Citing strong growth in North America and North East Asia, Ericsson reported Q3 2019 sales of SEK 57.1 (53.8) billion (US$5.88 billion), up 3% when adjusted for comparable units and currency, and up 6% on a reported basis. Operating income was SEK 6.5 billion (11.4% operating margin) when excluding restructuring charges and items affecting comparability. Net income was SEK -6.9 (2.7) billion.
Ericsson now has 27 commercial 5G contracts with named operators.
At its Investor Day in Stockholm, Ericsson expressed confidence in reaching 2020 and 2022 financial targets.
Some comments from Börje Ekholm, President and CEO of Ericsson:
We continue to see strong momentum in our business, based on the strategy to increase our investments for technology leadership, including 5G. We saw organic sales growth[1] of 3% in the quarter, driven by the early adopters of 5G, in North America and North East Asia. Our operating income was SEK 6.5 b., corresponding to a margin of 11.4% excluding restructuring costs, the SEC and DOJ provision of USD -1.2 b. (SEK -11.5 b.) and the refund of social security costs of SEK 0.9 b. Free cash flow before M&A was SEK 5.5 (0.7) b. adding to our strong financial position.
Our focused strategy, introduced in 2017, is aimed at building a stronger Ericsson longer term. With clear focus on our operator customers the strategy stands on a foundation of increased investments in R&D for technology and cost leadership, and growing market footprint. Increased R&D efforts, which will continue, have resulted in a competitive portfolio driving improved gross margin. In addition, we have been able to record several important wins improving market footprint for future business. We are disciplined in the deals we take and target opportunities where we have a clear competitive advantage through technology leadership, supported by our improved cost structure in hardware and software. While we believe the strategic contracts are attractive long term, the initial margins may be challenging. This is due to high associated costs as operators change vendors.
An important indicator for our execution of the strategy is the improvement in gross margin. The gross margin[2] in the quarter ended at 37.8% compared with 36.9% last year and 36.7% last quarter. Within the 0.8 percentage point[3] sequential decline in Networks gross margin, we have absorbed the margin impact and inventory provisions related to strategic contracts.
The largest market for 5G infrastructure will be China where deployments are expected to start near term. We have invested to increase our market share, however it is still too early to assess possible volumes and price levels. Based on historic experience we expect to have challenging margins initially but positive margins over the lifespan of a contract.
With an organic sales growth[1] of 4%, segment Networks delivered another solid quarter, with strong development in North America. Operating margin improved YoY, with continued good traction for the Ericsson Radio System.
The turnaround of Digital Services is on track for low single digit margins in 2020. Driven by strong improvement in the underlying business, the losses were substantially reduced QoQ, in spite of a negative impact from the remainder of the 45 critical contracts of SEK 0.5 b. (slightly more than in the second quarter). The negative impact of these contracts will continue to vary between quarters as they are addressed. We continue to focus on developing a full 5G and cloud-native portfolio. It is encouraging to see that the sales growth in our new product portfolio improved from 13% to 19% rolling 12 months.
5G is taking off faster than earlier anticipated and we see initial 5G buildout as a capacity enhancer in metropolitan areas. However, over time, new exciting innovations for 5G will come with industrial and IoT use cases, leveraging the speed, latency and security characteristics of 5G. This provides opportunities for our customers to capture new revenues as they provide additional benefits to consumers and businesses.
Our IoT business is growing almost twice as fast as the estimated market growth of 20-25% per year. We have more than 4,500 enterprises on our IoT platform and the number of connected devices on the platform has more than doubled year to date. To fully leverage our position and capture new recurring revenue streams we are increasing our investments in IoT within Emerging Business. With this investment, we do not expect to reach breakeven for the segment next year, and instead incur losses of SEK -1.5 to -2.0 b.
https://www.ericsson.com/4a98ea/assets/local/investors/documents/2019/ericsson-investor-update-2019.pdf
