Ericsson reported Q1 2022 sales of SEK 55.1 (49.8) billion, up 3% compared to a year earlier. The company said sales were driven by Networks in North America and in Europe and Latin America.
Reported gross margin was 42.3% (42.8%) impacted by proactive investments in supply chain resilience in Networks. Rolling four quarter gross margin was 43.2%.
Ericsson cited a provision for impairment of assets and other extraordinary costs due to its indefinite suspension of affected business in Russia, ongoing discussions with the U.S. Department of Justice regarding bribes in Iraq, and its efforts to build a buffer of critical components to handle supply chain problems.
Comments from Börje Ekholm, President and CEO of Ericsson:
We continue to execute on our strategy to be a leading mobile infrastructure provider and to establish a focused enterprise business. We see strong business momentum and our investments in technology and a resilient supply chain have allowed us to continue to win market share and deliver on customer commitments in spite of global supply chain challenges. In the quarter, we saw organic sales[1] growth of 3%. Gross margin at 42.3% (42.8%) indicates underlying stability while absorbing cost increases in the supply chain. Our EBITA margin was 11.0%, adjusted for revaluation of holdings and provision related to Russia.
Russia’s invasion of Ukraine and the resulting humanitarian disaster is a major setback for the world. While mobile infrastructure is essential for communications in Russia, it has been clear from the start of the invasion that business in Russia would have to be reconsidered. Following current sanctions, we have announced an indefinite suspension of our affected business in Russia and recorded a provision for impairment of assets and other extraordinary costs of SEK -0.9 b. in Q1. We will continue to monitor and respond to the situation day by day, with priority on the safety and well-being of our people.
In our core mobile infrastructure business, we foresee a longer investment cycle compared with previous mobile generations as 5G’s broad application usage will drive a continued need to increase capacity. Technology leadership is driving our competitiveness, and in the quarter, we invested SEK -10.7 (-9.6) b. in R&D.
Networks sales grew organically by 4% in Q1 reflecting our continually strengthened market position. Gross margin was 44.7% (46.1%). Software sales vary between quarters, and a certain SEK 1 b. annual software contract that is normally recorded in Q1, is this year delayed into Q2. Gross margin was also negatively impacted by proactive investments in supply chain resilience. Hard work throughout the organization enabled us to deliver on customer commitments despite global supply chain challenges. We also continue to increase our R&D investments to extend our leadership. R&D increased by SEK -1 b. YoY and was primarily related to our Cloud RAN portfolio, which gives customers more flexible deployment options, and to next generation ASICs that provide industry-leading radio performance, energy savings and footprint reduction. We foresee long-term attractive return on our investments similar to the last few years.
Digital Services organic sales were down by -2% YoY in the quarter and EBIT was SEK -1.4 b. We are building a strong platform for Digital Services and sales development in the cloud native 5G core portfolio is encouraging with double digit growth, albeit from a low base. However, the overall result in the quarter is not satisfactory. The target of a limited loss for 2022 is challenging especially in light of the increased investments in R&D in service orchestration and 5G portfolio. We now increase focus on accelerating sales growth and addressing efficiency to improve profitability.
To capture opportunities in the rapidly growing enterprise space, we are focusing on two specific areas. The first focus area is wireless networks for enterprise where we already offer easy-to-use pre-packaged solutions, with Cradlepoint showing strong growth in the first quarter as 5G coverage increases on the US C-band. We also see growing momentum for our 5G portfolio in Dedicated Networks. In addition, we are increasing investments in our enterprise go-to-market organization.
The other focus area is a Global Network Platform, which will be built on global unified interfaces, so called APIs. Developers and enterprises will be able to create new use cases and experiences, like high quality video or XR on top of the 5G network, which enable operators and the industry to monetize the network investment in new ways. Ericsson intends to play a major role in building the API platform. With our previously announced intention to acquire Vonage – more than 1 million developers, 120,000 enterprise customers and a proven scaled API infrastructure – we will have a strong position to deliver on this ambition.
Ericsson’s IPR licensing revenues in Q1 were affected by several expiring patent license agreements pending renewal and by 5G license negotiations. We are confident in our strong 5G position and leading patent portfolio, positioning us well to conclude pending and future license renewals. Revenues from current IPR licensing contracts are estimated to SEK 1.0–1.5 b. in Q2. The actual revenue impact will depend on timing as well as terms and conditions of new agreements.
We are currently engaging with the Department of Justice (DOJ) regarding the breach notices it issued relating to the Deferred Prosecution Agreement. The resolution of these matters could result in a range of actions by DOJ, and may likely include additional monetary payments, the magnitude of which cannot at this time be reliably estimated. As this process is ongoing, we remain limited in what we can say about the historical events covered in the Iraq investigation and our ongoing engagement on the matter. We are fully committed to co-operating with the DOJ and our work to further strengthen our Ethics and Compliance program, controls and our culture remains a top priority. It was actually our improved compliance program that allowed us to identify the misconduct in Iraq that started at least back in 2011.
In light of the global supply chain challenges, we decided to create a buffer of vital components in order to secure that we meet customer delivery commitments. In the quarter this had a material impact on inventory levels and therefore Free cash flow before M&A amounted to -1.7 (+1.6) b. We expect elevated inventory levels to remain in the next few quarters.
https://www.ericsson.com/en/press-releases/2022/4/ericsson-reports-first-quarter-results-2022
