Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 6-K

 

 

REPORT OF FOREIGN ISSUER

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

October 21, 2020

Commission File Number 000-12033

 

 

LM ERICSSON TELEPHONE COMPANY

(Translation of registrant’s name into English)

 

 

Torshamnsgatan 21, Kista

SE-164 83, Stockholm, Sweden

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F. Form 20-F   ☒ Form 40-F  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

Announcement of LM Ericsson Telephone Company, October 21, 2020 regarding “Third quarter report 2020”.

 

 

 


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

TELEFONAKTIEBOLAGET LM ERICSSON (publ)
By:  

/s/ XAVIER DEDULLEN

  Xavier Dedullen
  Senior Vice President, Chief Legal Officer
By:  

/s/ CARL MELLANDER

  Carl Mellander
  Senior Vice President, Chief Financial Officer

Date: October 21, 2020


Table of Contents

LOGO

Third quarter report 2020    

Stockholm, Oct 21, 2020

Third quarter highlights

 

   

Sales adjusted for comparable units and currency increased by 7% YoY mainly driven by 5G sales in Mainland China. Reported sales were SEK 57.5 (57.1) b.

 

   

Gross margin excluding restructuring charges improved to 43.2% (37.8%) with margin improvement in all segments. Reported gross margin improved to 43.1% (37.7%).

 

   

Operating income excluding restructuring charges and items affecting comparability in Q3 2019, improved to SEK 9.0 b. (15.6% operating margin) from SEK 6.51 b. (11.4% operating margin) driven by Networks. Reported operating income SEK 8.6 (-4.2) b.

 

   

Networks reported sales increased by 6% YoY, with an increase of 13% adjusted for comparable units and currency. Operating margin excluding restructuring charges was 22.7% (18.4%).

 

   

Net income was SEK 5.6 (-6.91) b.

 

   

Free cash flow before M&A was SEK 3.9 (4.5) b., including a capital injection into the Swedish Pension Trust of SEK -2 b. in the quarter. Net cash Sep 30, 2020, was SEK 41.5 (37.4) b.

 

1

Q3 2019 was impacted by cost provisions of SEK -11.5 b. related to the investigation by the United States Securities and Exchange Commission (SEC) and the United States Department of Justice (DOJ) as well as a refund of social security costs of SEK 0.9 b.

Planning assumptions highlights (please see page 5 for complete planning assumptions)

 

   

The YTD results strengthen the Company’s confidence in delivering the Group targets for 2020. The financial targets for 2022 remain.

 

SEK b.

   Q3
2020
    Q3
2019
    YoY
change
    Q2
2020
    QoQ
change
    Jan-Sep
2020
    Jan-Sep
2019
 

Net sales

     57.5       57.1       1     55.6       3     162.8       160.8  

Sales growth adj. for comparable units and currency

     —         —         7     —         —         —         —    

Gross margin

     43.1     37.7     —         37.6     —         40.2     37.5

Operating income (loss)

     8.6       -4.2       —         3.9       124     16.8       4.4  

Operating margin

     15.0     -7.3     —         6.9     —         10.3     2.8

Net income (loss)

     5.6       -6.9       —         2.6       115     10.4       -2.6  

EPS diluted, SEK

     1.61       -1.89       —         0.74       118     3.00       -0.67  

Measures excl. restructuring charges and other items affecting comparability¹

              

Gross margin excluding restructuring charges

     43.2     37.8     —         38.2     —         40.7     37.6

Operating income excl.restr.charges & items affecting comparability in 2019 ²

     9.0       6.5       38     4.5       98     18.1       13.9  

Operating margin excl.restr.charges & items affecting comparability in 2019 ²

     15.6     11.4     —         8.2     —         11.1     8.6

Free cash flow before M &A

     3.9       4.5       -12     3.2       22     9.5       9.5  

Net cash, end of period

     41.5       37.4       11     37.5       11     41.5       37.4  

 

1 

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

2 

Excludes restructuring charges in all periods. No other adjustments made in 2020. Q1 2019 excludes a capital gain related to the divestment of 51% of MediaKind (SEK 0.7 b.), divestment of certain assets in Red Bee Media (SEK 0.1 b.) and a reversal of an earlier provision for impairment of trade receivables following customer payment (SEK 0.7 b.). Q3 2019 excludes cost provisions (SEK -11.5 b.) related to the investigation by the United States Securities and Exchange Commission and the United States Department of Justice and a refund of social security costs (SEK 0.9 b.).

 

   
1    Ericsson | Third quarter report 2020        


Table of Contents

CEO comments

 

Amid the continuing global Covid-19 pandemic and with more than 80% of our people working from home, we keep on executing on our focused strategy. We continue to win footprint in several markets leveraging our competitive 5G portfolio. The gross margin1 improved in all segments in the third quarter and reached 43.2% (37.8%), the highest since 2006. With the acquisition of Cradlepoint, expected to close in Q4, we are making further progress in our strategy to build an enterprise business. Covid-19 has so far had limited impact on our business, but we are closely monitoring any signs of a change in the situation. The year to date results strengthen our confidence in delivering on the 2020 Group target.

Networks grew organically2 by 13% and reported a gross margin1 of 46.7% (41.6%). This reflects high activity levels in North East Asia and North America. Underlying business fundamentals remain strong in North America driven by consolidation in the US operator market, pending spectrum auctions, and increased demand for 5G. The 5G contracts in Mainland China have developed according to plan, contributing positively to profits in Q3 and are expected to improve further. Our business in Europe grew based on several footprint gains. While the pandemic has hurt revenues for several of our customers, and in some cases this has led to a reduction of capex, we have not seen any negative impact on our business, largely due to footprint gains. However, the pandemic negatively impacted our sales in Latin America and Africa.

Digital Services continued to make good progress on the execution of the turnaround plan, transforming the business and increasing software sales. The gross margin1 improved to 43.5% (38.3%), supported by increased software sales and improvements in the underlying business. Our cloud-native 5G core portfolio shows very positive momentum with a high win-ratio and a significant number of new customer contracts. We are selectively increasing R&D investments to accelerate our growth portfolio to capture market opportunities. However, sales in our legacy portfolio is declining faster than earlier predicted. In the short term, this shortfall will not be compensated by the growth in new offerings and therefore our sales volume is lower than expected. With weaker sales in combination with higher R&D investments, there is a risk of further delay in reaching the 2020 operating margin target for Digital Services.

Managed Services delivered a gross margin1 of 20.1% (17.9%). The 4Q rolling operating margin1 is 7.4%. Sales declined mainly due to the US operator consolidation. We expect our investments in automation and AI to create future business opportunities, which are anticipated to gradually improve the margin profile as this new portfolio grows.

Emerging Business and Other reported a gross margin1 of 30.5% (20.5%). Our IoT platform sales grew by more than 40% despite an impact on demand from Covid-19. In the quarter we announced our plans to acquire Cradlepoint, which will strengthen our ability to grow in the 5G enterprise market alongside our existing dedicated networks and IoT portfolio. Cradlepoint will drive revenues for our customers as wireless WAN gains further penetration. Cradlepoint will operate as a standalone subsidiary within Ericsson, and we look forward to welcoming the team at Cradlepoint to Ericsson.

Patent licensing continues to perform well based on our strong IPR portfolio, even though revenues decreased in the third quarter as one of our licensees experienced lower sales volumes. We are approaching several important contract renewals. We are confident in the value of our broad patent portfolio, including a strong position in 5G and will seek to maximize the net present value of our patent estate that has been built over time through our large R&D investments. Depending on timing of the agreement renewals, we may see gaps in IPR revenues in 2021 and 2022.

Free cash flow before M&A amounted to SEK 3.9 (4.5) b. in the third quarter, a year-on-year improvement of SEK 1.9 b., if adjusted for a capital injection into the Swedish Pension Trust and last year’s positive effect from a social security refund. On a 4Q rolling basis we have generated SEK 17.7 b. of free cash flow before M&A3 if excluding the payments to SEC and DOJ.

We are committed to continue improving our Ethics and Compliance program. Through driving stronger management ownership and accountability for compliance, we are also reinforcing our commitment to responsible business practices and a stronger corporate culture. Our people should always be able to speak up and we expect Ericsson leaders to operate with integrity at all times.

Open RAN is a hot topic in our industry today and Ericsson is a strong supporter of openness and actively engages in alliances, such as 3GPP, ONAP and the O-RAN alliance. In the years to come, networks will gradually evolve, as will the current open standards. At the same time 5G is ready and happening now so focus must be on providing early access to 5G networks to enable the broader ecosystem to innovate at scale.

We remain positive on the longer-term outlook for the industry and Ericsson. The year to date results strengthen our confidence in delivering on the 2020 Group target.

Stay healthy and well.

Börje Ekholm

President and CEO

 

1 

Excluding restructuring charges

2

Sales adjusted for comparable units and currency

3

Free cash flow before M&A rolling 4Q includes; Q4 2019 (SEK -1.9 b.), Q1 2020 (SEK 2.3 b.), Q2 2020 (SEK 3.2 b.) and Q3 2020 (SEK 3.9 b.) adjusted for SEC and DOJ payments (SEK 10.1 b.) in Q4 2019.

 

 

   
2    Ericsson | Third quarter report 2020    CEO comments


Table of Contents

Financial highlights

Net sales development

 

SEK b.

   Q3
2020
     Q3
2019
     YoY
change
    YoY
adj.¹
    Q2
2020
     Jan-Sep
2020
     Jan-Sep
2019
     YoY
change
    YoY
adj.¹
 

Net sales

     57.5        57.1        1     7     55.6        162.8        160.8        1     2

of which Networks

     41.7        39.3        6     13     39.8        116.6        110.6        5     6

of which Digital Services

     8.7        9.9        -12     -5     8.6        24.7        26.7        -8     -6

of which Managed Services

     5.5        6.4        -14     -9     5.6        16.8        18.5        -9     -9

of which Emerging Business and Other

     1.6        1.6        -3     2     1.6        4.8        5.1        -6     -4

 

1 

Sales growth adjusted for comparable units and currency. Non-IFRS financial measures are reconciled at the end of this report to the most directly reconcilable line items in the financial statements.

 

Group reported sales increased by 1% YoY. Sales growth adjusted for comparable units and currency was 7%, primarily driven by 5G deployments in North East Asia and North America. Sales in Latin America and Africa declined, primarily due to Covid-19 and macroeconomic instability.

IPR licensing revenues decreased to SEK 2.2 (2.4) b. YoY, mainly due to lower volumes with one licensee.

Networks sales adjusted for comparable units and currency increased by 13% YoY with growth in North East Asia, North America and Europe while sales declined in Latin America and Africa.

Digital Services sales adjusted for comparable units and currency decreased by -5% YoY with reduced sales in the legacy portfolio. Uncertainty related to Covid-19 and its

potential economic effects impacted the segment. Sales declined in all market areas except South East Asia, Oceania and India.

Managed Services sales adjusted for comparable units and currency decreased by -9% YoY, mainly due to lower variable sales in a managed services contract in North America post the merger between two large operators, and transfer of a managed services contract to an associated company.

Emerging Business and Other sales adjusted for comparable units and currency increased by 2% YoY, partly driven by Emerging Business.

Sequentially, Group reported sales increased by 3% supported by sales growth in market areas North East Asia and in South East Asia, Oceania and India.

 

 

Income and margin development

 

SEK b.

   Q3
2020
    Q3
2019
    YoY
change
    Q2
2020
    QoQ
change
    Jan-Sep
2020
    Jan-Sep
2019
 

Net sales

     57.5       57.1       1     55.6       3     162.8       160.8  

Gross income

     24.8       21.5       15     20.9       18     65.5       60.4  

Gross margin

     43.1     37.7     —         37.6     —         40.2     37.5

Research and development (R&D) expenses

     -10.1       -9.5       —         -10.0       —         -29.3       -28.2  

Selling and administrative expenses

     -6.0       -4.9       —         -7.1       —         -19.3       -17.9  

Impairment losses on trade receivables

     0.0       0.2       -100     0.0       —         -0.1       0.9  

Other operating income and expenses

     0.1       -11.3       —         0.1       -53     0.3       -10.5  

Operating income

     8.6       -4.2       —         3.9       124     16.8       4.4  

of which Networks

     9.2       7.2       27     5.3       74     20.2       18.4  

of which Digital Services

     -0.6       -0.7       —         -0.7       —         -2.7       -3.9  

of which Managed Services

     0.5       0.6       -13     0.3       87     1.2       2.0  

of which Emerging Business & Other

     -0.4       -11.3       —         -1.0       —         -1.9       -12.1  

Operating margin

     15.0     -7.3     —         6.9     —         10.3     2.8

Financial income and expenses, net

     0.1       -0.7       —         0.3       -63     -0.5       -1.7  

Taxes

     -3.2       -2.0       —         -1.6       —         -5.9       -5.4  

Net income

     5.6       -6.9       —         2.6       115     10.4       -2.6  

Restructuring charges

     -0.3       -0.1       —         -0.7       —         -1.3       -0.5  

Measures excl.restructuring charges and other items affecting comparability¹

              

Gross margin excluding restructuring charges

     43.2     37.8     —         38.2     —         40.7     37.6

Operating income excl.restr.charges & items affecting comparability in 2019 ²

     9.0       6.5       38     4.5       98     18.1       13.9  

Operating margin excl.restr.charges & items affecting comparability in 2019 ²

     15.6     11.4     —         8.2     —         11.1     8.6

Operating margin excluding restructuring charges

     15.6     -7.1     —         8.2     —         11.1     3.1

 

1 

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

2 

Excludes restructuring charges in all periods. No other adjustments made in 2020. Q1 2019 excludes a capital gain related to the divestment of 51% of MediaKind (SEK 0.7 b.), divestment of certain assets in Red Bee Media (SEK 0.1 b.) and a reversal of an earlier provision for impairment of trade receivables following customer payment (SEK 0.7 b.). Q3 2019 excludes cost provisions (SEK -11.5 b.) related to the investigation by the United States Securities and Exchange Commission and the United States Department of Justice and a refund of social security costs (SEK 0.9 b.).

Gross margin

Reported gross margin was 43.1% (37.7%). Gross margin excluding restructuring charges improved to 43.2% (37.8%) YoY driven by strong margin improvements in all segments. Increased software sales contributed to the higher margin in Networks and Digital Services. Managed Services gross margin improved mainly as an effect of efficiency gains.

 

 

   
3    Ericsson | Third quarter report 2020    Financial highlights


Table of Contents

Sequentially, reported gross margin increased to 43.1% from 37.6%. Gross margin excluding restructuring charges increased to 43.2% from 38.2%. The improvement was primarily driven by the increased gross margin in Networks as a result of the business mix and higher software sales. Managed Services gross margin improved due to efficiency gains. Digital Services gross margin remained stable over the quarters. The share of IPR licensing revenues declined QoQ.

Restructuring charges

Restructuring charges increased to SEK -0.3 (-0.1) b. YoY. The ongoing restructuring of the acquired antenna and filter business in segment Networks as well as organizational changes as a consequence of the operator merger in North America impacted restructuring charges in the quarter.

Research and development (R&D) expenses

R&D expenses increased to SEK -10.1 (-9.5) b. R&D expenses excluding restructuring charges were SEK -9.9 (-9.4) b. R&D expenses increased in segment Networks according to plan.

Selling and administrative (SG&A) expenses

SG&A expenses were SEK -6.0 (-4.9) b. The social security refund of SEK 0.9 b. in Q3 2019 impacts comparison YoY. Revaluation of customer financing was SEK 0.0 (-0.1) b.

Impairment losses on trade receivables

Impairment losses on trade receivables were SEK 0.0 (0.2) b.

Other operating income and expenses

Other operating income and expenses was SEK 0.1 (-11.3) b. Q3 2019 was impacted by a provision of SEK -11.5 b. to cover the settlement with the United States Securities and Exchange Commission (SEC) and the United States Department of Justice (DOJ). Share in earnings of JVs and associated companies was SEK -0.1 (-0.2) b.

Operating income and margin

Reported operating income improved to SEK 8.6 (-4.2) b. YoY. Operating income excluding restructuring charges and items affecting comparability in Q3 2019 improved to SEK 9.0 (6.5) b. corresponding to an operating margin of 15.6% (11.4%). The improvement was driven by segment Networks.

Sequentially, reported operating income increased to SEK 8.6 b. from SEK 3.9 b. Operating income excluding restructuring charges increased to SEK 9.0 b. from SEK 4.5 b. Operating income improved in all segments QoQ, with segment Networks as the main contributor.

Financial net

Reported financial net improved to SEK 0.1 (-0.7) b. YoY, mainly driven by a positive currency hedge effect following the strengthened SEK to USD. The currency hedge effect was SEK 0.3 b. in the quarter compared with SEK -0.3 b. in Q3 2019. Sequentially the financial net declined to SEK 0.1 b. from SEK 0.3 b. with the currency hedge effect down from SEK 0.6 b. in the second quarter. The SEK strengthened against the USD between June 30, 2020 (SEK/USD rate 9.37) and September 30, 2020 (SEK/USD rate 9.00).

Taxes

Taxes were SEK -3.2 (-2.0) b. The tax rate in Q3 was 36% compared with 38% in Q2 2020. The tax rate is impacted by non-deductible costs in the quarter.

Net income

Net income improved to SEK 5.6 (-6.9) b. and EPS diluted improved to SEK 1.61 (-1.89) YoY driven by the stronger operating income and the improved financial net. Q3 2019 was impacted by the provision of SEK -11.5 b. for the settlement with SEC and DOJ as well as the social security refund of SEK 0.9 b.

Employees

The number of employees on September 30, 2020, was 99,826, compared with 99,800 at the end of the previous quarter.

Financial highlights, year to date (Jan-Sep)

Reported sales increased by 1%. Sales adjusted for comparable units and currency increased by 2%. Reported sales in segment Networks increased by 5% while sales adjusted for comparable units and currency increased by 6%. Sales growth in Networks was driven by North East Asia and North America. Reported sales declined by -8% in Digital Services, whereas sales for comparable units and currency declined by -6%, due to declining sales in the legacy portfolio in combination with continued uncertainty due to Covid-19. Reported sales and sales adjusted for comparable units and currency in Managed Services declined by -9%, mainly due to reduced variable sales in North America. In the market area dimension, sales growth in North East Asia and North America has offset a decline in the other three market areas.

Reported gross margin increased to 40.2% (37.5%) driven by improvements primarily in Networks and Digital Services, mainly due to business mix and a higher share of software sales.

Reported operating income increased YoY to SEK 16.8 (4.4) b. The operating income was impacted by increased restructuring charges of SEK -1.3 (-0.5) b. Q3 2019 was negatively impacted by a provision of SEK -11.5 b. for the settlement with SEC and DOJ and positively by a refund of social security costs of SEK 0.9 b. In addition, operating income Q1 2019 was positively impacted by capital gains (SEK 0.8 b.) related to the media businesses, and a reversal of a provision for impairment of trade receivables (SEK 0.7 b.) following customer payment.

Net income year to date improved to SEK 10.4 (-2.6) b.

 

 

   
4    Ericsson | Third quarter report 2020    Financial highlights


Table of Contents

Planning assumptions

Market related

 

    The global RAN equipment market is estimated to grow by 8% (previously: 4% growth) for full-year 2020. China is expected to grow by 33% and the global RAN market without China is expected to be flat in 2020. The global RAN equipment market is estimated to be flat at 0% CAGR for 2019-2024 (Source: Dell’Oro).

 

    The momentum in North America remains strong and the market is estimated to grow by 4% in 2020 (Source: Dell’Oro).

Ericsson related

Financial targets

 

    The YTD results strengthen the Company’s confidence in delivering on the Group targets for 2020. The financial targets for 2022 remain.

 

    With the weaker sales in Digital Services, in combination with higher R&D investments, the Company foresees a risk of further delay in reaching the 2020 operating margin target in this segment. The 2022 operating margin target for Digital Services of 10-12% remains.

Net sales

    Three-year average reported sales seasonality between Q3 and Q4 is +17%.

 

    The revenues from current IPR licensing contracts are expected to reach approximately SEK 10 b. for 2020. During 2021 and 2022 the Company may see temporarily lower IPR licensing revenues as important agreements are up for renewal.

Gross margin

 

    The software share of sales in segment Networks is expected to be lower in Q4 2020 after a favorable Q3 2020. Historically the share of services sales typically increases in Q4 compared with Q3.

 

    The improvements in Digital Services continue, but earnings will vary between quarters depending on business mix, sales seasonality and impact of the remainder of the 45 critical contracts.

 

    In Managed Services there will be quarterly variations depending on timing of add-on sales and costs, but underlying margins have been established at a higher level.

R&D and SG&A expenses

 

    Operating expenses typically increase between Q3 and Q4 due to seasonality. The average increase for the last three years was SEK 3 b., with large variations.

Restructuring charges

 

    Restructuring charges are estimated to approximately 1% of sales, as a yearly average.

Currency exposure

 

    Rule of thumb: A change by 10% of USD to SEK would have an impact of approximately +/-5% on net sales and approximately +/-1 percentage point on operating margin.

Cradlepoint

 

    Transaction is expected to close in the coming weeks.

 

    Upon closing, a consideration of around USD 1 b., subject to customary adjustments for working capital and net debt, will be paid using cash-at-hand.

 

    Cradlepoint will be fully consolidated into the Ericsson group in segment Emerging Business & Other.

 

    Cradlepoint’s sales for 2019 were SEK 1.2 b. with a gross margin of 61%.

 

    Ericsson’s operating margin is expected to be negatively impacted by approximately -1% as of closing in Q4 2020 up until 2022. Half of this impact is related to amortization of intangible assets.

 

    Cradlepoint is expected to contribute with positive operating cash flow starting in 2022
 

 

   
5    Ericsson | Third quarter report 2020    Planning assumptions


Table of Contents

Market area sales

 

SEK b.

   Q3
2020
     Q3
2019
     YoY
change
    Q2
2020
     QoQ
change
    Jan-Sep
2020
     YoY
change
 

South East Asia, Oceania and India

     7.8        7.4        5     6.6        19     20.3        -1

North East Asia

     8.8        6.4        39     7.8        13     20.5        23

North America

     18.4        19.0        -3     18.4        0     54.7        3

Europe and Latin America

     13.3        14.3        -7     13.1        2     38.6        -7

Middle East and Africa

     5.5        6.0        -9     5.4        2     16.8        -2

Other¹

     3.7        4.0        -8     4.3        -15     11.9        -2
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     57.5        57.1        1     55.6        3     162.8        1
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

1

Market area “Other” includes primarily IPR licensing revenues and the major part of segment Emerging Business and Other.

Sales breakdown by market area by segment is available at the end of this report.

 

    Ericsson 5G status on October 21: 65 live networks and 112 commercial agreements with unique operators

 

    Strong growth in North East Asia and continued business momentum in North America

 

    Networks sales continued to grow in Europe driven by market share gains

South East Asia, Oceania and India

Sales remained flat in Networks, while sales increased YoY in Digital Services due to timing of project milestones. Managed Services sales increased YoY, mainly as a result of a new contract win in 2020.

North East Asia

Sales increased YoY. Networks sales grew, primarily driven by continued 5G deployment in Mainland China. Digital Services sales declined due to timing and project milestones.

North America

Sales increased YoY adjusted for currencies. Networks sales grew driven by continued 5G momentum. Digital Services sales decreased due to lower legacy hardware volumes. Managed Services sales decreased post the merger between two large operators.

Europe and Latin America

Sales decreased YoY due to earlier decisions on Managed Services contract exits and reduced sales in Latin America due to macroeconomic uncertainty following Covid-19. Networks sales increased in Europe as a result of market share gains, partly offsetting the sales decline in Latin America.

Middle East and Africa

Sales decreased YoY primarily in Africa due to macroeconomic uncertainty related to Covid-19 and delayed investments in Networks and Digital Services. Continued 5G deployments in the Middle East contributed positively. Managed Services sales were stable.

Other

IPR licensing revenues decreased to SEK 2.2 (2.4) b. YoY, mainly due to lower volumes with one licensee.

 

 

   
6    Ericsson | Third quarter report 2020    Market area sales


Table of Contents

Segment results

 

Segment Networks

 

SEK b.

   Q3
2020
    Q3
2019
    YoY
change
    Q2
2020
 

Net sales

     41.7       39.3       6     39.8  

Sales growth adj. for comparable units and FX

     —         —         13     —    

Gross income

     19.4       16.3       19     16.0  

Gross margin

     46.5     41.6     —         40.2

Operating income

     9.2       7.2       27     5.3  

Operating margin

     22.0     18.4     —         13.2

Restructuring charges

     -0.3       0.0       —         -0.4  

Measures excl. restructuring charges

        

Gross margin excl. restructuring charges

     46.7     41.6     —         40.5

Operating income excl. restructuring charges

     9.4       7.2       31     5.6  

Operating margin excl. restructuring charges

     22.7     18.4     —         14.1

Breakdown of sales into products, services and IPR licensing is available in the back-end tables.

 

    Sales adjusted for comparable units and currency up 13%

 

    Operating margin excluding restructuring charges 22.7%

 

    A large share of software sales contributed to the higher margins in Networks

Net sales

Reported sales increased by 6% YoY. Sales adjusted for comparable units and currency increased by 13%. Sales growth was driven by North East Asia, North America and Europe. Sales declined YoY in Latin America and Africa, where the pandemic negatively impacted capex levels for some customers.

Gross margin

Reported gross margin increased to 46.5% (41.6%) YoY. Gross margin excluding restructuring charges increased to 46.7% (41.6%), as a result of a large share of software sales and operational leverage.

Reported gross margin increased QoQ to 46.5% from 40.2%. The increase is mainly driven by the business mix including a larger share of software sales.

Operating income and margin

Reported operating income increased to SEK 9.2 (7.2) b. YoY, with an increase in operating margin to 22.0% (18.4%). Operating margin excluding restructuring charges increased to 22.7% (18.4%). Operating expenses increased by SEK -1.1 b. to SEK -10.3 b. due to increased restructuring charges, accelerated R&D investments in 5G and in a broader portfolio of antenna and site solutions as well as an increase in SG&A expenses driven by the increased Group investments in digitalization and compliance.

Reported operating income increased by SEK 3.9 b. QoQ while operating income excluding restructuring charges increased by SEK 3.8 b. supported by seasonally higher sales, improved gross margin and seasonally lower operating expenses.

Net sales rolling four quarters were SEK 161.1 b. and operating margin excluding restructuring charges was 17.0%.

Segment Digital Services

 

SEK b.

   Q3
2020
    Q3
2019
    YoY
change
    Q2
2020
 

Net sales

     8.7       9.9       -12     8.6  

Sales growth adj. for comparable units and FX

     —         —         -5     —    

Gross income

     3.8       3.7       1     3.7  

Gross margin

     43.4     37.9     —         43.6

Operating income (loss)

     -0.6       -0.7       —         -0.7  

Operating margin

     -6.8     -6.7     —         -8.1

Restructuring charges

     -0.1       -0.1       —         0.0  

Measures excl. restructuring charges

        

Gross margin excl. restructuring charges

     43.5     38.3     —         43.6

Operating income (loss) excl. restructuring charges

     -0.5       -0.5       —         -0.7  

Operating margin excl. restructuring charges

     -5.8     -5.4     —         -8.5

Breakdown of sales into products, services and IPR licensing is available in the back-end tables.

 

    Sales declined due to lower sales of the legacy portfolio

 

    Reported gross margin improved to 43.4% (37.9%) supported by a higher share of software, in line with the strategy

 

    The growth portfolio sales grew by 5% in the quarter supported by cloud infrastructure products

Net sales

Reported sales decreased by -12% YoY. Sales adjusted for comparable units and currency decreased by -5% YoY, mainly impacted by a sales decline in the legacy portfolio, primarily in hardware, as well as continued uncertainty related to Covid-19 and its potential economic effects. Sales grew YoY in South East Asia, Oceania and India while sales in all other market areas declined. Q3 2019 was supported by higher than normal legacy sales in North America and Europe.

Reported sales grew by 2% QoQ, with good business momentum in the growth portfolio, which grew by 5% both sequentially and for rolling 12 months. Sales of cloud infrastructure products strengthened in the quarter. Important 5G Core contracts have been signed with several tier-1 operators in 2020 and are expected to generate revenues in 2021 and beyond.

Gross margin

Reported gross margin increased to 43.4% (37.9%) supported by a favorable business mix with higher share of software sales. Q3 2019 was negatively impacted by critical contracts, while such impact in Q3 2020 was limited.

Gross margin excluding restructuring charges decreased to 43.5% from 43.6% QoQ. The impact of critical contracts was limited in both quarters.

Operating income (loss)

Reported operating income (loss) was SEK -0.6 (-0.7) b. Operating income (loss) excluding restructuring charges was SEK -0.5 (-0.5) b. Operating expenses excluding restructuring charges remained flat YoY. While rationalization of the legacy portfolio continues, R&D investments are made in the growth portfolio of 5G and cloud-native products.

Reported operating income as well as operating income excluding restructuring charges improved QoQ, supported by seasonally higher sales and lower operating expenses.

Net sales rolling four quarters were SEK 37.8 b. and operating margin excluding restructuring charges was -7.0%.

 

 

   
7    Ericsson | Third quarter report 2020    Segment results


Table of Contents

Segment Managed Services

 

SEK b.

   Q3
2020
    Q3
2019
    YoY
change
    Q2
2020
 

Net sales

     5.5       6.4       -14     5.6  

Sales growth adj. for comparable units and FX

     —           -9     —    

Gross income

     1.1       1.1       -4     1.0  

Gross margin

     19.9     17.9     —         17.1

Operating income

     0.5       0.6       -13     0.3  

Operating margin

     8.9     8.8     —         4.7

Restructuring charges

     0.0       0.0       —         0.0  

Measures excl. restructuring charges

        

Gross margin excl. restructuring charges

     20.1     17.9     —         17.2

Operating income excl. restructuring charges

     0.5       0.6       -11     0.3  

Operating margin excl. restructuring charges

     9.1     8.9     —         4.8

 

    Sales declined YoY mainly due to reduced variable sales in North America

 

    Operating margin excluding restructuring charges increased YoY despite lower sales

 

    Further investments in automation, analytics and AI-driven offerings – supporting 5G and efficiency in service delivery

Net sales

Reported sales declined by -14% YoY. Sales adjusted for comparable units and currency decreased by -9% YoY, mainly due to reduced variable sales in a large contract in North America, post the merger between two large operators, and transfer of a contract from Ericsson to an associated company. Sales in Managed Services IT showed growth mainly in market areas North America and in South East Asia, Oceania and India.

Gross margin

Reported gross margin increased to 19.9% (17.9%). Gross margin excluding restructuring charges increased to 20.1% (17.9%) YoY, mainly as a result of efficiency gains.

Reported gross margin increased to 19.9% from 17.1% QoQ. Gross margin excluding restructuring charges increased to 20.1% from 17.2% QoQ, mainly due to higher variable sales, efficiency gains and timing of costs.

Operating income and margin

Reported operating income was SEK 0.5 (0.6) b. Operating income excluding restructuring charges was SEK 0.5 (0.6) b. The decline was mainly due to lower sales.

Reported operating income increased to SEK 0.5 b. from SEK 0.3 b. QoQ driven by higher gross margin.

Net sales rolling four quarters were SEK 23.8 b. Operating margin excluding restructuring charges rolling four quarters was 7.4%.

Segment Emerging Business and Other

 

SEK b.

   Q3
2020
    Q3
2019
    YoY
change
    Q2
2020
 

Net sales

     1.6       1.6       -3     1.6  

Of which Emerging Business and iconectiv

     1.0       1.1       -1     1.1  

Of which Red Bee Media

     0.5       0.6       -15     0.5  

Of which Media Solutions

     0.0       0.0         0.0  

Sales growth adj. for comparable units and FX

     —         —         2     —    

Gross income

     0.5       0.3       55     0.2  

Gross margin

     32.0     20.2     —         12.6

Operating income (loss)

     -0.4       -11.3       —         -1.0  

Of which Em. Business, iconectiv & common costs

     -0.3       -0.5       —         -0.8  

Of which Red Bee Media

     0.0       0.0       —         0.0  

Of which Media Solutions

     -0.2       -0.3       —         -0.1  

Of which adjustments in Q3 2019 ¹

     —         -10.5       —         —    

Operating margin

     -26.7     -695.8     —         -60.5

Restructuring charges

     0.0       0.0       —         -0.3  

Measures excl. restructuring charges

        

Gross margin excl.restructuring charges

     30.5     20.5     —         25.3

Operating income (loss) excl. restructuring charges

     -0.5       -11.3       —         -0.6  

Operating margin excl. restructuring charges

     -29.2     -695.1     —         -39.6

Op. income excl. restr. charges & items affecting comp.¹

     -0.5       -0.8       —         -0.6  

Op. margin excl. restr. charges & items affecting comp.¹

     -29.2     -46.6     —         -39.6

 

1 

Cost provisions related to a resolution of the SEC and DOJ investigations of SEK -11.5 b. and refund of social security costs of SEK 0.9 b. in Q3 2019.

 

    Continued sales and gross margin growth in Emerging Business

 

    connective delivered stable sales and solid profitability

 

    Agreement to acquire Cradlepoint announced September 18

Net sales

Reported sales decreased by -3% YoY. Sales adjusted for comparable units and currency increased by 2%, partly driven by Emerging Business.

Gross margin

Reported gross margin increased to 32.0% (20.2%) YoY. Gross margin excluding restructuring charges increased to 30.5% (20.5%). The increase was driven by Emerging Business.

Reported gross margin increased to 32.0% from 12.6% QoQ. Gross margin excluding restructuring charges increased to 30.5% from 25.3% QoQ. The improvement was driven by Emerging Business.

Operating income (loss)

Reported operating income (loss) was SEK -0.4 (-11.3) b. Operating income (loss) excluding restructuring charges and items affecting comparability was SEK -0.5 (-0.8) b.

Media Solutions reported operating income was SEK -0.2 (-0.3) b. including Ericsson’s 49% share in earnings of the MediaKind business.

Red Bee Media’s operating income improved and reached break even and iconectiv delivered solid profitability.

Net sales rolling four quarters were SEK 6.5 b.

Acquisition of Cradlepoint

Acquisition of Cradlepoint, the market leader in Wireless Edge WAN solutions, was announced in Q3 for a price amouting to approximately USD 1.1 b. It complements Ericsson’s enterprise offerings and creates valuable new revenue streams for customers. The transaction is expected to close within some weeks, subject to merger clearance and other closing conditions.

 

 

   
8    Ericsson | Third quarter report 2020    Segment results


Table of Contents

Cash flow and financial position

 

SEK b.

   Q3
2020
     Q3
2019
     Q2
2020
     Jan-Sep
2020
     Jan-Sep
2019
 

Net income adjusted for non-cash items

     9.7        -4.3        5.6        20.0        6.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Working capital changes (net operating assets and liabilities)

     -4.4        11.3        -0.1        -5.0        10.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flow from operating activities

     5.3        7.0        5.4        15.0        16.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Capex (net) including product development

     -1.1        -1.4        -1.5        -3.9        -4.3  

Other investing activities and lease liabilities

     -0.3        -1.1        -0.7        -1.6        -2.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Free cash flow before M&A

     3.9        4.5        3.2        9.5        9.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Acquisitions/divestments, net

     -0.1        -0.5        0.0        -0.3        -0.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Free cash flow

     3.8        4.0        3.2        9.1        9.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flow from investing activities

     -1.1        -3.1        -0.5        -6.6        1.2  

Cash flow from financing activities

     -0.9        0.2        -4.6        -4.0        -7.0  

Net change in cash and cash equivalents

     3.1        5.7        -2.7        3.7        12.8  

 

SEK b.

   Sep 30
2020
    Sep 30
2019
    Jun 30
2020
 

Gross cash

     78.2       76.2       75.4  
  

 

 

   

 

 

   

 

 

 

- Borrowings, current

     14.6       1.6       15.3  

- Borrowings, non-current

     22.1       37.2       22.6  
  

 

 

   

 

 

   

 

 

 

Net cash

     41.5       37.4       37.5  
  

 

 

   

 

 

   

 

 

 

Equity

     82.5       77.5       78.5  

Total assets

     277.2       288.5       276.8  

Capital turnover (times)

     1.3       1.4       1.3  

Return on capital employed (%)

     13.5     3.8     9.9

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

    Free cash flow before M&A was SEK 3.9 (4.5) b. including a capital injection into the Swedish Pension Trust of SEK -2.0 b.

 

    Solid net cash position at SEK 41.5 (37.4) b.

Cash flow from operating activities

Reported cash flow from operating activities was SEK 5.3 (7.0) b. Change in net operating assets was SEK -4.4 b., driven by higher inventories and lower trade payables. A capital injection of SEK -2.0 b. was made into the Ericsson Swedish Pension Trust as previously reported, affecting cash flow negatively, as described under “Financial position” below. Out of the SEK 0.9 b. refund of social security costs in Q3 2019, SEK 0.4 b. had a positive impact on cash flow. Provisions of SEK 0.5 b. were utilized of which SEK 0.2 b. related to restructuring.

Free cash flow

Free cash flow before M&A was SEK 3.9 (4.5) b. Investments in property, plant and equipment were SEK -1.0 (-1.2) b. and capitalized development expenses were SEK -0.2 (-0.3) b. Free cash flow was SEK 3.8 (4.0) b.

Cash flow from investing and financing activities

Reported cash flow from investing activities was SEK -1.1 (-3.1) b. mainly due to less purchases of interest-bearing securities.

Reported cash flow from financing activities was SEK -0.9 (0.2) b.

Cash flow, year to date (Jan-Sep) development

Free cash flow before M&A year to date was SEK 9.5 (9.5) b. despite total payments made into the Swedish Pension Trust of SEK -3.0 b.

Reported cash flow from investing activities was SEK -6.6 (1.2) b. mainly due to purchase of interest-bearing securities while investments in property, plant and equipment remained stable YoY.

Reported cash flow from financing activities was SEK -4.0 (-7.0) b. of which payment of dividends was SEK -2.5 (-4.4) b. The second installment of the 2019 dividend payment was made on October 7.

Financial position

Gross cash was SEK 78.2 (76.2) b. Gross cash increased by SEK 2.8 b. QoQ as a result of the positive free cash flow. Net cash was SEK 41.5 (37.4) b., an increase of SEK 4.0 b. QoQ.

Liabilities for post-employment benefits decreased in the quarter, to SEK 36.5 b. from SEK 38.6 b., mainly as a result of a capital injection of SEK -2.0 b. into the Swedish Pension Trust. The Swedish defined benefit obligation (DBO) was calculated using a discount rate based on the yields of Swedish government bonds. If the discount rate had been based on Swedish covered mortgage bonds, the liability for post-employment benefits would have been approximately SEK 9.8 b. lower (~SEK 26.7 b.).

As previously reported in the Q1 and Q2 2020 earnings reports there was a funding need for the Swedish pension plan in 2020. The total need was approximately SEK 4 b. of which SEK 3 b. was to be covered by payments into the Swedish Pension Trust and SEK 1 b. by providing a pledged business mortgage to PRI Pensionsgaranti. In Q2 2020, SEK -1 b. was paid and in Q3 2020 the remaining SEK -2 b. was paid into the Swedish Pension Trust. Depending on future market conditions, further cash injections to Pension Trusts amounting to approximately SEK 1 b. per year can be expected. Details regarding Ericsson’s pension plans can be found in note G1 “Post-employment benefits” of the Annual Report.

The average maturity of long-term borrowings as of September 30, 2020, was 1.9 years, a decrease from 2.8 years 12 months earlier.

 

 

   
9    Ericsson | Third quarter report 2020    Cash flow


Table of Contents

Parent Company

 

Income after financial items Jan-Sep 2020, was SEK 3.7 (-9.4) b.

At the end of the quarter, gross cash (cash, cash equivalents, short-term investments and interest-bearing securities, non-current) amounted to SEK 66.3 (59.4) b.

There was an increase in intercompany lending of SEK 1.0 b. and in intercompany borrowing of SEK 0.1 b. in the third quarter.

In accordance with the conditions of the long-term variable compensation program (LTV) for Ericsson employees, 4,489,317 shares from treasury stock were distributed or sold to employees during the third quarter. The holding of treasury stock on September 30, 2020 was 6,043,585 Class B shares.

 

 

   
10    Ericsson | Third quarter report 2020    Parent Company


Table of Contents

Other information

 

Ericsson accelerates 5G for Enterprise with acquisition of Cradlepoint

On September 18, 2020, Ericsson announced that the Company has agreed to acquire Cradlepoint, a US-based vendor in Wireless Edge WAN 4G and 5G Enterprise solutions. The investment is key to Ericsson’s ongoing strategy of capturing market share in the rapidly expanding 5G Enterprise space. Cradlepoint complements Ericsson’s existing 5G Enterprise portfolio which includes Dedicated Networks and a global IoT platform.

The combined offering will create valuable new revenue streams for customers by supporting full 5G-enabled services for enterprise, and boost returns on investments in the network.

Cradlepoint will become a fully owned subsidiary of Ericsson while continuing to operate as a standalone company within segment Emerging Business and Other.

The acquisition price amounts to approximately USD 1.1 b. with the transaction expected to close during Q4 2020, subject to closing conditions.

Cradlepoint’s sales for 2019 were SEK 1.2 b. with a gross margin of 61%. Ericsson’s operating margin is expected to be negatively impacted by approximately -1% in 2021 and 2022—where half is related to amortization of intangible assets which arise from the acquisition.

Cradlepoint is expected to contribute to operating cash flow starting in 2022.

Investigation into Ericsson’s licensing practice in China

In April 2019, Ericsson was informed by China’s State Administration for Market Regulation (SAMR) Anti-monopoly bureau that SAMR has initiated an investigation into Ericsson’s patent licensing practices in China. Ericsson is cooperating with the investigation, which is still in a fact-finding phase. The next steps include continued fact-finding and meetings with SAMR in order to facilitate the authority’s assessments and conclusions.

Covid-19 update

Ericsson continues to closely monitor the Covid-19 situation and the Global Crisis Management Council and task forces in each Market Area have been activated since January. The health and safety of employees, customers, partners and other stakeholders is Ericsson’s top priority. In June, travel and event restrictions were prolonged until the end of the year and employees are still asked to work from home. A mandatory use of face masks in all offices and locations was introduced in September. An office furniture program was also introduced, allowing employees to buy furniture for their home office environment.

The proactive approach to Business Continuity Management (BCM) in full alignment with customers at the beginning of the year has paid off so far with continued quality in Ericsson’s operations and customers´ networks while maintaining highest priority for the wellbeing of Ericsson employees. The Company continues this approach across all facets of the managed service business including through thorough risk assessment and management. For the supply chain, the dual mode production strategy and regionalized supply chains are successful, making it possible to keep the supply chain operational.

 

 

   
11    Ericsson | Third quarter report 2020    Other information


Table of Contents

Risk factors

 

Ericsson is exposed to a number of risks in its activities. To stimulate identification and support cross-functional treatment within the Ericsson Group, risks are grouped in a number of categories, including for example risks relating to technology, IPR, compliance, project execution, operations, products and services, treasury and accounting, the geopolitical environment, M&A, cyber security and occupational health and safety.

Ericsson’s risk management is embedded into strategy development and operational processes and is a part of the Ericsson Group Management System to ensure accountability, effectiveness, efficiency, business continuity and compliance. Risks are defined in both a short-term and long-term perspective and are related to long-term objectives as per the strategic direction as well as to short-term objectives.

Risk factors and uncertainties of relevance to Ericsson are described in the Annual Report 2019. Updates to these risk factors and uncertainties observed by Ericsson that are deemed of short-term relevance include, but are not limited to, the following:

Pandemics, such as for example the one caused by the novel Coronavirus, Covid-19, could severely impact our local and global operations

Pandemics, such as for example the one caused by the novel Coronavirus, could severely impact our local and global operations related to e.g. Service Delivery, Research & Development, Sales and Supply, as well as our customers and suppliers, with significant financial and other consequences. As an example, the Coronavirus pandemic has caused challenges and risks relating to travel and lockdowns limiting access to sites, transportation and logistics and impacting the flow of goods. Although we further strengthen business continuity measures to be able to continue to support our customers’ needs and mitigate any impact on our business, disruptions to the global economy and to the operations and business of our customers, suppliers, and partners could cause disturbances in our operations and may have a material adverse effects on our business and financial position.

Our ability to benefit from intellectual property rights (IPR), may be limited by the loss of patent licenses to or from third parties

Patent licensing agreements are generally multi-year and term based and the process for renewal of these licenses normally requires negotiations, particularly in conjunction with technology shifts and the introduction of new standards, such as 5G. Such renewals and negotiations may take time to resolve, sometimes involve litigation and may have material adverse impact on our business and financial position, including on the timing for and level of revenues from the IPR licensing contract portfolio.

Stockholm, October 21, 2020

Telefonaktiebolaget LM Ericsson

Börje Ekholm, President and CEO

Org. no. 556016-0680

Date for next report: January 26, 2021

 

 

   
12    Ericsson | Third quarter report 2020    Risk factors


Table of Contents

Editor’s note

 

Press briefing and live webcast

Ericsson invites media, investors and analysts to a conference call on October 21, 2020 starting at 9:00 am CET.

Live audio webcast of the conference call as well as supporting slides will be available at:

www.ericsson.com/investors and

www.ericsson.com/press

Replay of the conference call will be available approximately one hour after the call has ended and will remain available for seven days.

For further information, please contact:

Carl Mellander, Senior Vice President, Chief Financial Officer

Phone: +46 72 583 88 70

E-mail: investor.relations@ericsson.com or

media.relations@ericsson.com

Stella Medlicott, Senior Vice President, Chief Marketing and Communications Officer Phone: +46 73 095 65 39

E-mail: investor.relations@ericsson.com or

media.relations@ericsson.com

Telefonaktiebolaget LM Ericsson

Org. number: 556016-0680

Torshamnsgatan 21

SE-164 83 Stockholm

Phone: +46 10 719 00 00

www.ericsson.com

Investors

Peter Nyquist, Vice President,

Head of Investor Relations

Phone: +46 70 575 29 06

E-mail: peter.nyquist@ericsson.com

Lena Häggblom, Director,

Investor Relations

Phone: +46 72 593 27 78

E-mail: lena.haggblom@ericsson.com

Stefan Jelvin, Director,

Investor Relations

Phone: +46 70 986 02 27

E-mail: stefan.jelvin@ericsson.com

Media

Peter Olofsson, Head of Corporate Communication

Phone: +46 70 267 34 45

E-mail: media.relations@ericsson.com

Corporate Communications

Phone: +46 10 719 69 92

E-mail: media.relations@ericsson.com

 

 

   
13    Ericsson | Third quarter report 2020    Editor’s note


Table of Contents

Forward-looking statements

 

This report includes forward-looking statements, including statements reflecting management’s current views relating to the growth of the market, future market conditions, future events, financial condition, and expected operational and financial performance, including, the following:

 

    Our goals, targets, strategies, planning assumptions and operational or financial performance expectations, such as the investor day key messages and our targets and strategies as described in the introductory bullets, the CEO comments, the Segment descriptions and in Other information

 

    Industry trends, future characteristics and development of the markets in which we operate

 

    Our future liquidity, capital resources, capital expenditures, cost savings and profitability

 

    The expected demand for our existing and new products and services as well as plans to launch new products and services including research and development expenditures

 

    The ability to deliver on future plans and to realize potential for future growth

 

    The expected operational or financial performance of strategic cooperation activities and joint ventures

 

    The time until acquired entities and businesses will be integrated and accretive to income

 

    Technology and industry trends including the regulatory and standardization environment in which we operate, competition and our customer structure.

The words “believe,” “expect,” “foresee,” “anticipate,” “assume,” “intend,” “likely,” “projects,” “may,” “could,” “plan,” “estimate,” “forecast,” “will,” “should,” “would,” “predict,” “aim,” “ambition,” “seek,” “potential,” “target,” “might,” “continue,” or, in each case, their negative or variations, and similar words or expressions are used to identify forward-looking statements. Any statement that refers to expectations, projections or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.

We caution investors that these statements are subject to risks and uncertainties many of which are difficult to predict and generally beyond our control that could cause actual results to differ materially from those expressed in, or implied or projected by, the forward-looking information and statements.

Important factors that could affect whether and to what extent any of our forward-looking statements materialize include, but are not limited to, the factors described in the section “Risk Factors”, and in “Risk Factors” in the Annual Report 2019.

These forward-looking statements also represent our estimates and assumptions only as of the date that they were made. We expressly disclaim a duty to provide updates to these forward-looking statements, and the estimates and assumptions associated with them, after the date of this report, to reflect events or changes in circumstances or changes in expectations or the occurrence of anticipated events, whether as a result of new information, future events or otherwise, except as required by applicable law or stock exchange regulation

 

 

   
14    Ericsson | Third quarter report 2020    Forward-looking statements


Table of Contents

Auditors’ Review Report

 

Introduction

We have reviewed the condensed interim financial information (interim report) of Telefonaktiebolaget LM Ericsson (publ.) as of September 30, 2020, and the nine months period then ended. The board of directors and the CEO are responsible for the preparation and presentation of the interim report in accordance with IAS 34 and the Swedish Annual Accounts Act. Our responsibility is to express a conclusion on this interim report based on our review.

Scope of review

We conducted our review in accordance with the International Standard on Review Engagements ISRE 2410, Review of Interim Report Performed by the Independent Auditor of the Entity.

A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing, ISA, and other generally accepted auditing standards in Sweden. The procedures performed in a review do not enable us to obtain assurance that would make us aware of all significant matters that might be identified in an audit. Therefore, the conclusion expressed based on a review does not give the same level of assurance as a conclusion expressed based on an audit.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the interim report is not prepared, in all material respects, in accordance with IAS 34 and the Swedish Annual Accounts Act, regarding the Group, and with the Swedish Annual Accounts Act, regarding the Parent Company.

Stockholm, October 21, 2020

Deloitte AB

Thomas Strömberg

Authorized Public Accountant

 

 

   
15    Ericsson | Third quarter report 2020    Auditors’ Review Report


Table of Contents

Financial statements

and other information

 

Contents

 

Financial statements

     17  

Condensed consolidated income statement

     17  

Condensed statement of comprehensive income (loss)

     17  

Condensed consolidated balance sheet

     18  

Condensed consolidated statement of cash flows

     19  

Condensed consolidated statement of changes in equity

     20  

Condensed consolidated income statement – isolated quarters

     20  

Condensed consolidated statement of cash flows – isolated quarters

     21  

Condensed Parent Company income statement

     22  

Condensed Parent Company statement of comprehensive income (loss)

     22  

Condensed Parent Company balance sheet

     23  

Accounting polices and Explanatory notes

     24  

Accounting policies

     24  

Explanatory notes

     24  

Net sales by segment by quarter

     25  

Gross income by segment by quarter

     26  

Operating income (loss) by segment by quarter

     26  

Net sales by market area by quarter

     27  

Net sales by market area by segment

     28  

Top 5 countries in sales

     28  

IPR licensing revenues by segment by quarter

     29  

Provisions

     29  

Financial instruments

     30  

Information on investments

     30  

Other information

     31  

Number of employees

     31  

Alternative performance measures

     32  

Sales growth adjusted for comparable units and currency

     32  

Items excluding restructuring charges

     33  

EBITA and EBITA margin

     34  

Rolling four quarters of net sales and operating margin excluding restructuring charges (%)

     34  

Gross cash and net cash, end of period

     35  

Capital employed

     35  

Capital turnover

     35  

Return on capital employed

     36  

Equity ratio

     36  

Return on equity

     36  

Adjusted earnings (loss) per share (non-IFRS)

     37  

Free cash flow and free cash flow before M&A

     37  

Sales growth by segment adjusted for comparable units and currency

     38  

Gross margin by segment by quarter

     38  

Operating margin by segment by quarter

     38  

Restructuring charges by function

     39  

Restructuring charges by segment

     39  

Gross income and gross margin excluding restructuring charges by segment

     40  

Operating income (loss) and operating margin excluding restructuring charges by segment

     41  

EBITA and EBITA margin by segment by quarter

     42  

Other ratios

     42  
 

 

   
16    Ericsson | Third quarter report 2020    Financial statements and other information


Table of Contents

Financial statements

Condensed consolidated income statement

 

     Q3     Jan-Sep  

SEK million

   2020      2019      Change     2020      2019      Change  

Net sales

     57,472        57,127        1     162,800        160,843        1

Cost of sales

     -32,710        -35,587        -8     -97,333        -100,453        -3
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Gross income

     24,762        21,540        15     65,467        60,390        8
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Research and development expenses

     -10,101        -9,497        6     -29,281        -28,182        4

Selling and administrative expenses

     -5,992        -4,920        22     -19,282        -17,915        8

Impairment losses on trade receivables

     -28        200        -114     -146        910        -116
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating expenses

     -16,121        -14,217        13     -48,709        -45,187        8
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Other operating income and expenses

     61        -11,305        -101     281        -10,466        -103

Share in earnings of JV and associated companies

     -59        -214        -72     -239        -298        -20
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating income (loss)

     8,643        -4,196        -306     16,800        4,439        278
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Financial income and expenses, net

     109        -685        -116     -501        -1,731        -71
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income after financial items

     8,752        -4,881        -279     16,299        2,708        502
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income tax

     -3,186        -2,013        58     -5,868        -5,352        10
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss)

     5,566        -6,894        -181     10,431        -2,644        -495
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to:

                

Owners of the Parent Company

     5,353        -6,229          9,961        -2,207     

Non-controlling interests

     213        -665          470        -437     

Other information

                

Average number of shares, basic (million)

     3,326        3,308          3,322        3,304     

Earnings (loss) per share, basic (SEK) 1)

     1.61        -1.89          3.00        -0.67     

Earnings (loss) per share, diluted (SEK) 2)

     1.61        -1.89          3.00        -0.67     

 

1) 

Based on net income (loss) attributable to owners of the Parent Company.

2) 

Potential ordinary shares are not considered when their conversion to ordinary shares would increase earnings per share.

Condensed statement of comprehensive income (loss)

 

     Q3     Jan-Sep  

SEK million

   2020      2019     2020      2019  

Net income (loss)

     5,566        -6,894       10,431        -2,644  
  

 

 

    

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss)

          

Items that will not be reclassified to profit or loss

          

Remeasurements of defined benefits pension plans incl. asset ceiling

     -701        -2,716       -3,902        -8,166  

Revaluation of borrowings due to change in credit risk

     -269        81       424        -454  
  

 

 

    

 

 

   

 

 

    

 

 

 

Tax on items that will not be reclassified to profit or loss

     148        629       707        1,886  
  

 

 

    

 

 

   

 

 

    

 

 

 

Items that have been or may be reclassified to profit or loss

          

Cash flow hedge reserve

          

Gains/ losses arising during the period

     71        -374       -24        -580  

Reclassification adjustments on gains/ losses included in profit or loss

     70                211           

Changes in cumulative translation adjustments

     -887        2,092       -2,366        3,687  

Share of other comprehensive income (loss) on JV and associated companies

     -24        68       -26        114  

Tax on items that have been or may be reclassified to profit or loss

     -30        77       -39        119  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other comprehensive income (loss), net of tax

     -1,622        -143       -5,015        -3,394  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total comprehensive income (loss)

     3,944        -7,037       5,416        -6,038  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total comprehensive income (loss) attributable to:

          

Owners of the Parent Company

     3,717        -6,409       4,963        -5,656  

Non-controlling interests

     227        -628       453        -382  

 

   
17    Ericsson | Third quarter report 2020    Financial statements


Table of Contents

Condensed consolidated balance sheet

 

     Sep 30      Jun 30      Dec 31  

SEK million

   2020      2020      2019  

Assets

        

Non-current assets

        

Intangible assets

        

Capitalized development expenses

     3,978        4,078        4,040  

Goodwill

     30,314        31,130        31,200  

Intellectual property rights, brands and other intangible assets

     2,091        2,189        2,491  

Property, plant and equipment

     13,882        13,996        13,850  

Right-of-use assets

     8,243        8,251        8,487  

Financial assets

        

Equity in JV and associated companies

     1,317        1,415        1,565  

Other investments in shares and participations

     1,420        1,472        1,432  

Customer finance, non-current

     1,269        1,553        2,262  

Interest-bearing securities, non-current

     23,898        24,025        20,354  

Other financial assets, non-current

     5,312        5,944        5,614  

Deferred tax assets

     29,726        31,082        31,174  
  

 

 

    

 

 

    

 

 

 
     121,450        125,135        122,469  
  

 

 

    

 

 

    

 

 

 

Current assets

        

Inventories

     32,804        31,917        30,863  

Contract assets

     11,468        10,971        12,171  

Trade receivables

     38,180        38,325        43,069  

Customer finance, current

     1,878        1,001        1,494  

Other current receivables

     17,081        18,035        14,479  

Interest-bearing securities, current

     5,552        5,739        6,759  

Cash and cash equivalents

     48,774        45,655        45,079  
  

 

 

    

 

 

    

 

 

 
     155,737        151,643        153,914  
  

 

 

    

 

 

    

 

 

 

Total assets

     277,187        276,778        276,383  
  

 

 

    

 

 

    

 

 

 

Equity and liabilities

        

Equity

        

Stockholders’ equity

     82,830        79,005        82,559  

Non-controlling interest in equity of subsidiaries

     -345        -533        -681  
  

 

 

    

 

 

    

 

 

 
     82,485        78,472        81,878  
  

 

 

    

 

 

    

 

 

 

Non-current liabilities

        

Post-employment benefits

     36,515        38,605        35,817  

Provisions, non-current

     2,378        2,240        2,679  

Deferred tax liabilities

     1,102        1,164        1,224  

Borrowings, non-current

     22,132        22,582        28,257  

Lease liabilities, non-current

     7,426        7,400        7,595  

Other non-current liabilities

     1,759        1,812        2,114  
  

 

 

    

 

 

    

 

 

 
     71,312        73,803        77,686  
  

 

 

    

 

 

    

 

 

 

Current liabilities

        

Provisions, current

     8,544        8,363        8,244  

Borrowings, current

     14,587        15,290        9,439  

Lease liabilities, current

     2,257        2,302        2,287  

Contract liabilities

     29,393        31,532        29,041  

Trade payables

     30,704        32,182        30,403  

Other current liabilities

     37,905        34,834        37,405  
  

 

 

    

 

 

    

 

 

 
     123,390        124,503        116,819  
  

 

 

    

 

 

    

 

 

 

Total equity and liabilities

     277,187        276,778        276,383  
  

 

 

    

 

 

    

 

 

 

 

   
18    Ericsson | Third quarter report 2020    Financial statements


Table of Contents

Condensed consolidated statement of cash flows

 

     Q3      Jan-Sep      Jan-Dec  

SEK million

   2020      2019      2020      2019      2019  

Operating activities

              

Net income

     5,566        -6,894        10,431        -2,644        1,840  

Adjustments for

              

Taxes

     2,465        -411        3,177        703        1,652  

Earnings/dividends in JV and associated companies

     74        278        259        373        406  

Depreciation, amortization and impairment losses

     2,105        2,199        6,381        6,799        9,089  

Other

     -541        508        -247        882        1,079  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     9,669        -4,320        20,001        6,113        14,066  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Changes in operating net assets

              

Inventories

     -1,578        1,077        -3,369        -4,939        261  

Customer finance, current and non-current

     -635        -265        489        -792        -858  

Trade receivables and contract assets

     -1,513        6,528        4,046        14,211        10,995  

Trade payables

     -624        -2,913        1,304        -1,060        -372  

Provisions and post-employment benefits

     -1,897        10,719        -2,868        6,780        -3,729  

Contract liabilities

     -1,501        -3,988        1,486        2,834        -1,579  

Other operating assets and liabilities, net

     3,358        151        -6,059        -6,770        -1,911  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     -4,390        11,309        -4,971        10,264        2,807  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flow from operating activities

     5,279        6,989        15,030        16,377        16,873  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investing activities

              

Investments in property, plant and equipment

     -963        -1,231        -3,403        -3,643        -5,118  

Sales of property, plant and equipment

     55        122        150        538        744  

Acquisitions/divestments of subsidiaries and other operations, net

     -89        -466        -342        -164        -1,505  

Product development

     -167        -313        -640        -1,216        -1,545  

Other investing activities

     301        -56        133        -257        -331  

Interest-bearing securities

     -246        -1,114        -2,537        5,973        4,214  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flow from investing activities

     -1,109        -3,058        -6,639        1,231        -3,541  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financing activities

              

Dividends paid

     -42        -141        -2,540        -4,435        -4,450  

Repayment of lease liabilities

     -567        -1,052        -1,781        -2,279        -2,990  

Other financing activities

     -277        1,396        308        -294        540  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flow from financing activities

     -886        203        -4,013        -7,008        -6,900  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Effect of exchange rate changes on cash

     -165        1,550        -683        2,194        258  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in cash and cash equivalents

     3,119        5,684        3,695        12,794        6,690  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, beginning of period

     45,655        45,499        45,079        38,389        38,389  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, end of period

     48,774        51,183        48,774        51,183        45,079  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

   
19    Ericsson | Third quarter report 2020    Financial statements


Table of Contents

Condensed consolidated statement of changes in equity

 

     Jan-Sep      Jan-Dec  

SEK million

   2020      2019      2019  

Opening balance

     81,878        87,770        87,770  

Adjustment due to new accounting standards 1)

     —          -249        -249  
  

 

 

    

 

 

    

 

 

 

Adjusted opening balance

     81,878        87,521        87,521  
  

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss)

     5,416        -6,038        -1,750  

Sale/repurchase of own shares

     163        125        197  

Long-term variable compensation plans

     123        303        377  

Dividends to shareholders 2)

     -5,095        -4,435        -4,450  

Transactions with non-controlling interests

     —          -1        -17  
  

 

 

    

 

 

    

 

 

 

Closing balance

     82,485        77,475        81,878  
  

 

 

    

 

 

    

 

 

 

 

1) 

Opening balance adjustment in 2019 due to IFRS 16.

2) 

SEK 0.75 per share of the dividend decided by the AGM in April will be paid out in Q4 2020.

Condensed consolidated income statement – isolated quarters

 

     2020      2019  

Isolated quarters, SEK million

   Q3      Q2      Q1      Q4      Q3      Q2      Q1  

Net sales

     57,472        55,578        49,750        66,373        57,127        54,810        48,906  

Cost of sales

     -32,710        -34,661        -29,962        -41,939        -35,587        -34,739        -30,127  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross income

     24,762        20,917        19,788        24,434        21,540        20,071        18,779  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Research and development expenses

     -10,101        -10,035        -9,145        -10,633        -9,497        -9,518        -9,167  

Selling and administrative expenses

     -5,992        -7,052        -6,238        -8,222        -4,920        -6,964        -6,031  

Impairment losses on trade receivables

     -28        42        -160        -173        200        151        559  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating expenses

     -16,121        -17,045        -15,543        -19,028        -14,217        -16,331        -14,639  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other operating income and expenses 1)

     61        131        89        756        -11,305        66        773  

Share in earnings of JV and associated companies

     -59        -152        -28        -37        -214        -67        -17  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss)

     8,643        3,851        4,306        6,125        -4,196        3,739        4,896  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial income and expenses, net

     109        292        -902        -71        -685        -441        -605  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income after financial items

     8,752        4,143        3,404        6,054        -4,881        3,298        4,291  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Taxes

     -3,186        -1,558        -1,124        -1,570        -2,013        -1,451        -1,888  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     5,566        2,585        2,280        4,484        -6,894        1,847        2,403  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to:

                    

Owners of the Parent Company

     5,353        2,452        2,156        4,430        -6,229        1,705        2,317  

Non-controlling interests

     213        133        124        54        -665        142        86  

Other information

                    

Average number of shares, basic (million)

     3,326        3,322        3,317        3,313        3,308        3,304        3,300  

Earnings (loss) per share, basic (SEK) 2)

     1.61        0.74        0.65        1.34        -1.89        0.52        0.70  

Earnings (loss) per share, diluted (SEK) 3)

     1.61        0.74        0.65        1.33        -1.89        0.51        0.70  

 

1) 

Includes cost provisions related to the resolution of the SEC and DOJ investigations of SEK -11.5 b. in Q3 2019 and a partial release of the same provision of SEK 0.7 b. in Q4 2019.

2) 

Based on net income (loss) attributable to owners of the Parent Company.

3) 

Potential ordinary shares are not considered when their conversion to ordinary shares would increase earnings per share.

 

   
20    Ericsson | Third quarter report 2020    Financial statements


Table of Contents

Condensed consolidated statement of cash flows – isolated quarters

 

     2020      2019  

Isolated quarters, SEK million

   Q3      Q2      Q1      Q4      Q3      Q2      Q1  

Operating activities

                    

Net income (loss)

     5,566        2,585        2,280        4,484        -6,894        1,847        2,403  

Adjustments for

                    

Taxes

     2,465        1,132        -420        949        -411        310        804  

Earnings/ dividends in JV and associated companies

     74        155        30        33        278        71        24  

Depreciation, amortization and impairment losses

     2,105        2,156        2,120        2,290        2,199        2,274        2,326  

Other

     -541        -440        734        197        508        450        -76  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     9,669        5,588        4,744        7,953        -4,320        4,952        5,481  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Changes in operating net assets

                    

Inventories

     -1,578        -1,253        -538        5,200        1,077        -3,065        -2,951  

Customer finance, current and non-current

     -635        307        817        -66        -265        384        -911  

Trade receivables and contract assets

     -1,513        0        5,559        -3,216        6,528        3,338        4,345  

Trade payables

     -624        4,104        -2,176        688        -2,913        1,833        20  

Provisions and post-employment benefits

     -1,897        -1,189        218        -10,509        10,719        -480        -3,459  

Contract liabilities

     -1,501        -1,000        3,987        -4,413        -3,988        -1,641        8,463  

Other operating assets and liabilities, net

     3,358        -1,108        -8,309        4,859        151        -1,698        -5,223  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     -4,390        -139        -442        -7,457        11,309        -1,329        284  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flow from operating activities

     5,279        5,449        4,302        496        6,989        3,623        5,765  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Investing activities

                    

Investments in property, plant and equipment

     -963        -1,327        -1,113        -1,475        -1,231        -1,098        -1,314  

Sales of property, plant and equipment

     55        69        26        206        122        184        232  

Acquisitions/divestments of subsidiaries and other operations, net

     -89        -45        -208        -1,341        -466        3        299  

Product development

     -167        -211        -262        -329        -313        -446        -457  

Other investing activities

     301        -126        -42        -74        -56        -36        -165  

Interest-bearing securities

     -246        1,141        -3,432        -1,759        -1,114        2,414        4,673  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flow from investing activities

     -1,109        -499        -5,031        -4,772        -3,058        1,021        3,268  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financing activities

                    

Dividends paid

     -42        -2,489        -9        -15        -141        -3,308        -986  

Repayment of lease liabilities

     -567        -618        -596        -711        -1,052        -623        -604  

Other financing activities

     -277        -1,451        2,036        834        1,396        -680        -1,010  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash flow from financing activities

     -886        -4,558        1,431        108        203        -4,611        -2,600  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Effect of exchange rate changes on cash

     -165        -3,084        2,566        -1,936        1,550        13        631  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net change in cash and cash equivalents

     3,119        -2,692        3,268        -6,104        5,684        46        7,064  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, beginning of period

     45,655        48,347        45,079        51,183        45,499        45,453        38,389  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, end of period

     48,774        45,655        48,347        45,079        51,183        45,499        45,453  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

   
21    Ericsson | Third quarter report 2020    Financial highlights


Table of Contents

Condensed Parent Company income statement

 

     Q3      Jan-Sep      Jan-Dec  

SEK million

   2020      2019      2020      2019      2019  

Net sales

     —          —          —          —          —    

Cost of sales

     —          —          —          —          —    

Gross income

                                  

Operating expenses

     -503        -275        -995        -1,032        -1,531  

Other operating income and expenses 1)

     633        -10,925        1,828        -9,957        -8,148  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     130        -11,200        833        -10,989        -9,679  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial net

     1,327        1,030        2,899        1,626        6,610  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income after financial items

     1,457        -10,170        3,732        -9,363        -3,069  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Transfers to (-)/from untaxed reserves

     —          —          —          —          -1,961  

Taxes

     -193        -189        -511        -264        87  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

     1,264        -10,359        3,221        -9,627        -4,943  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

1) 

Includes costs of SEK -10.7 billion in 2019 related to the resolution of the SEC and DOJ investigations.

Condensed Parent Company statement of comprehensive income (loss)

 

     Q3      Jan-Sep      Jan-Dec  

SEK million

   2020      2019      2020      2019      2019  

Net income (loss)

     1,264        -10,359        3,221        -9,627        -4,943  

Revaluation of borrowings due to change in credit risk

     -269        81        424        -454        -651  

Tax on items that will not be reclassified to profit or loss

     56        -17        -87        93        134  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total other comprehensive income, net of tax

     -213        64        337        -361        -517  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss)

     1,051        -10,295        3,558        -9,988        -5,460  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

   
22    Ericsson | Third quarter report 2020    Financial highlights


Table of Contents

Condensed Parent Company balance sheet

 

     Sep 30      Dec 31  

SEK million

   2020      2019  

Assets

     

Fixed assets

     

Intangible assets

     34        58  

Tangible assets

     388        303  

Financial assets ¹)

     110,477        106,156  
  

 

 

    

 

 

 
     110,899        106,517  
  

 

 

    

 

 

 

Current assets

     

Receivables

     26,753        23,166  

Short-term investments

     5,274        6,328  

Cash and cash equivalents

     37,095        29,800  
  

 

 

    

 

 

 
     69,122        59,294  
  

 

 

    

 

 

 

Total assets

     180,021        165,811  
  

 

 

    

 

 

 

Stockholders’ equity, provisions and liabilities

     

Equity

     

Restricted equity

     48,164        48,164  

Non-restricted equity

     31,005        32,222  
  

 

 

    

 

 

 
     79,169        80,386  
  

 

 

    

 

 

 

Provisions

     627        668  

Non-current liabilities

     22,354        28,341  

Current liabilities

     77,871        56,416  
  

 

 

    

 

 

 

Total stock holders’ equity, provisions and liabilities

     180,021        165,811  
  

 

 

    

 

 

 

¹)   Of which interest-bearing securities, non-current

     23,898        20,354  

 

   
23    Ericsson | Third quarter report 2020    Financial highlights


Table of Contents

Accounting policies and Explanatory notes

Accounting policies

 

The group

This condensed consolidated interim financial report for the quarterly reporting period ended September 30, 2020, has been prepared in accordance with Accounting Standard IAS 34 “Interim Financial Reporting”. The term “IFRS” used in this document refers to the application of IAS and IFRS as well as interpretations of these standards as issued by IASB’s Standards Interpretation Committee (SIC) and IFRS Interpretations Committee (IFRIC). The accounting policies adopted are consistent with those of the annual report for the year ended December 31, 2019 and should be read in conjunction with that annual report. There are no amendments of IFRS during 2020 that are estimated to have a material impact on the result and financial position of the Company.

Explanatory notes

Covid-19 impacts on the Financial statements

As noted in the previous interim reports, the Covid-19 pandemic has impacted certain lines within our financial statements. Fiscal stimulus provided by governments worldwide has reduced government bond yields and resulted in the significant movement in the capital and equity markets in Q1. These trends have largely reversed as the economic conditions improved in subsequent quarters. This meant that movements in certain line items reported in Q1 have largely been offset or reversed in subsequent quarters to Q3. Figures below are year to date.

In Sweden, government bond yields decreased significantly in Q1, resulting in a significant increase in the net pensions liability. The market conditions have since stabilized, although government bond yields are still lower than that at the end of 2019. The higher pensions liability was offset by cash contributions into the pension trust of SEK 3.0 b and improved trust asset performance in subsequent quarters, resulting in a net increase in pension liability of SEK 0.5 b at Q3.

Borrowings issued by the Parent Company are held at fair value with changes in value due to changes in credit risk recognized in Other comprehensive income (OCI). The widening of credit spreads for corporate bonds in Q1 resulted in a positive impact in equity. Credit spreads on corporate bonds have decreased substantially in subsequent quarters, resulting in a positive impact of SEK 0.4 b. recognized in the OCI at Q3.

Foreign exchanges rates continued to fluctuate significantly during the period. Since the peak in Q1, USD has weakened against SEK in subsequent quarters. This resulted in a net gain on the hedge loan balances used to manage FX execution risk of SEK 0.4 b. recognized within Financial income and expenses in the Consolidated income statement at Q3.

A stronger SEK in Q2 and Q3 also resulted in a negative currency translation adjustment of SEK -2.4 b. on consolidation, recognized in the OCI at Q3.

The Company currently expect no material changes to expected future cash flows which could impact recoverability of assets such as deferred tax assets and intangible assets. Risk assessment on the business plans is carried out on a regular basis and an impairment review will be performed if conditions suggest that such assets may be impaired.

The Company also assessed the wider economic impact in the foreseeable future on the expected credit losses model for trade receivables. The Company concluded that the impact is not material but will continue to perform such analysis on a regular basis.

 

 

   
24    Ericsson | Third quarter report 2020    Accounting policies and Explanatory notes


Table of Contents

Net sales by segment by quarter

 

     2020     2019  

Isolated quarters, SEK million

   Q3     Q2     Q1     Q4     Q3     Q2     Q1  

Networks

     41,659       39,827       35,126       44,448       39,261       37,819       33,481  

Of which Products

     30,992       28,966       24,748       31,159       27,500       26,698       23,765  

Of which Services

     10,667       10,861       10,378       13,289       11,761       11,121       9,716  

Digital Services

     8,733       8,575       7,345       13,168       9,881       8,991       7,817  

Of which Products

     4,621       4,598       3,798       7,338       5,594       4,611       3,937  

Of which Services

     4,112       3,977       3,547       5,830       4,287       4,380       3,880  

Managed Services

     5,498       5,573       5,714       7,027       6,359       6,323       5,856  

Emerging Business and Other

     1,582       1,603       1,565       1,730       1,626       1,677       1,752  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     57,472       55,578       49,750       66,373       57,127       54,810       48,906  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2020     2019  

Sequential change, percent

   Q3     Q2     Q1     Q4     Q3     Q2     Q1  

Networks

     5     13     -21     13     4     13     -20

Of which Products

     7     17     -21     13     3     12     -20

Of which Services

     -2     5     -22     13     6     14     -18

Digital Services

     2     17     -44     33     10     15     -40

Of which Products

     1     21     -48     31     21     17     -47

Of which Services

     3     12     -39     36     -2     13     -30

Managed Services

     -1     -2     -19     11     1     8     -15

Emerging Business and Other

     -1     2     -10     6     -3     -4     -23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     3     12     -25     16     4     12     -23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2020     2019  

Year over Year change, percent

   Q3     Q2     Q1     Q4     Q3     Q2     Q1  

Networks

     6     5     5     7     9     17     17

Of which Products

     13     8     4     5     9     20     22

Of which Services

     -9     -2     7     12     11     10     6

Digital Services

     -12     -5     -6     1     10     2     8

Of which Products

     -17     0     -4     -2     22     3     0

Of which Services

     -4     -9     -9     5     -3     0     17

Managed Services

     -14     -12     -2     2     -2     -3     -1

Emerging Business and Other

     -3     -4     -11     -24     -33     -18     6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1     1     2     4     6     10     13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2020     2019  

Year to date, SEK million

   Jan-Sep     Jan-Jun     Jan-Mar     Jan-Dec     Jan-Sep     Jan-Jun     Jan-Mar  

Networks

     116,612       74,953       35,126       155,009       110,561       71,300       33,481  

Of which Products

     84,706       53,714       24,748       109,122       77,963       50,463       23,765  

Of which Services

     31,906       21,239       10,378       45,887       32,598       20,837       9,716  

Digital Services

     24,653       15,920       7,345       39,857       26,689       16,808       7,817  

Of which Products

     13,017       8,396       3,798       21,480       14,142       8,548       3,937  

Of which Services

     11,636       7,524       3,547       18,377       12,547       8,260       3,880  

Managed Services

     16,785       11,287       5,714       25,565       18,538       12,179       5,856  

Emerging Business and Other

     4,750       3,168       1,565       6,785       5,055       3,429       1,752  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     162,800       105,328       49,750       227,216       160,843       103,716       48,906  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     2020     2019  

Year over year change, percent

   Jan-Sep     Jan-Jun     Jan-Mar     Jan-Dec     Jan-Sep     Jan-Jun     Jan-Mar  

Networks

     5     5     5     12     14     17     17

Of which Products

     9     6     4     13     16     21     22

Of which Services

     -2     2     7     10     9     9     6

Digital Services

     -8     -5     -6     5     6     4     8

Of which Products

     -8     -2     -4     5     9     2     0

Of which Services

     -7     -9     -9     4     4     8     17

Managed Services

     -9     -7     -2     -1     -2     -2     -1

Emerging Business and Other

     -6     -8     -11     -19     -18     -7     6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1     2     2     8     9     11     13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

   
25    Ericsson | Third quarter report 2020    Accounting policies and Explanatory notes


Table of Contents

Gross income by segment by quarter

 

     2020      2019  

Isolated quarters, SEK million

   Q3      Q2      Q1      Q4      Q3      Q2      Q1  

Networks

     19,375        16,022        15,586        18,265        16,327        15,670        14,455  

Digital Services

     3,787        3,738        2,929        4,898        3,749        3,311        2,878  

Managed Services

     1,093        955        933        1,039        1,136        779        1,036  

Emerging Business and Other

     507        202        340        232        328        311        410  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     24,762        20,917        19,788        24,434        21,540        20,071        18,779  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2020      2019  

Year to date, SEK million

   Jan-Sep      Jan-Jun      Jan-Mar      Jan-Dec      Jan-Sep      Jan-Jun      Jan-Mar  

Networks

     50,983        31,608        15,586        64,717        46,452        30,125        14,455  

Digital Services

     10,454        6,667        2,929        14,836        9,938        6,189        2,878  

Managed Services

     2,981        1,888        933        3,990        2,951        1,815        1,036  

Emerging Business and Other

     1,049        542        340        1,281        1,049        721        410  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     65,467        40,705        19,788        84,824        60,390        38,850        18,779  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income (loss) by segment by quarter

     2020      2019  

Isolated quarters, SEK million

   Q3      Q2      Q1      Q4      Q3      Q2      Q1  

Networks

     9,165        5,255        5,827        6,399        7,216        5,680        5,472  

Digital Services

     -591        -697        -1,417        -164        -660        -1,405        -1,798  

Managed Services

     491        263        408        292        562        203        1,252  

Emerging Business and Other

     -422        -970        -512        -402        -11,314        -739        -30  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8,643        3,851        4,306        6,125        -4,196        3,739        4,896  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2020      2019  

Year to date, SEK million

   Jan-Sep      Jan-Jun      Jan-Mar      Jan-Dec      Jan-Sep      Jan-Jun      Jan-Mar  

Networks

     20,247        11,082        5,827        24,767        18,368        11,152        5,472  

Digital Services

     -2,705        -2,114        -1,417        -4,027        -3,863        -3,203        -1,798  

Managed Services

     1,162        671        408        2,309        2,017        1,455        1,252  

Emerging Business and Other

     -1,904        -1,482        -512        -12,485        -12,083        -769        -30  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     16,800        8,157        4,306        10,564        4,439        8,635        4,896  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

   
26    Ericsson | Third quarter report 2020    Accounting policies and Explanatory notes


Table of Contents

Net sales by market area by quarter

 

     2020     2019  

Isolated quarters, SEK million

   Q3     Q2     Q1     Q4     Q3     Q2     Q1  

South East Asia, Oceania and India

     7,801       6,582       5,917       9,231       7,432       6,965       6,148  

North East Asia

     8,814       7,790       3,907       9,704       6,356       6,516       3,824  

North America

     18,356       18,407       17,911       17,368       18,985       17,699       16,171  

Europe and Latin America 1) 2)

     13,318       13,061       12,241       17,489       14,308       14,085       13,124  

Middle East and Africa

     5,520       5,431       5,829       8,426       6,046       5,641       5,412  

Other 1) 2)

     3,663       4,307       3,945       4,155       4,000       3,904       4,227  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     57,472       55,578       49,750       66,373       57,127       54,810       48,906  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

1)   Of which in Sweden

     249       284       227       235       13       149       192  

2)   Of which in EU*

     7,090       7,278       6,259       10,572       8,815       8,385       7,957  
     2020     2019  

Sequential change, percent

   Q3     Q2     Q1     Q4     Q3     Q2     Q1  

South East Asia, Oceania and India

     19     11     -36     24     7     13     -25

North EastAsia

     13     99     -60     53     -2     70     -54

North America

     0     3     3     -9     7     9     -10

Europe and Latin America 1) 2)

     2     7     -30     22     2     7     -27

Middle East and Africa

     2     -7     -31     39     7     4     -21

Other 1) 2)

     -15     9     -5     4     2     -8     -5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     3     12     -25     16     4     12     -23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

1)   Of which in Sweden

     -12     25     -3     1708     -91     -22     -49

2)   Of which in EU*

     -3     16     -29     20     5     5     -23
     2020     2019  

Year over year change, percent

   Q3     Q2     Q1     Q4     Q3     Q2     Q1  

South East Asia, Oceania and India

     5     -5     -4     12     -7     0     -4

North East Asia

     39     20     2     16     10     37     13

North America

     -3     4     11     -4     27     23     43

Europe and Latin America 1) 2)

     -7     -7     -7     -2     -3     1     1

Middle East and Africa

     -9     -4     8     23     4     -3     -8

Other 1) 2)

     -8     10     -7     -6     -13     -1     21
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1     1     2     4     6     10     13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

1)   Of which in Sweden

     1815     91     18     -37     -97     -75     -79

2)   Of which in EU*

     -4     5     -4     2     4     -3     -7
     2020     2019  

Year to date, SEK million

   Jan-Sep     Jan-Jun     Jan-Mar     Jan-Dec     Jan-Sep     Jan-Jun     Jan-Mar  

South East Asia, Oceania and India

     20,300       12,499       5,917       29,776       20,545       13,113       6,148  

North East Asia

     20,511       11,697       3,907       26,400       16,696       10,340       3,824  

North America

     54,674       36,318       17,911       70,223       52,855       33,870       16,171  

Europe and Latin America 1) 2)

     38,620       25,302       12,241       59,006       41,517       27,209       13,124  

Middle East and Africa

     16,780       11,260       5,829       25,525       17,099       11,053       5,412  

Other 1) 2)

     11,915       8,252       3,945       16,286       12,131       8,131       4,227  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     162,800       105,328       49,750       227,216       160,843       103,716       48,906  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

1)   Of which in Sweden

     760       511       227       589       354       341       192  

2)   Of which in EU*

     20,627       13,537       6,259       35,729       25,157       16,342       7,957  
     2020     2019  

Year to date, year over year change, percent

   Jan-Sep     Jan-Jun     Jan-Mar     Jan-Dec     Jan-Sep     Jan-Jun     Jan-Mar  

South East Asia, Oceania and India

     -1     -5     -4     1     -4     -2     -4

North East Asia

     23     13     2     18     20     27     13

North America

     3     7     11     20     30     32     43

Europe and Latin America 1) 2)

     -7     -7     -7     -1     0     1     1

Middle East and Africa

     -2     2     8     5     -2     -5     -8

Other 1) 2)

     -2     1     -7     -1     1     9     21
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     1     2     2     8     9     11     13
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

1)   Of which in Sweden

     115     50     18     -75     -82     -77     -79

2)   Of which in EU*

     -1     1     -4     -1     -2     -5     -7

 

*)

No sales to UK are included as from 2020.

 

   
27    Ericsson | Third quarter report 2020    Accounting policies and Explanatory notes


Table of Contents

Net sales by market area by segment

 

     Q3 2020     Jan-Sep 2020  

SEK million

   Networks     Digital
Services
    Managed
Services
    Emerging
Business
and Other
    Total     Networks     Digital
Services
    Managed
Services
    Emerging
Business
and Other
    Total  

South East Asia, Oceania and India

     5,560       1,085       1,153       3       7,801       14,237       2,935       3,100       28       20,300  

North East Asia

     7,432       1,130       164       88       8,814       16,594       3,167       539       211       20,511  

North America

     15,616       1,984       745       11       18,356       46,618       5,264       2,746       46       54,674  

Europe and Latin America

     8,056       2,728       2,443       91       13,318       23,074       7,745       7,535       266       38,620  

Middle East and Africa

     3,108       1,416       993       3       5,520       9,693       4,209       2,865       13       16,780  

Other

     1,887       390       0       1,386       3,663       6,396       1,333       0       4,186       11,915  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     41,659       8,733       5,498       1,582       57,472       116,612       24,653       16,785       4,750       162,800  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share of total

     72     15     10     3     100     72     15     10     3     100

 

     Q3 2020  

Sequential change, percent

   Networks     Digital
Services
    Managed
Services
    Emerging
Business
and
Other
    Total  

South East Asia, Oceania and India

     24     1     12     -63     19

North East Asia

     16     -4     -5     54     13

North America

     -1     14     -15     -52     0

Europe and Latin America

     3     4     -3     2     2

Middle East and Africa

     3     -2     2     —         2

Other

     -21     -22     -100     -3     -15
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     5     2     -1     -1     3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Q3 2020     Jan-Sep 2020  

Year over year change, percent

   Networks     Digital
Services
    Managed
Services
    Emerging
Business
and Other
    Total     Networks     Digital
Services
    Managed
Services
    Emerging
Business
and Other
    Total  

South East Asia, Oceania and India

     1     17     18     -77     5     -5     10     11     -30     -1

North East Asia

     54     -13     -26     319     39     28     9     -22     132     23

North America

     4     -26     -39     -58     -3     9     -21     -21     -43     3

Europe and Latin America

     -2     -8     -19     -17     -7     -4     -9     -14     -9     -7

Middle East and Africa

     -11     -11     5     -67     -9     0     -9     4     8     -2

Other

     -11     -10     -100     -4     -8     2     3     —         -8     -2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     6     -12     -14     -3     1     5     -8     -9     -6     1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Top 5 countries in sales

 

     Q3     Jan-Sep  

Country, percentage of net sales

   2020     2019     2020     2019  

United States

     34     35     35     34

China

     10     7     8     6

Australia

     4     3     4     3

Japan

     4     4     4     3

Saudi Arabia

     4     3     4     3

 

   
28    Ericsson | Third quarter report 2020    Accounting policies and Explanatory notes


Table of Contents

IPR licensing revenues by segment by quarter

 

     2020      2019  

Isolated quarters, SEK million

   Q3      Q2      Q1      Q4      Q3      Q2      Q1  

Networks

     1,773        2,282        2,019        2,014        1,972        1,845        2,066  

Digital Services

     389        501        443        443        433        404        454  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,162        2,783        2,462        2,457        2,405        2,249        2,520  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2020      2019  

Year to date, SEK million

   Jan-Sep