Ericsson reports fourth quarter and full year results 2016

FOURTH QUARTER HIGHLIGHTS

• Reported sales decreased by -11% YoY, with SEK -5.5 b. lower IPR licensing revenues.
• Despite strong sequential sales growth in Networks, the underlying market remained weak in the fourth quarter.
• Gross margin was 26.1% (36.3%). Gross margin, excluding restructuring charges, was stable QoQ, but declined to 29.4% (36.6%) YoY, following lower IPR licensing revenues and a higher share of Global Services sales with reduced margin in the quarter.
• Operating income was SEK -0.3 (11.0) b. Operating income, excluding restructuring charges, decreased to SEK 4.4 (11.7) b., mainly due to lower IPR licensing revenues.
• The cost and efficiency program is tracking towards target. The execution pace was faster than predicted in the quarter, resulting in full-year restructuring charges of SEK 7.6 b. compared with estimated SEK 5.5-6.5 b.
• The baseline for current IPR licensing contract portfolio is approximately SEK 7 b. on an annual basis. Smartphone volumes, new agreements and IoT licensing will determine growth opportunities going forward.
• Cash flow from operating activities was SEK 19.4 (21.9) b. supported by reduced operating assets.
• Effective January 16, 2017, Börje Ekholm assumed the position of President and CEO.

FULL YEAR HIGHLIGHTS

• Reported sales decreased by -10% mainly due to weaker demand for mobile broadband, especially in markets with a weak macroeconomic environment. IPR licensing revenues declined to SEK 10.0 (14.4) b.
• Operating income declined to SEK 6.3 (21.8) b. due to lower sales and a changed business mix in mobile broadband, with a lower proportion of capacity business. This was partly offset by lower operating expenses.
• Cash flow from operating activities was SEK 14.0 (20.6) b. Net cash at year-end was SEK 31.2 b.
• The Board of Directors will propose a dividend for 2016 of SEK 1.00 (3.70) per share to the AGM.

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)

The negative industry trends remained in the fourth quarter. However, sales were positively impacted by favorable currency exchange rates combined with hardware deliveries, previously planned for Q1 2017. Profitability declined YoY following lower IPR licensing revenues mainly due to last year's agreement with Apple as well as increased restructuring charges. Operating cash flow in the fourth quarter was SEK 19.4 b., supported by reduced operating assets.

Business

Group sales declined by -11% YoY, primarily due to the decrease of SEK -5.5. b in IPR licensing revenues. Full-year IPR licensing revenues were SEK 10.0 (14.4) b.

In 2016, a number of markets, in regions such as Latin America, the Middle East and Africa, were impacted by a weak macroeconomic environment with a negative effect on mobile broadband investments. The underlying market remained weak in the fourth quarter with further weakness in Latin America. However, hardware deliveries previously planned for Q1 2017 were made on customer requests, and had a positive impact on sales in the fourth quarter. In combination with a weakened SEK versus USD, this resulted in a stronger than expected sequential sales growth in mobile broadband. Segment Networks sales increased by 39% QoQ. The new radio platform, Ericsson Radio System (ERS), represented almost 15% of total deliveries of radio units for 2016 and the roll-out of the new platform is gradually ramping up.

Global Services sales declined by -4% YoY mainly due to the reduced scope of a managed services contract in North America. Support Solutions sales declined by -39% YoY, mainly due to lower IPR licensing revenues. In addition, TV & Media sales were lower than expected due to a rapid decline in legacy products.

Sales in the targeted areas declined by -7% YoY, mainly impacted by lower sales in OSS and BSS following the transition from legacy to new products. We are allocating resources into our digital transformation projects to secure important deliveries in 2017. Full-year sales for targeted areas were flat and accounted for 20% of group sales in 2016.

The current industry trends and business mix of coverage and capacity sales in mobile broadband are expected to prevail in 2017. At the Investor Update in November we presented our estimate of the Radio Access Network (RAN) equipment market in USD; a decline by -10% to -15% in 2016 and further decline by -2% to -6% in 2017.

The baseline for current IPR licensing contract portfolio is approximately SEK 7 b. on an annual basis. Smartphone volume growth, agreements with currently unlicensed handset manufacturers and IoT licensing will determine growth opportunities going forward.

Profitability

Operating income decreased to SEK -0.3 (11.0) b. in the quarter, mainly due to lower IPR licensing revenues, higher restructuring charges and lower gross margin.

The cost and efficiency program, first initiated in November 2014, is tracking to target of an annual run rate of operating expenses, excluding restructuring charges, of SEK 53 b. by second half of 2017. Full-year operating expenses, excluding restructuring charges, amounted to SEK 56.4 b., corresponding to a full-year reduction of SEK 5 b. The execution pace was faster than predicted in the quarter resulting in front-loaded restructuring charges. With current plans, we expect restructuring charges of approximately SEK 3 b. for 2017.

Cash flow

Operating cash flow in Q4 was SEK 19.4 b. Operating cash flow was mainly driven by reduced operating assets. Full-year operating cash flow amounted to SEK 14.0 b. Net cash at the end of quarter was SEK 31.2 b.

The Board will propose a dividend of SEK 1.00 (3.70) per share to the AGM. The Board believes that it is prudent to align the dividend level with 2016 earnings adjusted for restructuring charges  and the current market outlook. However, the Board expresses confidence in the ongoing actions to improve Ericsson's financial performance, and has the ambition to increase the dividend over time as our performance improves.

Focus going forward

We as well as our customers are going through a period of rapid change. As a consequence, we are reviewing our priorities in order to set the future direction of the company. This work has been initiated involving key teams in the company, to secure quality of decisions and speed in implementation once decisions are made. Emphasis will be on refining the strategy to focus investments into areas where we both can and must win. Building on the suggestion from the famous ice hockey player Wayne Gretzky; We will focus on skating where the puck will be, not where it has been.

In the near term, stability will be key to establishing a strong base for future growth. This means prioritizing profitability over growth, but also to diligently continue to work on efficiency and effectiveness across all operations. This can and will ensure that we remain at the forefront of technological development - building on the combined strength across products, services and solutions.

NOTES TO EDITORS

You find the complete report with tables in the attached PDF or by following this link https://www.ericsson.com/res/investors/docs/q-reports/2016/12month16-en.pdf or on www.ericsson.com/investors

Ericsson invites media, investors and analysts to a briefing at the Ericsson Studio, Grönlandsgatan 8, Stockholm, at 09.00 (CET), January 26, 2017.
A conference call for analysts, investors and media will begin at 15.00 (CET).

Live webcast of the briefing and conference call details, as well as supporting slides, will be available at www.ericsson.com/press and www.ericsson.com/investors

FOR FURTHER INFORMATION, PLEASE CONTACT

Contact person

Peter Nyquist, Head of Investor Relations
Phone: +46 10 714 64 49
E-mail: peter.nyquist@ericsson.com

Additional contacts

Helena Norrman, Senior Vice President, Marketing and Communications
Phone: +46 10 719 34 72
E-mail: media.relations@ericsson.com

Investors

Åsa Konnbjer, Director, Investor Relations
Phone: +46 10 713 39 28
E-mail: asa.konnbjer@ericsson.com

Stefan Jelvin, Director, Investor Relations
Phone: +46 10 714 20 39
E-mail: stefan.jelvin@ericsson.com

Rikard Tunedal, Director, Investor Relations
Phone: +46 10 714 54 00
E-mail: rikard.tunedal@ericsson.com

Media

Ola Rembe, Vice President, Head of External Communications
Phone: +46 10 719 97 27
E-mail: media.relations@ericsson.com

Corporate Communications
Phone: +46 10 719 69 92
E-mail: media.relations@ericsson.com

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 CET on January 26, 2017.