non-strategic contracts.
We continue to invest in our competitive 5G-ready portfolio to enable our customers to efficiently migrate to 5G. Operators around the world plan for launching 5G services, led by North America. The strong customer interest in 5G generates a gradual increase in costs for field trials. We expect the costs to remain on high levels, at least for the coming 12-18 months, and they are included in our 2020 profitability target of at least 10%.
Networks gross margin improved to 41.5% (34.8%) with an organic sales growth of 5%. The strong sales were mainly driven by a continued high activity level primarily in North America. Due to the strong sequential sales increase in the third quarter we expect lower effects from seasonality than normal in the fourth quarter in Networks.
Digital Services gross margin improved to 36.9% (32.0%) YoY, but declined QoQ. We see clear results of our cost-out activities and good progress in large parts of the business. At the same time, provisions related to large digital transformation projects increased in the quarter, explaining the sequential drop in gross margin. We are not satisfied with the development in these digital transformation projects and are thus increasing our efforts to turn them around.
In Managed Services, gross margin improved to 12.9% (-4.0%) supported by efficiency gains and customer contract reviews. We have finalized 40 of the targeted 42 contracts, with an annualized profit improvement of SEK 0.9 b. We are increasing our investments in R&D to reshape the offering based on automation and artificial intelligence. We see strong customer interest in the coming solutions, but sales are so far limited as we are in early stages.
In segment Emerging Business and Other, sales grew by 22% driven by growth in the iconectiv business. We continue to invest in strategic future growth areas such as Internet of Things (IoT) and saw increasing momentum with one important customer win with our connectivity platform solutions in the quarter. As parts of the portfolio in Emerging Business are in an early phase, sales are so far limited. We will remain disciplined in our investments in Emerging Business by tracking each venture against delivery milestones.
Even though the cost reduction program, announced in July 2017, has been completed, we continue our efforts to drive efficiency and cost reductions to further increase competitiveness. Our estimate for restructuring charges of SEK 5-7 b. for the full year remains. Free cash flow excluding M&A improved to SEK 0.7 (-0.8) b. and our cash position remains strong. Our work to further strengthen the balance sheet continues.
As previously disclosed, we have been voluntarily cooperating since 2013 with an investigation by the SEC and, since 2015, with an investigation by the DOJ into Ericsson's compliance with the U.S. FCPA. While we cannot comment in detail we can provide the following update on the process. We have identified facts that are relevant to the investigations and these facts have been shared with the authorities. We continue to cooperate with the SEC and the DOJ and are engaged in discussions with them to find a resolution. 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. We continue our efforts to improve on our compliance program. See further details in "Other information".
There is strong momentum in the global 5G market with lead markets moving forward. The global radio access market is recovering from several years of negative growth and our investments in R&D have positioned us well to benefit from this development. More work remains, however, to get all parts of the business to a satisfactory performance level. We remain confident in reaching our long-term target of at least 12% operating margin beyond 2020."
President and CEO
 Excluding restructuring charges
 Organic sales growth: Sales adjusted for comparable units and currency
Planning assumptions going forward
Ericsson related 2018; Sales
Ericsson related 2018; Operating expenses
Ericsson related 2018; Other
Q3 2018 Q4 2018 Q4 2017 FY 2017 FY 2018 FY 2019 SEK b. Actual Estimate Actual Actual Estimate Estimate Cost of sales -0.2 -0.1 -0.8 -2.6 -0.7 R&D expenses -0.5 -0.5 -0.6 -0.3 -1.7 Total impact -0.7 -0.6 -1.4 -2.9 -2.4 -1 to -2
NOTES TO EDITORS
You find the complete report with tables in the PDF or by following this link https://www.ericsson.com/assets/local/investors/documents/financial-reports-and-filings/interim-reports-archive/2018/9month18-en.pdf or on http://www.ericsson.com/investors
The company will hold a press briefing, which will also be available through a live webcast, starting at 09.00 CEST on October 18, 2018 at Ericsson Studio, Grönlandsgatan 8, Kista, Sweden. A conference call for analysts, investors and media will begin at 14.00 (CEST).
This information is information that Telefonaktiebolaget LM Ericsson is obliged to make public pursuant to the EU Market Abuse Regulation. The information was submitted for publication, through the agency of the contact person set out above, at 07:30 CEST on October 18, 2018.