Ericsson reported stronger sales growth and improved margins in the third quarter, thanks to demand for 5G and a continued focus on cost reductions. Sales increased 9 percent year-on-year to SEK 53.8 billion, according Telecompaper. On an organic basis, revenues rose 1 percent and were up 5 percent at the main Networks division.
Ericsson said North America continued to lead the sales growth at Networks, while sales were also up in Europe and Latin America, driven by investments in 5G readiness and LTE networks. Due to
the strong sequential sales increase in the third quarter, the company expects lower effects from seasonality than normal in the fourth quarter at Networks. Costs for 5G trials wil remain high for at least another 12-18 months.
The gross margin excluding restructuring charges improved to 36.9 percent in Q3 from 28.5 percent a year ago, driven mainly by cost reductions, the continued ramp-up of Ericsson Radio System and good progress in reviewing unprofitable Managed Services contracts.
The adjusted operating margin moved to 7.0 percent from negative 1.7 percent a year earlier, and the Networks division improved to 16.1 percent. Ericsson CEO Borje Ekholm said there was still more work to be done, but the company was on track to reach its target of an operating margin of at least 12 percent by 2020.
The net result was a profit of SEK 2.7 billion versus a loss of SEK 3.5 billion a year ago. Operating cash flow improved to a positive SEK 2.0 billion from breakeven last year, and net cash increased to SEK 32.0 billion at the end of the period.
The positive results were offset by a warning from the company that it expects to incur fines under a US corruption investigation. The company has been under investigation since 2013 by the SEC and 2015 by the DOJ for compliance with the Foreign Corrupt Practices Act. Based on the information shared with the US authorities, Ericsson said it expects the probe to result in "monetary and other measures, the magnitude of which cannot be estimated currently but may be material". The company has not taken any provisions for the investigation, but said it had already started implementing changes in company controls, after hiring in 2016 an independent compliance advisory firm for recommendations.
