Thank you, operator. And hello, everyone, and welcome to this Q3 Call today. With me here today, I have our CEO and President, Borje Ekholm; as well as our CFO, Carl Mellander. During the call today, we will be making forward-looking statements.
These statements are based on current expectations and certain planning assumptions, which are subject to risks and uncertainties. The actual results may differ materially due to factors mentioned in today’s press release and discussed in this conference call.
We encourage you all to read about these risks and uncertainties in our earnings report as well as in our annual report. With that said, I would leave the word now to Borje Ekholm..
Thank you, Peter, and welcome, everyone, to our third quarter report. As you have seen, we show stable performance in a very challenging market. Of course, it’s a tough report, but we have also significant one-time costs that hurt earnings during the third quarter, but underlying performance shows a breakeven result for our third quarter.
What’s especially encouraging is that we see emerging signs of, call it, execution in a very challenging quarter. Our strategy, as we determined with the focused strategy, is starting to deliver results in the market. And we see that through the slight growth in our Networks segment.
So if we adjust actually for the large rescoped Managed Services contract during last year and foreign exchange, we have a slight growth in our Networks segment. We also see increasing stability in our roadmaps as well as projects in IT & Cloud, which, of course, still are hurting our earnings.
If we also look at sales overall on a FX adjusted basis, it fell, but at a lower pace than before at only 3%. As I said, if we adjust earnings for the significant one-time costs, which are driven by our strategy and the focused strategy, we show a breakeven result, with the Networks delivering an 11% margin. We see the losses again in IT & Cloud.
It’s partly explained by the higher amortization, then capitalization of R&D expenses, but it’s also hurting gross margins from the focus on simply delivering or stabilizing our digital transformation projects.
And here, we see some progress during the quarter as we are gradually starting to deliver these projects and reaching the milestones in the projects. We see also that in the second quarter, we communicated a risk of SEK 3 billion to SEK 5 billion that we expected to realize up until mid next year as a consequence of our focused strategy.
During the quarter, we have taken provisions and adjustments of SEK 3.3 billion of that, with very limited impact on cash flow.
We see that the range – at the end of the day, once we are through all the restructuring and the focus – and the consequences of the focused strategy, we expect and see that with the current visibility, we will be in the higher end of that range, but that we will be sufficient.
We are also taking restructuring charges of SEK 2.8 billion during the third quarter. We expect to accelerate the pace in the fourth quarter, which will – and then, therefore, as a consequence, we have increased the estimate of the total restructuring cost for the year a bit, but that’s a consequence of moving faster on cost-out simply.
Our free cash flow in a difficult season and a difficult quarter was slightly negative at SEK 500 million, but we see our cash position being very stable. We move on to the next slide. We see that we are making progress on a number of elements in our strategy. The first is that we’re reaching 55% penetration of our Ericsson Radio System.
And we also see that to be a very competitive product offering in the market, resulting in a stronger market position and demand from our customers as well as improved earnings.
During the quarter here, we have – or we should say about China, we are seeing that the big investment peak in China is now over, and the levels are normalizing, so demand is a little softer. At the same time, we see increased market share, and we are targeting to increase the market share in China to prepare for 5G.
This will have a dilutive effect on gross margins in the fourth quarter, but the ambition is still to keep a double-digit margin for our Networks business despite that. We continue to work through our Managed Services contracts. And to date, we have worked through 13 of 42 identified challenged contracts, and the pace continues here to accelerate.
Our cost reduction program and efficiency program that we target simply on the group common cost as well as service delivery, we have started to execute on that. And during the third quarter, there is a net reduction of 3,000, and that is after we have actually hired 1,100 R&D engineers.
And we do that as a consequence of our focused strategy where we want to have technology leadership, and that’s our ambition, to achieve technology leadership. So you see the efficiency gains we’re getting are quite significant and starting to be realized.
Here, we will increase the pace of execution during the fourth quarter, which then results in the higher restructuring charges that we foresee. On IT & Cloud, we still have significant losses.
But the key here and our first ambition has been to stabilize product roadmaps as well as the large digital transformation projects, and we are seeing a big progress during the quarter. We see that we today deliver two customers on the digital transformation projects, and they have gone live in several of the challenged projects.
The investments we have taken hurts gross margin, but at the same time, we need to make sure that we fulfill customer requirements first. So whilst we’re through this now, we see that we actually can turn more attention to gaining efficiencies in service delivery. And as you know, services is a big part of the delivery in IT & Cloud.
And here, we need to realize significant efficiency gains, and that’s what we are starting to execute on now. Our focused strategy gets a lot of positive feedback and reinforcement from our customers, so that’s still supporting our strategy. But more importantly, we see customers increasingly engaged in 5G discussions.
And here, we are very competitive with our ERS portfolio that actually offers 5G-ready hardware. So that puts our customers on the way to realizing the vision of 5G. If we just move on to look at the market area sales, we see increasing stability.
North America is, to a very large extent, only dependent on the large Managed Services contract that was rescoped during Q4 last year. So that has hurt comparable numbers. Besides that, development is stable. We see in Europe and Latin America, we see a little bit of mixed picture. Increasing stability in Europe.
Still weak in Latin America, but we see some bright lights in there as well as, for example, Brazil is starting to grow. Northeast Asia is, of course, hurt by the development that I described earlier, with normalizing 4G investment levels in China.
And in south – our Asia, Oceania and India, we see a stable development as well as Middle East and Africa. We move on to the segment summary. We see that, if we adjust sales for just currency in Networks, it’s down 1%. But then that is explained by, of course, the large Managed Services contract that we lost in North America.
So in the product portfolio, network product, we see a growth today. Operating margin was 11%, and that is primarily due to the strong or the improved gross margin. We are still hurt by our changed capitalization rate, which leads to higher amortization than capitalization. We are also seeing here that we increased our investments in R&D in Networks.
We do that to achieve technology leadership. We want to lead the market into 5G, and we are investing to make sure we stay ahead of competitors. We have also strong deliveries of our Ericsson Radio System during the quarter, and that shows that it’s a very competitive portfolio. In IT & Cloud, losses continue.
It’s a continued pressure on legacy product sales, which are falling quite fast and continue to fall at the same pace as earlier. Operating earnings is weak, to a large extent, it’s due to the big swing in capitalization between the quarter – well, sequentially, as well as year-over-year, which have materially impacted earnings.
It’s also due to a weakening of the gross margin, which, as I described before, is due to our focus on fulfilling customer contracts and that it needs us to deliver on the large digital services contracts, which we are seeing signs that we’re delivering on now with the number of going live projects during the quarter.
So our focus on the turnaround plan has been stability, profitability growth in that order. So during the third quarter, we have worked on regaining stability in projects and product roadmaps, and we’re seeing signs of progress there.
We are now turning our attention to accelerate the efforts to restore profitability by making our service delivery more efficient, and that’s where we are working now. In segment Other, we see that, that has continued to shrink, with 11% adjusting for FX during the quarter.
It’s really lower legacy product sales, but it’s also lower Broadcast Services sales. We see, though, emerging positive signs on our new media product portfolio with several contract wins during the quarter.
We see also that the shrinking sales is partly offset – to a very large extent, offset by cost take-out during the quarter, and that we have also succeeded with. We are also continuing to pursue strategic opportunities for our Media business during the quarter to realize their full potential. Thank you. With that, I give the word over to Carl..
Thank you, Borje, and good morning, everyone. So if we look at the gross margin trend then, starting from the first quarter 2016. What is clear here is that we have stabilized the gross margin after the rather dramatic decline we had in Q3 a year ago.
And now we are at 30%, improving somewhat here sequentially, but also, of course, year-over-year, and this again is driven by the improvement in the Networks segment. This is, although improving, of course, clearly not an acceptable level for us. And our entire focused strategy, of course, aims at reaching substantially higher gross margin over time.
If we move then to operating income and the bridge here to look at what the elements are between Q2 last year and Q3 this year. And as Borje mentioned earlier, of course, FX had an important impact in the quarter.
And together with this one Managed Services contract that brought volumes down in sales, and of course, that has a bottom line impact as well. Then you see the improvement in the Networks margins, as we have talked about here, which is encouraging.
Then a small contribution from SG&A, and I’ll come to the cost program and the SG&A development in a second here. Then of course, the large effect that Borje also alluded to has to do with the capitalization effect.
And this is in line with what we mentioned in the second quarter report also where certain technology shifts, portfolio shifts have led to reduced capitalization of product development expenses and also changed a bit the way we defer hardware costs here. So the delta between the quarters is actually SEK 2 billion on bottom line.
So of course, we count this as an underlying – part of the underlying business. But if we wouldn’t, of course, our result this quarter would have been SEK 1.5 billion positive on EBIT level or, let’s say, 3%. If we move to the costs side then. R&D to the left, and here, we eliminate this capitalization effect just to compare apple with apple.
And you can see R&D expenses was stable here in the quarter. Of course, as you know, the strategy is to increase investments in R&D for technology and cost leadership. And Borje also mentioned the 1,100 R&D engineers that we have recruited during the quarter.
On the right side then, you see the SG&A development, small reduction, but this is also actually helped by FX. So we cannot claim any visible impact of the cost-out effort yet. However, of course, the activity level on the cost side is very high. And if we move to the next slide, we can talk more about that.
So as we all remember then from the last quarter, we talked about the SEK 10 billion cost reduction, at least SEK 10 billion. And we have accelerated this during the quarter. We, as Borje already mentioned, then have seen a net reduction of 3,000 employees in the quarter.
And then we have then decided to consolidate our testing environment and the two remaining Global ICT centers. So we are closing the one in Canada and taking a big restructuring charge on that, but that will also reduce our run rate cost from second half of 2018 by some SEK 300 million.
We also have good progress in other areas such as IT, for example, the supply chain, et cetera, also contributing to the cost reductions.
When it comes to the restructuring charges then, we report SEK 2.8 billion this quarter, and we estimate another SEK3 billion to SEK4 billion in the fourth quarter, which will bring the total for the full year then to between SEK9 billion and SEK10 billion.
This is an increase from earlier estimates, and that has to do with the accelerated efforts on cost reduction. If we move to the next one. Cash flow is decent, rather solid, stable in the quarter here. Q3 is typically a very weak quarter when it comes to cash flow.
This time, we have an operating cash flow of zero, which has to do with improved working capital management. We deliver SEK1 billion increase then on the gross cash, so now we end the quarter with SEK65 billion. And net cash, we earned at SEK24 billion, which is up from around SEK16 billion one year ago.
To drill a little bit more into cash flow then, we can look at the free cash flow position as well and the development here. There, we can see more clearly then that the working capital side or net operating assets shows a clear improvement from the previous quarter there. We also have less CapEx.
This is also due to the fact that we invest less in the Global ICT centers compared with last year. So all in all, we delivered a free cash flow in the quarter of SEK0.5 billion negative, and you can compare that with last quarter then with the SEK5 billion negative number. So a solid balance sheet.
We also included here the debt maturity profile just to see what the obligations are on the debt market. So nothing to worry about on this side. Very briefly on the capitalization, we have mentioned it a few times already. But as you remember, this is really due to certain shifts in the technology and the portfolio.
We explained it thoroughly, I think, in the second quarter report. It has to do with product platform development, software release development and also hardware costs then. And as shown on the previous slide, the impact in the quarter was SEK1.5 billion negative in the quarter.
And in line with previous estimates then, we can say that for Q4, we estimate the total impact here of these items to be SEK1.4 billion minus. This is totally in line with what we reported also or forecasted in the second quarter report.
Over 2018 and 2019, we will still see some impact here, but gradually less over those three years, mainly this impacts IT & Cloud as well as Networks. There is further detail here, but I think in the interest of time, I’ll skip this. It’s included in the package there. Instead, I believe we should go to the cash flow impact.
And not to go to the details here, this is to provide you with an insight on the various items here when it comes to restructuring, provisions and so on, and what the impact on cash flow those will have.
But you can note there that when it comes to the customer and market risks, the provisions that we are doing now in Q3, that impact on cash out is very limited, SEK0.7 billion. To turn to the future then, let’s look at the final detail, the planning assumptions for the coming periods. And this is all stated in the report, so please refer to that.
It’s a bit short term, but basically, we specify when it comes to the RAN equipment market that the decline expected is 8%, and we have said high single digit before, so we are being a little bit more precise now, but maintaining the message.
A couple of points which are just repeated from before when it comes to top line effect of the focused strategy, Managed Services in the simplifies and NRO, we maintain the SEK10 billion there.
When it comes to top line in Q4, we believe it to be lower than what the usual seasonality would suggest, and this has to do with the effects in China, as Borje described earlier. Cost savings, about SEK10 billion, no change there. We have already mentioned the capitalization effects already. The details are found here again.
And same thing goes for restructuring charges, we have talked about that. I think maybe just to highlight and repeat the fact that the market share increase there in Mainland China will have a dilutive effect on the gross margin short term, and this is in Q4 we’re talking about now.
But the ambition is still then to – for Networks to continue to deliver double-digit adjusted operating margin also in the fourth quarter. With that, I hand back to you, Borje. Thank you..
Thank you, Carl. So just to summarize the third quarter. We see a stabilized performance in a very challenging market, where earnings are significantly impacted by one-time events during the quarter. We also see signs of improvement in our performance. Yes, we are still a long way to go, no question about that.
But we are also seeing signs that the market – that we are stabilizing our performance, and we’re getting control of our projects and products. The focus going forward is, of course, on ensuring strong accountability in the organization and a strong follow-up.
We’re also feeling a very strong endorsement from our customers and increasing customer confidence. We are on track to realize SEK 10 billion in cost reductions by mid next year. We’re accelerating our cost-out activities during the fourth quarter, which gives higher restructuring charges, but at the same time, earlier benefits.
We will come back and talk more about the details on our programs as well as KPIs to monitor the progress during our Capital Markets Day in a few weeks. With that, thank you..
Thank you, Borje. So operator, we are now open for the Q&A session, so please..
Thank you. [Operator Instructions] And we first go to the line of Achal Sultania with Credit Suisse. Please go ahead. Your line is now open..
Hello, Achal..
Hi, Peter. Good morning, everyone. Just one clarification on the guidance around Q4.
So when we talk about lower seasonality, I just want to understand, is China the only driver which is causing that lower seasonality or are there other factors alongside China, like FX or any other region? And then just on the margin side, you’re talking about gross margins getting negatively impacted, but then also you’re confident about Networks EBIT margin being above 10%.
So I’m just trying to understand, like this impact is coming in Networks or is it coming in IT & Cloud? Just some clarification around that would be helpful. Thanks..
Okay. So the historical seasonality would suggest something like 24%. And mainly, we’re talking about China having an impact on that now. So that is really the main reason for a slightly lower estimate for Q4 on top line. On your second question, this is mainly related to the Networks business..
Networks and business?.
No. Networks business..
Okay. Networks business..
Networks business area..
Okay. Thank you..
We are now over to the line of Andrew Gardiner at Barclays. Please go ahead. Your line is now open.
Hi, Andrew..
Good morning, Peter. Good morning all. Another one on the – some of the statements around fourth quarter, specifically on China, please. So you have said that you made efforts to sort of gain market share, particularly within LTE in China.
So you’re sort of gaining market share, and it sounds like you’re saying you’ll start to see the effects of that in fourth quarter, yet weaker revenue and weaker gross margin. I’m just trying to understand the moving parts there.
Is the price activity in China such that you have gained market share, but that is leading to the weaker revenue and weaker gross margin in the quarter? Is that what we should conclude from that? So just a bit more detail around those moving parts will be helpful to understand the business dynamics..
What we see in China is – I mean, there is – the whole market is normalizing. I think it’s important to remember. There have been a big build-out of LTE over the last few years in China, and that is gradually normalizing. So keep that in mind. The second part is that we are gaining market share.
And we – when you gain market share, there is an upfront cost and you get the benefit over time. So there is a timing benefit or timing issue here. So what we are saying with this is that it we should expect this to hurt our – or dilute our earnings or margins during the fourth quarter, and that’s in business area Networks.
So that’s what’s going to happen, then we get the benefits in subsequent quarters. So, yes, it is hurting our near-term earnings, but it’s creating a very attractive return longer term. And that’s what we’re guiding for.
So we’re still saying, in order for you to at least assess how much it is, that we are – our ambition is clearly to have a double-digit margin in Networks even after this investment. So when you do the break-in and the swap, it is related to certain costs, and that’s what hurt us in the near term..
Can I add, Carl here, just to put in perspective? So China sales in the third quarter was SEK 3.5 billion, that’s about 7% of our sales, to put the magnitude on that..
Okay. And perhaps just one final sort of clarification. I’ll put it in another way.
I mean, are you saying volumes and volume share will quite clearly increase given these wins in the fourth quarter?.
Yes, we should regain market share based on these wins..
All right. Thank you..
Thank you..
We are now over to the line of Tal Liani at Bank of America Merrill Lynch. Please go ahead. Tal, your line is open..
Hi, Tal..
Hey. Good morning. I have two questions. The first one is about the services. I think last quarter, you said that you negotiated 9; this quarter, you say 13.
And the question is, what does it involve? When you say you renegotiate contracts, what does it involve? Or what are you doing? Why are there charges related? And then, if you did four in the quarter, are these the easy ones, and then the pace goes slower and slower? What prevents you from doing all the other 30 or so that are left? Thanks..
Yes. We have the – if we look at the – we have renegotiated or changed the scope and – or exited 13 contracts during – up until the third quarter. And we see that to have an annualized effect on operating income, call it, from 2018 and forward of SEK 400 million.
So what is the case here is we are – what we call challenged contracts is actually when they are not part of our future strategy. And when we have projects that are not part of our future strategy, we try to change the – rescope of them or get out of certain parts. Then it depends on what do we do in each contract.
That’s, of course, something that we need to negotiate with the customer. And I would say some of them results in us changing the scope of contract. Some of them results in a changed pricing on the contract. And some of them also relate to, in a way, getting out of it and the customer taking back the contract, for example.
And there are a number of those happening, and it’s not something that can be done quickly. It has to be done together with the customer because we still are an important part of the network for the customer. So we’re trying to do this in a way that minimizes the impact and minimizes the cost for us, and that’s what we’re trying to do.
So the rest of the, call it, the 30 remaining contracts, we will, call it, address over the next – or until end of 2018. So we’re trying to deliver on the cadence on that..
And you didn’t give an update about selling the Media business. Can you give us an update? Thanks..
one is the product side and one is the broadcast services, and that work continues. We have during the quarter addressed the cost situation in both of these, so we are getting costs more imbalanced. We’re also seeing a number of large contract wins in our Media product portfolio, which is important because it is the new portfolio making the wins.
So in parallel with this, we are pursuing different strategic opportunities. And as we make progress, we will report on that..
Thank you..
Thank you, Tal..
We are now over the line of Johanna Ahlqvist at SEB. Please go ahead. Your line is now open..
Good morning, Johanna..
Good morning. Thank you for taking my question. I have one question related to – you mentioned that you see underlying growth within the Networks if you sort of exclude the scale-down of the Managed Services business.
And I’m just wondering if you can give some flavor on what regions you see this growth and how you put this in relation to the 8% RAN market decline that you comment on. Is it the fact that you take market share somewhere or – yes, please? Thank you..
We see that we have a very competitive portfolio in the Networks business. And that is – it’s a portfolio that’s globally competitive. So we see that we are getting a lot of good traction with customers. We have to see where the RAN market comes out.
There will be reports, and we don’t know that yet, but we feel good about the development during the quarter. We also see, as I said during the market area review, we still feel it in North America. We see that we are gaining market share in China, for example, but we see that in other parts as well.
And as we realize that, it should have a result on market shares..
And just if I may, a follow-up. Into 2018, you previously comment on a decline of, I think, 2%.
Given what you now see in China, the combination of you gaining market share, but still the Chinese market sort of normalizing of – that they have a build-out, do you foresee that you will have a RAN market that’s growing next year? Or what is the sort of best forecast for 2018? Has that changed? Thank you..
We see no reason to change our guidance on the RAN market..
Okay, fair. Thank you..
Fair enough..
We are now over to the line of Rich Kramer, Arete Research. Please go ahead. Your line is open..
Yes, thanks very much.
If we add up all of the things that you’ve mentioned for sort of next year and going forward, the shutdown of services centers, the exiting of contracts, the ongoing tough market conditions, what prevents sales next year from being materially lower? And won’t that make the SEK 10 billion cost reduction plan somewhat insufficient? And maybe if you could sketch out the outline a little bit of the cash restructuring costs you’re expecting for next year since that’s going to be a very big issue for the balance sheet? And my second question will be for Carl.
Can you just lay out for us how FX is likely to impact fourth quarter and into next year as you have less protection from your hedging? Thanks..
If we look at next year, what we have said is that, first of all, our focused strategy, we are continuing to execute on, and that involves strengthening our position in 4G LTE and positioning ourselves for market leadership on 5G. We see IT & Cloud that we are working on turning around the performance there.
We are seeing increasing stability in our product roadmaps as well as projects. On Managed Services, it’s interesting to see that as we work on addressing the challenged contracts, at the same time, we’re starting to win new contracts. We have a very strong product offering.
And we can see that we can help our customers automate the way you run networks, and that’s actually creating a lot of attractive market opportunities and contract opportunities. So we see – we are very confident about the development along our strategy. We have guided for a RAN market that will be slightly lower during 2019.
But as you can hear, we are also having a very competitive product portfolio in the RAN market, so we are comfortable about that. We are confident about our cash position as well. We have planned for a very tough market condition in our focused strategy.
And as we plan for that, we made sure that we have capital that will clearly take us through that journey, and we feel very confident about that. I’ll let you, Carl, address the question on FX..
Exactly. So that you had – Richard, you had two questions, FX impact to Q4 and also cash – people restructuring, right? If I start with FX then, of course, compared with last year, if we remain on current levels, we see, of course, a continued impact of FX on sales. If we look at last year, it was about 10% higher than now on the U.S.
dollar, for example. So we expect, however, with current levels that in the planning assumptions we give, today, FX is sort of is covered and going to be stable Q3 to Q4. When it comes to the cash split of restructuring, you see the table that we try to outline how much cash and when it’s going to come in – or go out, rather.
But I’d like to point out also here that with these numbers, we feel good about our cash position and our strong balance sheet to execute on all these measures..
Okay, thank you..
We are next over to the line of Johannes Schaller at Deutsche Bank. Please go ahead, your line is open..
Good morning, thanks for letting me on. Actually, I have to come back to the China point, but a slightly kind of more midterm question. I mean, you’re saying you strengthened your footprint there on the 4G side basically to grow footprint ahead of 5G.
That very much reminds me of what happened with the European modernization phase that you had a few years ago when you also took on a lot of low-margin business to gain footprint, and your margins suffered for actually quite some time. So the margin profile in China seems to be very low again.
Can you just help me understand when that is actually going to turn into profitable business? Is that really just a one quarter affect? And also, is that in an isolated case? Or should we expect more of that low-margin hardware business with other telcos or in other regions now for the next few quarters as you try to add footprint? Thanks..
You should – what you see is that it hurts one quarter, that’s why we tell this for China. So that’s the effect. We are investing in growing our footprint with a very competitive ERS portfolio, but we’re also very committed to taking those gains at the margin profile that’s attractive for us..
So we should not expect any similar negative effects in future quarters as you win more of these projects?.
We are winning projects today, and you see that’s incorporated in the earnings..
And should we assume that this China contract improves in Q1 meaningfully already on the profitability side?.
You shouldn’t expect it to hurt earnings during the fourth quarter. I’m just trying to guide..
Very clear. Thank you..
Thank you, Johannes..
We are now over to the line of Amit Harchandani at Citigroup. Please go ahead, your line is open..
Good morning, everyone. Amit Harchandani from Citi and thanks for letting me on. Two questions, a quick one and a brief follow-up. Firstly, on the IT & Cloud business, you’ve talked about improving gross margins going into 2018.
Could you maybe help us understand the moving parts as we go into Q4, how we should think about that? And also going into 2018, if you could give us some further insight on what you’re doing and how we expect that to come through on the IT & Cloud side? And secondly, as a quick follow-up, just to clarify.
You said earlier, in response to a previous question, you think your balance sheet is strong enough from a cash perspective. So would it be, just to clarify, fair to say that you see no potential need to do something like a rights issue to fund your needs? Because that seems to be a better argument in the market today. Thank you..
If we start with the first one, the IT & Cloud. What we have done so far, and we’re now through this, is to focus on stability in our product roadmaps as well as the large digital transformation projects we have. We are seeing that we have worked through some of these, and we are getting – reaching milestones in both of those two.
So customer – we’re doing deliveries to customers now on some of the contracts, but we still have more to do. So that clearly is going to hurt earnings going into Q4. You can kind of infer from that. But what we’re also saying is that we are now working on the efficiency in service delivery.
And quite a lot of the inefficiencies and the cost for the loss in IT & Cloud comes actually from inefficiencies in service delivery and cost inefficiencies in that business. Those, we are going to address as we go into 2018, and that’s why you’ll see an improving gross margin profile.
It’s not that we expect any rapid growth or anything that’s going to get us out of this. It’s rather a cautious outlook on the market, but that we are getting cost efficiencies that should result in strengthening of gross margin. On the capital question, no, we don’t see any need for a rights issue.
We feel our capital position is very strong and clearly capable of taking us through the execution of the focused strategy..
Thank you..
That’s been improving in the third quarter, as you saw, so I think that’s worth pointing out again..
Thank you..
We are now over to the line of Daniel Djurberg at Handelsbanken. Please go ahead your line is open..
Good morning and thank you for taking my question. I was thinking, coming back to the gross margin again, given that you have some shipment of the Ericsson Radio System, it might have been in the quarter some 65%, 67%, given the year-to-date number of 55% and the 49% in the first half. Still, we only see a 31% gross margin in Networks.
So should we rather consider the Ericsson Radio System platform to be a gross margin stabilizer rather than more an expander?.
What you should see is – what we are trying to do is again that – and you can kind of think about what we’ve done during the quarter. We are, at the same time as we’re increasing penetration of Ericsson Radio System, trying also to increase and strengthening our market position. And that is what you see the consequence of here..
And should we expect that to be a little bit temporary effect then if we could see some hike and a more stabilized one needed to be offset by market share from the ERS, I mean?.
I think it’s important here to think about why do we think this is important with market share. It is basically to position ourselves for the 5G market. 5G will be built upon the 4G network.
So it’s very important for us to prepare our market position before the 5G launch, and that’s why you’ll see us also being – or at least trying to increase our market share. And that’s the investment profile we see going forward as well..
Okay. Fair enough. Thanks and good luck for Q4..
We are now over to the line of Aleksander Peterc at Societe Generale. Please go ahead your line is open..
Thank you for taking my question. You mentioned in the press release high capacity sales, which must have provided some support to your gross margins. Could you be a little bit more specific as to which geographies exactly saw such increases and whether this is a new sustainable trend or just a one-off event in Q3? And just more follow-up, if I may.
What’s driving the increase in Middle East and Africa of 4% that really stands out? Is it really the single contract to a single country or a particularly weak year-ago base? What’s driving that increase? Thank you..
If we come back a bit to the gross margin, we should also remember that the gross margin is hurt by the changed capitalization being smaller than amortization. So bear that in mind when you see the low increase in gross margin. That’s what we say, what I call it a bookkeeping effect, a noncash effect in that sense.
Besides that, we are seeing a very competitive portfolio in our ERS. We are getting customer traction. And why is that so interesting for the customers? Well, it is 5G-ready. That doesn’t mean it’s 5G, but it’s ready with a software upgrade to accommodate 5G traffic. It’s actually also a software upgrade away from being a narrowband IoT-enabled.
So that means, basically, it’s a future-proof – future-proof may sound a bit strong, but it makes you ready for the future market of narrowband IoT as well as 5G as an operator. And we’re seeing that gaining traction around the world. So that is not isolated to a region or a part..
Should I take the one on Middle East then, Aleksander? So actually, Middle East has a little bit of an easy comparison if you look year-over-year. But still, it’s a growth that we show if we eliminate the FX effect.
It’s various customers, actually, but to a single one of them, I think you could talk about the Saudi market which actually shows growth, strong performance in the quarter..
We’re over to the line of Douglas Smith at Agency Partners. Please go ahead. Your line is open..
A question for Carl. You mentioned earlier that the seasonality of cash flow was a little bit different this quarter. And in fact, the last couple of quarters have been a little bit different than historically.
Can you say anything about how you see cash flow and your net cash position in Q4? And in particular, do you – are you pretty sure you’ll get back above SEK30 billion net cash at the end of the year?.
So typically, Q4 is a strong quarter when it comes to cash flow. And of course, we expect that to be large as well. Although I have to say, Q4 in 2016, if you remember, was exceptionally strong. Many things went exactly in the right way then. But we expect a further improvement of cash flow.
I think it’s a fruit of hard focus on the working capital development and other factors there. So again, we delivered a good solid cash flow in Q3. And of course, our ambition is to continue and improve that further..
Yes. But you can’t commit to, let’s say, going to a particular net cash target like SEK30 billion plus at this moment..
No, I don’t want to guide on a specific number then..
Okay. Thank you..
We are now over to the line of Fredrik Lithell at Danske Bank. Please go ahead. Your line is open..
Yes, good morning. Thanks for taking the call. You talked about the sequential growth in Q4 normally being around 24%. You have China supporting you sequentially in the quarter in Q4, but still, you expect subdued effects or below normal trends in growth in Q4.
Could you elaborate a little bit on what regions you expect will not be able to keep up the normal pace? And then also, if you raise your EU charges to SEK9 billion, SEK10 billion for this year, do you see further effects on savings due to that? Or is it just that we should expect lower amounts of EU charges in 2018?.
Right. So the 24% we say is sort of an average, maybe a little bit on the high side even because of earlier – I mean, earlier quarter, we also had a number of pull-ins, if you remember, some customers that actually put in requirements earlier in 2016. But what we’re talking about for Q4 now is really the China development.
So no other specific information per region, as you asked about, other than the China..
Okay..
I think you want to stress the hardware deliveries we had in the end of 2016. So it makes the fourth quarter last year to be difficult comparisons in this..
Okay..
We are now over to the line of [indiscernible].Your line is open..
Good morning and thank you everybody. I have two questions. The net decrease of your workforce is 3,000 employees during the quarter, and that includes the add-on of 1,100 R&D employees.
Where has the 4,100 decrease been taken?.
We are implementing or executing around the world. It’s savings in several countries, and that’s why we don’t really go out to break down that. But what you see is that most of it is in service delivery so far, where we have taken some efficiency gains in several markets. Unidentified.
Okay. Can I ask you about the management team? There’s been – the recent internal recruitment was Niklas, and I’m going to have to apologize for my pronunciation, Heuveldop. That was probably completely incorrect.
How come there are no external recruitments to the management team?.
No, I have tried to put together a management team with the competence and capability to implement our focused strategy, and that’s what I feel we have today. And if you look at – it seems very funny to sit in a telephone conference to grade your management team, but I will say that I’m fully confident that they can implement.
And if you look at Niklas’ background and achievements, I’m very comfortable that he will execute in his new role..
Okay, thank you, Borje..
We are now over to the line of Francois Meunier at Morgan Stanley. Please go ahead. Your line is open..
Good morning Francois..
Hey guys, how are you?.
I’m fine..
Okay.
So I did I really hear here the word swaps, as in swap-outs? So basically, what you’re saying, in China, you’re taking all RBS 6000 and kind of giving away new ERS base stations so that you can play with 5G when 5G takes off? Is that really what you said?.
Oh, we said, that we’re taking market share from others..
But you’re giving away equipment for that. Is that the plan? Because if I remember, Hans did the same in Europe three, four years ago, and you gained a bit of market share for a year or 18 months, and then it didn’t last.
So what gives you the confidence this time that giving away equipment gives you a long-term or lasting market share advantage?.
We are preparing for the 5G. 5G will come on top of 4G, so it’s critical that we establish a market share in 4G. That’s what we’re doing here..
What I don’t understand is, normally, you gain market share because you have strong products.
Is it because your products are like me-too products and the customers are asking for kind of a sales incentive? Or is it because some saying it went wrong? Or is it because, like, you’re taking market share from Nokia or Nokia doesn’t want to play that game? I’m just trying to understand how this can be good long term?.
If you look at, first of all, what we are – in most projects around the world, you see not – you don’t have a quality – the negative consequence and the positive in different quarters. That’s what we have today in China. That’s what we’re guiding for due to the very rapid deployment. That’s what we’re trying to say.
Then we have a very competitive product portfolio, so it’s really on product that we win this than anything else..
Okay. Thank you, maybe we’ll discuss this a bit more at the Analyst Day. Thank you, very much..
We will do that. And we actually open operator, for the last question on this session. And again, we have a call at 2:00 clock again..
Okay. Our last question is from the line of Stefan Slowinski at Exane BNP. Please go ahead Stefan. Your line is open..
Great. Thanks for sneaking me in here. Just two quick ones. I haven’t seen it in the press release, but are you still committed to the 12.4% margin, and do you have a time frame on that? And then secondly, the closure of the ICT operation in Canada, is that part of the SEK 10 cost take outs or is that on top of that plan? Thank you..
First, I take the second one? No? When it comes to the gig, so it’s a SEK 300 million run rate improvement then, which we will get from this consolidation from the second half of next year, and it is part of the efficiency measures that we are taking.
But – so it’s SEK 300 million out of SEK 10 billion it’s not significant part, but yes, it’s part of that..
And the first was on the 12.4%..
Yes, we still say that after – beyond 2018, we’re going to double the operating margin. That still is our objective..
Okay, thanks guys..
And I don’t know if you have any concluding remarks, Borje.
No, I want to thank you all for listening in. We are – in summary, we’re seeing a third quarter that we’re getting stability in the business, and we feel very comfortable about our execution of the focused strategy. So we are well-prepared to taking the next steps on that in Q4 and 2018.
So what I want you to take with you is, yes, we’re stabilizing the performance; yes, we are making sure our large digital transformation projects are getting delivered; and yes, we are starting to execute on the cost-efficiency measures. Thank you..
Thank you..