Ericsson Sees Sales Stabilising Soon After Q1 Profit Beat

First quarter highlights – Driving gross margin improvements and cost efficiencies

• Sales declined organically[1] by -14% YoY, due to a -19% decline in Networks. Reported sales decreased to SEK 53.3 (62.6) b.
• Gross income excluding restructuring charges decreased to SEK 22.8 (24.9) b. as lower sales were partly offset by an improvement in gross margin. Reported gross income was SEK 22.7 (24.2) b.
• Gross margin excluding restructuring charges improved to 42.7% (39.8%) supported by a competitive product portfolio, cost actions, improved commercial discipline, as well as increased IPR licensing revenues. Reported gross margin was 42.5% (38.6%).
• EBITA excluding restructuring charges amounted to SEK 5.1 (4.8) b. with a margin of 9.6% (7.7%), which included a one-time gain of SEK 1.9 b. Reported EBITA was SEK 4.9 (3.8) b.
• Net income was SEK 2.6 (1.6) b. EPS diluted was SEK 0.77 (0.45).
• Free cash flow before M&A was SEK 3.7 (-8.0) b. reflecting improved management of working capital.
• Net cash on March 31, 2024, was SEK 10.8 b. compared with SEK 7.8 b. on December 31, 2023.

Ericsson said on Tuesday it expects sales to stabilise in the second half of 2024 amid signs some customers are looking to spend again, as the telecoms equipment maker beat first-quarter profit forecasts helped by a one-off gain.

The Swedish group pointed to recent contract wins and normalising customer inventory levels in North America.

However, it also predicted the 5G Radio Access Network (RAN) market would keep falling at least through the end of the year.

"There is still uncertainty in the market, and that we try to highlight as well," chief financial officer Lars Sandström told Reuters.

Telecoms equipment makers like Ericsson and rival Nokia have been hit by a drop in spending by customers on 5G equipment amid high interest rates and an uncertain economic outlook.

Ericsson's operating profit excluding restructuring charges rose unexpectedly to 4.3 billion Swedish crowns ($394.4 million) in the first quarter from 4.0 billion crowns a year earlier, despite a 15% sales drop. Analysts polled by LSEG had on average forecast a decline in profit to 1.7 billion crowns.

The profit included a one-off gain of 1.9 billion crowns related to the resolution of a commercial dispute, Ericsson said.

Analyst Paolo Pescatore at PP Foresight wrote on X that the results marked "another extremely challenging quarter for Ericsson," and this was expected to continue into 2025 due to investment cuts among telecom companies.

Ericsson in January predicted markets outside China would keep weakening this year and announced new layoffs in March, having slashed costs and shed thousands of jobs in 2023 as sales slowed after years of high demand for 5G gear.

"There will be more (lay-offs)," Sandström said, adding that a "big portion" of Ericsson's full-year restructuring costs of 3-4 billion crowns would be related to job cuts.

The company forecast a gross margin excluding restructuring charges at its Networks division of 42%-44% for the second quarter. In the first quarter it was 44.3%.

"In the second half, our margins should benefit from improved business mix," it added.

In his statement,  Börje Ekholm, President and CEO of Ericsson said.

In Q1, we continued to execute on our strategy to strengthen our leadership in mobile networks, drive a focused expansion in enterprise, and pursue cultural transformation. We maintained our leading market position, but as expected our customers continued to exercise caution with their investments. Against this tough market backdrop, we delivered solid expansion in gross margins. This underscores the competitiveness of our solutions, our commercial discipline, and our actions on costs.

We will continue to proactively optimize the business, including through strategic cost-saving measures, to ensure Ericsson is best positioned to increase shareholder value.

April 16, 2024