Ericsson Reports Q4, Full-Year Results 2022

Fourth quarter highlights

• The quarter was impacted by an IPR agreement resulting in total IPR revenues of SEK 6.0 (2.4) b. and previously announced charges of SEK -4.0 b., including DOJ provision, IoT divestment and Cloud Software and Services contract and portfolio exits.
• Group organic sales[1] grew by 1% YoY., of which IPR revenues contributed with 5 percentage points. Reported sales were SEK 86.0 (71.3) b. of which Vonage contributed SEK 4.1 b.
• Gross income increased to SEK 35.6 (30.8) b., while gross margin decreased to 41.4% (43.2%) primarily due to business mix change in Networks and previously announced charges for contract exits and portfolio adjustments in Cloud Software and Services. 
• EBITA excluding restructuring charges amounted to SEK 9.3 (12.8) b. with an EBITA margin of 10.8% (17.9%). EBITA was impacted by the previously announced charges.
• Free cash flow before M&A was SEK 16.9 (13.5) b. mainly driven by reduced inventory and high cash collection including IPR collection.
• Return on capital employed was 15.4% (26.6%) driven by lower EBIT.

Full-year highlights

• Group organic sales[1] grew by 3%, driven by a 4% increase in Networks and 16% in Enterprise. Reported sales were SEK 271.5 (232.3) b.
• Gross income increased to SEK 113.3 (100.7) b. with increases in segments Networks, Cloud Software and Services, and Enterprise.
• EBITA amounted to SEK 29.1 (33.3) b. with an EBITA margin of 10.7% (14.3%). EBITA was negatively impacted by previously announced charges of SEK -5.5 b., partly compensated by increased IPR licensing revenues.
• EBIT margin excl. restructuring charges was 10.1% (13.9%). Excluding Vonage and previously announced charges during the year, EBIT margin was 12.9%, reaching the 2022 target of 12-14%.
• Net income was SEK 19.1 (23.0) b. EPS diluted was SEK 5.62 (6.81).
• Free cash flow before M&A amounted to SEK 22.2 (32.1) b. Net cash was SEK 23.3 (65.8) b. at year-end 2022.
• Return on capital employed was 14.0% (18.4%) driven by higher capital employed and lower EBIT.
• A dividend for 2022 of SEK 2.70 (2.50) per share will be proposed to the AGM by the Board of Directors.

SEK b.	Q4 2022	Q4 2021	YoY change	Q3 2022	QoQ change	Jan-Dec 2022	Jan-Dec 2021	YoY change
Net sales	86.0	71.3	21%	68.0	26%	271.5	232.3	17%
Sales growth adj. for comparable units and currency[2]	-	-	1%	-	-	-	-	3%
Gross margin[2]	41.4%	43.2%	-	41.4%	-	41.7%	43.4%	-
EBIT	7.9	11.9	-34%	7.1	10%	27.0	31.8	-15%
EBIT margin[2]	9.1%	16.6%	-	10.5%	-	10.0%	13.7%	-
EBITA[2]	9.0	12.3	-26%	7.6	19%	29.1	33.3	-13%
EBITA margin[2]	10.5%	17.2%	-	11.2%	-	10.7%	14.3%	-
Net income	6.2	10.1	-39%	5.4	15%	19.1	23.0	-17%
EPS diluted, SEK	1.82	3.02	-40%	1.56	17%	5.62	6.81	-17%
Measures excl. restructuring charges[2]
Gross margin excluding restructuring charges	41.5%	43.5%	-	41.4%	-	41.8%	43.5%	-
EBIT excluding restructuring charges	8.1	12.3	-34%	7.2	12%	27.4	32.3	-15%
EBIT margin excluding restructuring charges	9.4%	17.3%	-	10.6%	-	10.1%	13.9%	-
EBITA excluding restructuring charges	9.3	12.8	-27%	7.7	21%	29.5	33.8	-13%
EBITA margin excluding restructuring charges	10.8%	17.9%	-	11.3%	-	10.9%	14.6%	-
Free cash flow before M&A	16.9	13.5	25%	2.5	-	22.2	32.1	-31%
Net cash, end of period	23.3	65.8	-65%	13.4	74%	23.3	65.8	-65%

[1] Sales adjusted for comparable units and currency

[2] Non-IFRS financial measures are reconciled at the end of this report to the most directly reconcilable line items in the financial statements

Speaking on the 2022 Q4 results, President and CEO of Ericsson, Börje Ekholm, said “with the company’s fourth quarter result we are on track to deliver on our long-term EBITA target of 15-18% by 2024”.

Ericsson remain fully committed to its strategic ambitions and have full confidence in the long term.

“During the quarter, we made measurable progress towards achieving these ambitions, against a backdrop of broad macroeconomic headwinds. As we said during our Capital Markets Day, there are near-term uncertainties, however, we are still in the early phase of global 5G rollout and widespread enterprise digitalization.”

The company’s strategy remains rooted in driving sustainable growth and maximizing value across all stakeholders.

“We are confident that we have the right team and strategy in place to extend our leadership in mobile networks; achieve profitability in Cloud Software and Services; execute in our high growth Enterprise segment; shape the industry landscape by becoming a platform company leveraging the 5G innovation platform; and continue our unwavering commitment to a culture of integrity”, Ekholm, said.

This quarter signed a multiyear IPR patent license agreement with a major licensee. This positive outcome positions Ericsson well to capture further 5G patent license agreements among handset manufacturers and in new areas such as consumer electronics and IoT, while its expect significant IPR revenue growth over the coming 18-24 months.

Its Group Net Sales grew by 1% YoY, of which IPR revenues contributed with 5 percentage points. EBITA[2] of SEK 9.3 (12.8) b. corresponds to a margin[2] of 10.8% (17.9%). The positive impact from higher IPR revenues was offset by expected business mix shift and previously announced charges of SEK -4 b. Ericsson executed on its ambition to reduce inventory contributing to free cash flow before M&A of SEK 16.9 (13.5) b.

Also, Ericsson Networks business grew in India on the back of significant market share gains. As anticipated, the growth from share gains in several markets could not fully compensate for reduced operator capex and inventory reductions in other markets, including North America. Gross margin was 44.6% (46.4%), negatively impacted by this business mix shift including a higher share of services sales from large network rollout projects. The IPR patent license agreement had positive margin impact.

During the quarter, the company were able to largely offset the impact of high inflation with commercial activities, including product substitution. And continue to invest in technology to enhance performance and cost leadership, expand global footprint and improve productivity and capital efficiency across the supply chain.

In Cloud Software and Services, organic sales decreased by -2% excluding IPR revenues. Sales growth in North America – mainly from 5G Core contracts – was offset by a decline in other market areas. Ericsson remain committed to improving profitability and are on a clear path to reaching operating profit break-even for full-year 2023 by limiting subscale software development, accelerating automation, and changing focus from market share gains to profitability. In Q4, its decided to exit certain subscale business, with a one-off charge.

Within Enterprise, Ericsson continue to leverage its strength in mobile networks to accelerate business. Organically, sales grew by 15%. “Our Enterprise strategy is underpinned by two pillars: First, our Enterprise Wireless Solutions business, focused on capturing the multi-billion-dollar enterprise market opportunity for 5G optimized networking and security solutions. Second, through the Global Communication Platform business, we will enable new ways of monetizing 5G by transforming how network features such as speed and latency are globally exposed, consumed and paid for”- Ekholm, said

Enterprise is a growth engine for the company, and its continue to fine-tune its portfolio to maximize profitability. To this end, Ericsson announced the divestment of loss-making IoT business in Q4,  continue to invest to strengthen enterprise go-to-market channel and broaden enterprise product portfolio.

In addition, the company is  increasing investments in developing the network APIs that will underpin the long-term growth in Global Communication Platform. From 2024 and beyond its enterprise business will be a major driver of Ericsson’s long-term growth and profitability, however, these investments will weigh on profitability during 2023.

Ericsson remain positive on the long-term outlook for its business. However, the near-term outlook, as also described at Capital Markets Day, remains uncertain. Its expect operators to continue to sweat assets in response to macroeconomic headwinds. Furthermore, its expect operators to adjust inventory levels as supply situation eases. These trends started to impact Networks in Q4 and expect them to continue at least during the first half of 2023.

At the same time, expect good growth from market share wins, albeit not fully offsetting the near-term headwinds. In the longer-term, capex is driven by traffic growth. Given near-term macroeconomic headwinds, Ericsson expect Enterprise to grow somewhat slower than during 2022.

While the quarter saw the easing of supply chain related challenges, the inflationary environment persisted.

Ericsson remain focused on navigating near-term headwinds through commercial initiatives but also by making the company more cost-effective.

“We expect to start seeing the effect of our SEK 9 b. cost savings activities during the second quarter of 2023. We anticipate declining margins in Networks during the first half of 2023 due to changing business mix. In Q1 we expect the EBITA[2] for the Group to be somewhat lower than EBITA[2] last year, with improvements during the year,” according to Ekholm.

Ericsson remain focused on reaching a resolution with the US authorities regarding the previously announced Deferred Prosecution Agreement (DPA) breach notices received by the company. In this regard, its have this quarter booked a SEK 2.3 b. (approx. USD 220 million) provision as Ericsson is now in a position to make a sufficiently reliable estimate of the financial penalty (and additional monitoring costs) associated with a breach resolution. “Separately, and with respect to the past matters described in the company’s 2019 Iraq investigation report, we continue to thoroughly investigate the facts in full cooperation with the DOJ and the SEC to determine if there is any merit to the allegations”, the CEO noted.

“Building a culture of ethics and integrity remains a top priority, and I am convinced that best-in-class compliance will give our company a competitive advantage. Both the company’s resolution with the DOJ and the SEC in 2019 and the ongoing investigation into past conduct in Iraq clearly highlight the importance of intelligent decision-making and effective risk management,” Ekholm concluded.

January 20, 2023