ERIXF Telefon AB LM Ericsson Sweden (PK)

Our performance during 2019 puts us on track to reach our targets for 2020 and 2022. Our focused strategy with increased investments in R&D combined with operational efficiency is paying off. We have regained technology leadership, recovered previously lost ground in several markets and improved the financial results. Today, we are a leader in 5G with 78 commercial 5G agreements with unique operators and 24 live 5G networks on four continents. Operating margin¹ excluding costs related to the resolution of the US SEC and DOJ investigations and restructuring charges was 9.7% for full-year 2019, almost reaching the target of more than 10% one year early.

Operating income was impacted by increased operating expenses. The increase is related to the Kathrein business acquisition, increased investments in digitalization and added resources to strengthen security as well as our Ethics and Compliance program. For 2020 we expect somewhat higher operating expenses, which will not jeopardize our financial targets.

Networks gross margin² was solid in the quarter at 41% including effects from strategic contracts which reflects the strong business fundamentals. Due to the uncertainty related to an announced operator merger, we saw a slowdown in our North American business in Q4, resulting in North America having the lowest share of total sales for some time. However, the underlying business fundamentals in North America remain strong. The negative growth in North America was more than offset by growth in Asia and the Middle East. It is still too early to assess possible volumes and price levels for the expected deployment of 5G in China, and we expect that the initial challenging margins will shift to positive margins over the lifespan of the contracts.

The Kathrein acquisition and increased investments were the main reasons why Networks operating margin² declined to 14.5% in Q4. The acquisition is strategically important to strengthen our capabilities in antennas. While we are executing on the integration plan, temporarily lower production and sales had a negative impact on margins in the quarter. We expect a gradual improvement as the integration progresses and a new antenna portfolio is developed, however we expect a negative contribution full-year 2020.

In segment Digital Services we continued the execution of our plan to turn around the business and showed a positive result² in Q4, despite a continued negative impact from the remaining critical projects (provisions of SEK -0.3 b. in Q4). We see strong development in the market, driven by the momentum in 5G resulting in good sales growth in Packet Core and OSS. While rationalization of the legacy portfolio will continue, we are re-investing R&D in our 5G and cloud-native portfolio.

The resolution of the US SEC and DOJ investigations highlights serious shortcomings in our otherwise proud history. The events described in the resolution are totally unacceptable. However, the resolution represents an important step for Ericsson. We are now fully focused on strengthening the company and making sure we are equipped to deal with compliance challenges. We have already put in place many important changes to our Ethics and Compliance program, including adding further compliance and assurance competence as well as strengthening our third-party management, leadership vetting and internal controls. This work will not stop; our zero-tolerance policy requires constant oversight and renewal, and we are confident that we are on the right path.

Free cash flow in 2019 excluding M&A amounted to SEK

7.6 (4.3) b., after payments of SEK 10.1 b. related to the resolution of the US SEC and DOJ investigations. The Board will propose a dividend of SEK 1.50 (1.00) per share to the AGM. The increase underlines the Board’s confidence in Ericsson delivering on its financial targets and building a strong financial position.

Our strategy aims at building a stronger company longer term and we do not trade long-term strengths for short-term gains. The foundation is our investments in R&D for both technology and cost leadership. This has secured us a competitive advantage as operators accelerate their 5G investments. We continue to execute on our focused strategy. The investments in digitalizing our business processes will increase costs in 2020 and will result in improved productivity in 2021 and beyond, supporting improved margins. Our competitive portfolio and cost position combined with the current market dynamics present a unique opportunity for us and we will continue to invest in order to further strengthen our market position.

Our product portfolio in Networks and Digital Services continues to gain good traction in a highly competitive market undergoing a technology shift to 5G. We see opportunities to further strengthen our position through our strong product offering in a market driven by the momentum in 5G. While we are confident that these opportunities will be value accretive in the long term, initial margins are challenging. Our competitive product offering and improved cost structure in hardware and services make our position and profitability much stronger than at the time of the European network modernization.

In 2019, we saw leading operators switch on their 5G networks. We are tracking well towards our targets for 2020 and 2022, but most importantly, we are making progress towards building a stronger company long term.

Börje Ekholm

President and CEO

Fourth quarter comments

Provision for the resolution of the US SEC and DOJ investigations

In Q3 2019 a provision of SEK -11.5 b. was made to cover costs in connection with a future settlement with the United States Securities and Exchange Commission (SEC) and the United States Department of Justice (DOJ). In Q4 2019 a resolution was reached, and payments of a total of SEK 10.1 b. were made. Part of the remaining provision will cover future monitoring costs while SEK 0.7 b. of the provision was released in Q4 2019, with a positive impact on operating income. The initial provision and the partial release were reported as Other operating income and expenses in segment Emerging Business and Other.

Net sales

Reported sales increased by 4% YoY. Sales adjusted for comparable units and currency increased by 1% YoY with growth in market areas Middle East & Africa, North East Asia and South East Asia, Oceania and India. As anticipated, the ongoing operator merger discussion led to lower sales in North America while there was growth with other North American customers.

Networks sales adjusted for comparable units and currency increased by 2% YoY, with strong sales growth in Japan and Saudi Arabia partly offset by reduced sales in North America. Digital Services sales adjusted for comparable units and currency decreased by -3% YoY, due to lower sales in North East Asia. Managed Services sales adjusted for comparable units and currency declined by -1% YoY. Sales adjusted for comparable units and currency in Emerging Business and Other increased by 9% YoY, driven by growth in iconectiv and IoT.

Sequentially, sales increased by 16%.

IPR licensing revenues

IPR licensing revenues increased to SEK 2.5 (2.1) b. YoY, mainly due to new contracts and currency effects from a stronger USD versus SEK. Revenues increased from SEK 2.4 b. QoQ, supported by a new contract.

Gross margin

Gross margin increased to 36.8% (25.7%). Gross margin excluding restructuring charges increased to 37.1% (32.0%), mainly driven by improvements in Digital Services, where the gross margin in Q4 2018 was impacted by costs related to a revised Business Support Systems (BSS) strategy. Managed Services gross margin improved, mainly as an effect of efficiency gains. Networks gross margin excluding restructuring charges was stable at 41.1% (41.0%), since operational leverage compensated for an increased portion of strategic contracts and a negative effect from the acquired Kathrein business. Higher IPR licensing revenues had a positive impact on gross margin YoY.

Sequentially, gross margin decreased to 36.8% from 37.7%. Gross margin excluding restructuring charges decreased to 37.1% from 37.8%, mainly due to lower gross margins in Networks and Managed Services. Networks gross margin declined with a negative impact from strategic contracts and the acquired business partly offset by a favorable business mix and operational leverage. Managed Services gross margin declined, mainly due to lower add-on sales.

Operating expenses

Operating expenses increased to SEK -19.0 (-18.0) b. YoY. Operating expenses excluding restructuring charges increased to SEK -18.9 (-17.6) b. The acquired Kathrein business added expenses of SEK -0.3 b. while the 51% divestment of MediaKind reduced operating expenses by SEK 0.6 b. YoY. Currency effects had a negative impact on operating expenses YoY.

R&D expenses excluding restructuring charges increased slightly to SEK -10.6 (-10.4) b. R&D expenses increased in both Networks and Managed Services while they declined in Digital Services and in Emerging Business and Other. The net impact of capitalized and amortized R&D expenses was SEK 0.2 (-0.6) b.

Selling and administrative (SG&A) expenses excluding restructuring charges increased to SEK -8.2 (-7.6) b. YoY. Revaluation of customer financing was SEK -0.2 (0.0) b. Increased investments in corporate projects for digital transformation, compliance and security impacted SG&A expenses negatively YoY.

Impairment losses on trade receivables were SEK -0.2 (0.4) b.

Sequentially, total operating expenses increased to SEK -19.0 b. from SEK -14.2 b. A refund of social security costs in Sweden of SEK 0.9 b. was made in Q3 2019. Increased impairment losses on trade receivables and the

acquired Kathrein business together added expenses of SEK 0.7 b. QoQ. Continued investments in R&D, seasonality between quarters and higher provisions for variable compensation also impacted operating expenses negatively QoQ.

Other operating income and expenses

Other operating income and expenses improved to SEK 0.8 (-0.3) b. YoY and from SEK -11.3 b. QoQ. A cost provision of SEK -11.5 b. related to the resolution of the US SEC and DOJ investigations impacted Q3 2019. SEK 0.7 b. of this provision was released in Q4 2019, with a positive impact. ST-Ericsson, a former joint venture, between Ericsson and STMicroelectronics, was split up between its owners in 2013. In the ongoing wind-down of the ST-Ericsson legal structure there was a non-cash negative impact of SEK -0.3 b. in the quarter. Q4 2018 was impacted by costs related to resetting the Edge Gravity business strategy in segment Emerging Business and Other.

Restructuring charges

Restructuring charges decreased to SEK -0.3 (-4.4) b. YoY. The main part of the restructuring charges in Q4 2018 was related to a revised BSS strategy in Digital Services.

Operating income and margin

Reported operating income improved to SEK 6.1 (-1.9) b. YoY. Operating income in Q4 2018 was negatively impacted by costs to reshape the BSS strategy. Operating income excluding restructuring charges was SEK 6.5 b. (operating margin 9.7%) and includes a positive impact from a partial release (SEK 0.7 b.) of a provision related to the resolution of the US SEC and DOJ investigations as well as a negative impact (SEK -0.3 b.) from the wind-down of the ST-Ericsson legal structure. Operating income in Q4 2018 was SEK 5.5 b. (operating margin 8.7%) excluding restructuring charges and costs related to the reshaped BSS strategy.

Sequentially operating income improved to SEK 6.1 b. from SEK -4.2 b., mainly due to the impact of the resolution of the US SEC and DOJ investigations of SEK -11.5 b. in Q3 2019 and SEK 0.7 b. in Q4 2019. The positive effect on operating income from sequentially higher sales was more than offset by increased operating expenses and a lower gross margin. The acquired Kathrein business had a negative impact of SEK -0.5 b. QoQ.

Financial income and expenses, net

The financial net improved to SEK -0.1 (-0.7) b. YoY and from SEK -0.7 b. QoQ, mainly due to positive currency hedge effects which derive from the hedge loan balance in USD. The currency hedge effect was SEK 0.2 b. compared with SEK -0.1 b. in Q4 2018 and SEK -0.3 b. in Q3 2019. The SEK strengthened against the USD between September 30, 2019 (SEK/USD rate 9.81) and December 31, 2019 (SEK/USD rate 9.32). Interest expenses on financial leases were SEK -0.1 (0.0) b. in the quarter, as an effect of IFRS 16 implementation.

Taxes

Taxes were SEK -1.6 (-3.9) b. Taxes in Q4 2018 were negatively impacted by impairment of withholding tax assets and non-deductible expenses. The cost provision related to the resolution of the US SEC and DOJ investigations is handled as non tax-deductible. The Company has implemented IFRIC 23, which requires quarterly assessments of uncertain tax positions.

Net income and EPS

Net income increased to SEK 4.5 (-6.5) b. and EPS diluted increased to SEK 1.33 (-1.99).

Employees

The number of employees was 99,417 on December 31, 2019, a net increase of 3,530 employees in the quarter of which 3,385 employees joined Ericsson through the Kathrein business acquisition.

Full-year comments

Net sales

Sales increased by SEK 16.4 b. or 8% to SEK 227.2 (210.8) b. Networks sales increased by SEK 16.4 b. (12%), Digital Services sales increased by SEK 1.8 b. (5%), Managed Services sales decreased by SEK -0.2 b. (-1%) and Emerging Business and Other sales decreased by SEK -1.6 b. (-19%). Sales adjusted for comparable units and currency increased by 4%.

The sales increase in Networks was driven mainly by higher demand for radio access network (RAN) equipment. Networks sales growth adjusted for comparable units and currency was 6%.

In Digital Services, growth in the new portfolio was offset by lower legacy product sales. Sales growth adjusted for comparable units and currency was -1%.

The sales decline in Managed Services was mainly a result of contract exits. Sales adjusted for contract exits grew in 2019.

The sales decrease in segment Emerging Business and Other was due to the 51% divestment of MediaKind in February 2019. Sales growth adjusted for comparable units and currency was 14%, driven by iconectiv and IoT.

In the geographical dimension, sales were driven by growth in North America and North East Asia.

The sales mix by commodity was: software 21% (21%), hardware 38% (37%) and services 41% (42%).

IPR licensing revenues

IPR licensing revenues increased to SEK 9.6 (8.0) b., driven by new contracts and a stronger USD to SEK. The revenues from current IPR licensing contract portfolio are approximately SEK 10 b. on an annual basis.

Gross margin

Gross margin increased to 37.3% (32.3%) with improved margins in Networks, Digital Services and Managed Services. In Networks the negative impact from strategic contracts was offset by improved hardware margins, operational leverage and lower restructuring charges. Digital Services gross margin improved, since costs for a revised BSS strategy had a negative impact in 2018. Managed Services gross margin improved, driven by customer contract exits and efficiency measures. A reduced share of services sales and an increased share of IPR and licensing revenues had a positive impact on gross margin. Restructuring charges included in the gross margin decreased to SEK -0.3 (-5.9) b.

Operating expenses

Operating expenses decreased to SEK -64.2 (-66.8) b., with SG&A expenses of SEK -26.1 (-27.5) b., R&D expenses of SEK -38.8 (-38.9) b. and impairment losses on trade receivables of SEK 0.7 (-0.4) b. Restructuring charges included in operating expenses were SEK -0.5 (-2.1) b. Currency effects impacted operating expenses negatively while the 51% divestment of MediaKind had a positive impact on operating expenses.

R&D expenses were impacted by increased investments in R&D for Networks and Managed Services. This increase was partly offset by lower R&D in Digital Services and Emerging Business and Other. The net effect of capitalized and amortized development expenses was SEK 0.3 (-1.7) b. Restructuring charges impacted R&D expenses by SEK -0.3 (-1.3) b.

SG&A expenses were positively impacted by a refund of earlier paid social security costs in Sweden of SEK 0.9 b. and by lower restructuring charges of SEK -0.1 (-0.8) b. Currency effects and increased investments in corporate projects for digital transformation, compliance and security had a negative impact YoY. Costs for customer financing revaluation declined to SEK -0.7 (-1.1) b.

Other operating income and expenses

Other operating income and expenses was SEK -9.7 (-0.2) b. and was negatively impacted by SEK -10.7 b. in costs related to the resolution of the US SEC and DOJ investigations. In 2019 51% of MediaKind was divested with a capital gain of SEK 0.7 b. in the first quarter. Share in earnings of JV and associated companies was SEK -0.3 (0.1) b., negatively impacted by the 49% ownership in MediaKind. The Company’s share in earnings of MediaKind was SEK -0.4 b. and the remaining investment is SEK 0.8 b.

Restructuring charges

Restructuring charges amounted to SEK -0.8 (-8.0) b. The cost reduction program announced in 2017 was completed in 2018. Restructuring costs related to the revised BSS strategy had a negative impact in 2018.

Operating income and margin

Operating income improved to SEK 10.6 (1.2) b. driven by higher gross margin and higher sales. This improvement was partly offset by SEK -10.7 b. in costs related to the resolution of the US SEC and DOJ investigations. Operating margin was 4.6% (0.6%). Operating margin excluding the SEC and DOJ costs of SEK -10.7 b. and excluding restructuring charges of SEK -0.8 b. was 9.7%. Operating margin excluding restructuring charges of SEK -8.0 b. was 4.4% in 2018.

Financial income and expenses, net

The financial net improved to SEK -1.8 (-2.7) b., mainly due to lower negative effects of foreign exchange revaluation, lower negative currency hedge effects and improved interest net. The currency hedge effects, which derive from the hedge loan balance in USD, impacted financial net by SEK -0.3 (-0.5) b. The SEK weakened against the USD between December 31, 2018 (SEK/USD rate 8.94) and December 31, 2019 (SEK/USD rate 9.32).

Taxes

Taxes were SEK -6.9 (-4.8) b. impacted by the increased income. Costs of SEK -10.7 b. related to the resolution of the US SEC and DOJ investigations are handled as non tax-deductible. Excluding these costs, the 2019 tax rate was approximately 35%. The Company has implemented IFRIC 23, which requires quarterly assessments of uncertain tax positions.

Net income and EPS

Net income improved to SEK 1.8 (-6.3) b., driven by higher operating income and an improved financial net. EPS diluted was SEK 0.67 (-1.98) and EPS (non-IFRS) was SEK 1.07 (0.27).

Employees

The number of employees was 99,417 on December 31, 2019, an increase of 4,058 employees compared with December 31, 2018. The increase derives mainly from the acquired Kathrein business and increased service delivery resources driven by higher sales. The increase was partly offset by the MediaKind divestment.

Fourth quarter comments

South East Asia, Oceania and India

Sales increased YoY across all segments driven by continued investments, primarily in LTE, by several major customers. Managed Services sales grew YoY, driven by add-on sales and YoY ramp-up of a contract signed in 2018.

North East Asia

Sales increased YoY. Network sales grew, driven by increased business volumes in Japan and initial launch of 5G in China. Digital Services sales decreased due to lower legacy product sales in China.

North America

Sales decreased YoY, with lower operator spending as a result of the uncertainty surrounding the announced operator merger while there was growth with other customers.

Europe and Latin America

Sales decreased YoY. Sales grew in Europe, driven by earlier announced contract wins. This growth was however more than offset by a decline in Latin America due to large deployments in 2018.

Middle East and Africa

Sales grew across all segments YoY. Networks sales grew on the back of ongoing 4G and 5G deployment in key markets in the Middle East. Digital Services sales grew, driven by 5G core deployment and achievement of project milestones in certain critical contracts. Managed Services sales grew, partly driven by add-on sales.

Full-year comments

South East Asia, Oceania and India

Sales remained stable in 2019. Growth in Managed Services was driven by add-on sales and by a contract that was signed in 2018. Digital Services sales decreased, due to lower legacy product sales in India.

North East Asia

Sales increased in 2019. The strong Networks sales growth was driven mainly by 5G deployment in South Korea, increased business volumes in Japan and initial launch of 5G in China. 4G in China continued to decline. Digital Services sales were stable.

North America

Sales increased in 2019. Networks sales increased driven by investments in 4G and 5G across all major customers. Digital Services sales increased as operators digitalize in preparation for 5G. Managed Services sales grew, driven by strong add-on sales in large customer contracts. Uncertainties regarding the pending operator merger impacted investment willingness in Q4 2019.

Europe and Latin America

Sales decreased slightly in 2019. Growth in Europe was driven by previously announced contract wins, partly offset by renegotiation and exits of low-performing and non-strategic businesses. Sales in Latin America declined due to timing of large deployment projects.

Middle East and Africa

Sales increased in 2019 in Networks and Digital Services, driven by 4G and 5G investments in the Middle East. Managed Services sales declined due to exit of non-strategic contracts.

Other

Sales declined as a result of the 51% divestment of the media business, which was transferred to MediaKind. IPR licensing revenues amounted to SEK 9.6 (8.0) b.

Fourth quarter comments

Net sales

Reported sales increased by 7% YoY, while sales adjusted for comparable units and currency increased by 2% YoY. The increase was driven by investments in LTE and 5G networks with strong growth particularly in Japan and Saudi Arabia.

Sales increased by 13% QoQ, which is less than normal seasonality. Sales increased QoQ in all market areas, apart from North America.

Gross margin

Gross margin increased to 41.1% (39.9%) YoY. Gross margin excluding restructuring charges remained stable at 41.1% (41.0%). Operational leverage compensated for an increased portion of strategic contracts and a negative effect from the acquired Kathrein business (of SEK -0.2 b. equal to -0.5 percentage points), demonstrating the strong underlying business fundamentals. Strategic contracts are taken to strengthen the market position and have a positive overall margin contribution but initially low or negative margins.

Gross margin decreased QoQ to 41.1% from 41.6%. The dilutive margin effect from the acquired business and strategic contracts was partly offset by a favorable business mix and operational leverage.

Operating income and margin

Operating income decreased to SEK 6.4 (6.9) b. YoY and operating margin decreased to 14.4% (16.5%). Operating income excluding restructuring charges was SEK 6.4 (7.3) b. and the corresponding operating margin was 14.5% (17.5%). The decrease in operating income in the quarter, despite stable sales and gross margin, is due to an increase in operating expenses of SEK 2.2 b. The increase in operating expenses is a result of continued investments in R&D for 5G and in corporate projects for digital transformation, compliance

and security. The acquired Kathrein business had a negative impact of SEK -0.5 b., corresponding to -1 percentage point in Networks operating margin. Impairment losses on trade receivables and provisions for customer financing impacted operating expenses by SEK -0.3 (0.3) b.

Operating income decreased to SEK 6.4 b. from SEK 7.2 b. QoQ and operating margin decreased to 14.4% from 18.4%. There was no impact of restructuring charges in the quarter or in the previous quarter. The decrease in operating income was driven by higher operating expenses due to increased investments in R&D for 5G and in corporate projects for digital transformation, compliance, and security. Impairment losses on trade receivables and provisions for customer financing impacted operating expenses by SEK -0.3 b. compared with SEK 0.0 b. in Q3 2019.

Full-year comments

Net sales

Reported sales increased by 12% in 2019 to SEK 155.0 (138.6) b. Sales adjusted for comparable units and currency increased by 6%. The sales increase was primarily in the US, South Korea, Italy, Germany and Saudi Arabia, driven by operator investments in LTE and 5G networks. The Networks share of IPR licensing revenues was SEK 7.9 (6.5) b.

Gross margin

Gross income increased to SEK 64.7 (55.2) b. while gross margin increased to 41.8% (39.8%). The impact of strategic contracts was more than offset by improved hardware margins and operational leverage. Lower restructuring charges in 2019 contributed positively.

Operating income and margin

Operating income increased to SEK 24.8 (19.4) b. Higher sales and gross margin as well as lower restructuring charges had a positive impact that was partly offset by increased operating expenses. Operating expenses increased mainly due to higher investments in R&D in line with the ambition to continue to strengthen the technology leadership and increased investments in corporate projects for digital transformation, compliance and security. Impairment losses on trade receivables impacted operating expenses by SEK -0.1 (-0.3) b.

Net impact from amortization and capitalization of development expenses and from recognition and deferral of hardware costs was SEK 1.1 (-0.3) b. Restructuring charges were SEK -0.1 (-1.8) b. Operating margin increased to 16.0% (14.0%).

Strategy execution

The target for Networks is to generate an operating margin of

15-17% (excluding restructuring charges) by 2020. Important ongoing strategic activities are to:

In addition, the acquired Kathrein antenna and filter business brings competence and capabilities to support the transformation of the antenna domain into multiple frequencies and multiple technologies. Radios and antennas are being consolidated and integrated to optimize network performance and to further improve performance, capacity and coverage for 5G.

At the close of the quarter Ericsson had announced 78 commercial 5G agreements with unique operators, publicly announced 32 5G contracts, and 24 live 5G networks across the globe.

Fourth quarter comments

Net sales

Reported sales increased by 1% YoY. Sales adjusted for comparable units and currency decreased by -3% YoY, due to lower 4G core sales in North East Asia where the transition to 5G is ongoing. The customer demand for the new portfolio is strong. In the quarter there was growth in OSS, Cloud infrastructure and services.

Gross margin

Gross margin increased to 37.2% (-9.5%) YoY. Gross margin excluding restructuring charges increased to 38.1% (16.4%). Gross margin in Q4 2018 was negatively impacted by costs related to the revised BSS strategy. Cost reductions had a positive impact YoY.

Gross margin excluding restructuring charges declined slightly to 38.1% from 38.3% QoQ with a continued negative impact from the remainder of the 45 critical contracts.

Operating income (loss)

Operating income was SEK -0.2 (-7.1) b. Operating income excluding restructuring charges was SEK 0.0 (-3.5) b., with a positive impact from increased gross margin and from lower operating expenses. The net impact of capitalized and amortized development expenses was SEK -0.1 (-0.6) b. in the quarter.

Sequentially, operating income excluding restructuring charges improved to SEK 0.0 b. from SEK -0.5 b., driven by higher sales.

Full-year comments

Net sales

Reported sales increased by 5% in 2019 driven by growth in North America. Services sales increased driven by customer support. Sales in

the new portfolio grew by 7% driven by customer investments in 4G and 5G, while sales in legacy products declined. Sales adjusted for comparable units and currency decreased by -1% YoY.

Gross margin

Gross margin increased to 37.2% (21.8%). Gross margin excluding restructuring charges improved to 37.8% (32.4%). 2018 was negatively impacted by costs related to the revised BSS strategy.

Operating income (loss)

Operating income improved to SEK -4.0 (-13.9) b. Operating income excluding restructuring charges improved to SEK -3.4 (-8.5) b., supported by higher gross margin and higher sales. In addition, operating expenses excluding restructuring charges declined by SEK -2.2 b. despite a currency headwind. The net impact of capitalized and amortized development expenses was SEK -0.9 (-1.8) b.

Strategy execution

Top priority is to continue to grow the new portfolio while turning Digital Services into a profitable business, targeting low single-digit operating margin by 2020 (excluding restructuring charges).

There is a strong business momentum in the new Digital Services portfolio of 5G and cloud-native products. Full-year sales of the new portfolio increased by 7%, driven by customer investments in 4G and 5G.

A key activity for turnaround of the Digital Services business is to complete, renegotiate or exit 45 identified critical and non-strategic customer contracts. Six contracts were addressed in the quarter, and a total of 35 contracts have been addressed to date. This is in line with the plan from 2017, to have addressed 75% of the contracts by the end of 2019.

In order to capture software value and protect the services margin, there is an increased focus on reducing systems integration costs by increasing serviceability and automation.

New ways of working and investments in automation to further improve R&D efficiency as well as investments in the new portfolio of 5G and cloud-native products will continue, in order to strengthen the market position and prepare Digital Services for profitable growth.

The execution of the revised BSS strategy announced in January 2019, is progressing according to plan, attracting both existing and new customers, with several important new BSS contracts signed during the year.

Fourth quarter comments

Net sales

Reported sales increased by 2% YoY. Managed Services sales adjusted for comparable units and currency declined by -1% YoY. Sales in Optimization (project business) showed growth.

Gross margin

Gross margin increased to 14.8% (11.4%) YoY, mainly as a result of efficiency gains.

Sequentially gross margin decreased to 14.8% from 17.9%, mainly as a result of higher add-on sales in Q3 2019.

Operating income and margin

Operating income was SEK 0.3 (0.3) b. An improved gross margin was offset by increased expenses, mainly investments in R&D.

Operating income declined QoQ to SEK 0.3 b from SEK 0.6 b. due to lower gross margin and seasonally higher operating expenses, including corporate investments in digital transformation, compliance and security.

Full-year comments

Net sales

Reported sales decreased by -1% YoY. Sales adjusted for customer contract exits increased.

Sales adjusted for comparable units and currency decreased by -4% YoY, mainly as a result of customer contract exits.

Gross margin

Gross margin increased to 15.6% (11.2%) YoY. Gross margin excluding restructuring charges increased to 15.8% (12.2%), mainly as a result of efficiency measures and customer contract exits.

Operating income and margin

Operating income increased to SEK 2.3 (1.1) b. YoY. Operating income excluding restructuring charges improved to SEK 2.4 (1.4) b. due to a positive effect from reversal of a provision for impairment of trade receivables made in Q1 2019, of SEK 0.7 b., and higher gross margin.

Operating margin was 6.3%, excluding restructuring charges and the positive effect from reversal of a provision for impairment of trade receivables of SEK 0.7 b. in Q1 2019. The operating margin development is in line with the 2020 target.

Restructuring charges amounted to SEK 0.0 (-0.3) b.

Strategy execution

The target for Managed Services is to have an operating margin of 5-8% (excluding restructuring charges) in 2020.

Artificial Intelligence (AI) and automation are essential to managing the increasing complexity of current and future networks. In 2019 Ericsson launched a new AI-based managed services offering for operators – Ericsson Operations Engine. With this offering, network and IT operations will shift from being reactive to proactive, data-driven operations, making sense of billions of data points so that actions can be taken before network issues impact customer experience. This will enable operators to address the increasing network complexity, the increasing volumes of devices, multiple technologies such as 4G, 5G and IoT and more diverse service requirements.

Further investments will be made in automation, analytics and AI-driven offerings, to support 5G, IoT and cloud as well as to increase the efficiency in service delivery.

Fourth quarter comments

Net sales

Reported sales decreased by -24% YoY, due to the 51% divestment of MediaKind. Sales adjusted for comparable units and currency increased by 9% YoY, driven by growth in iconectiv and IoT.

Gross margin

Gross margin increased to 13.4% (9.3%) YoY. Gross margin excluding restructuring charges declined to 15.1% (17.1%). The decline was due to the divestment of 51% of MediaKind and project losses in the legacy media business.

Sequentially gross margin decreased to 13.4% from 20.2%. Gross margin excluding restructuring charges decreased to 15.1% from 20.5% due to project losses in the legacy media business.

Operating income (loss)

Operating income was positively impacted by SEK 0.7 b. related to a partial release of a previously made cost provision related to the resolution of the US SEC and DOJ investigations. The positive impact was partly offset by the wind-down of the ST-Ericsson legal structure with a non-cash negative impact of SEK -0.3 b. Operating income excluding restructuring charges and these items was SEK -0.8 b.

Media Solutions operating income excluding restructuring charges was SEK -0.3 (-0.5) b. The operating income includes Ericsson’s 49% share in earnings of the MediaKind business.

Red Bee Media operating income excluding restructuring charges was close to break-even and improved to SEK 0.0 (-0.1) b.

Emerging Business, iconectiv and common costs operating income excluding restructuring charges was SEK -0.5 (-0.9) b. A cost of SEK -0.3 b. for resetting the Edge Gravity business was included in Q4 2018. In addition, iconectiv operating income improved YoY.

Full-year comments

Net sales

Reported sales decreased by -19% in 2019 due to the 51% divestment of MediaKind in February 2019. Sales adjusted for comparable units and currency increased by 14% YoY driven by growth in the iconectiv business through a multi-year number portability contract in the United States.

Gross margin

Gross margin declined mainly due to the 51% divestment of MediaKind. The decline was partly offset by lower restructuring charges.

Operating income (loss)

Operating income was impacted by costs of SEK -10.7 b. related to the resolution of the US SEC and DOJ investigations, a refund of earlier paid social security costs in Sweden of SEK 0.9 b. and by costs of SEK -0.3 b. related to the wind-down of the ST-Ericsson legal structure.

Operating income in Emerging Business, iconectiv and common costs improved, driven by profitable growth in iconectiv. Red Bee Media income improved supported by profit improvement activities and a capital gain of SEK 0.7 b. from a divestment in Q1 2019. Media Solutions income improved driven by the 51% divestment of Media Kind, including a capital gain from the transaction.

Strategy execution

Emerging Business and iconectiv

A lean start-up approach with selective investments has been implemented in Emerging Business, to build a position and grow sales in new areas, leveraging Ericsson’s core business. Apart from iconectiv (software-based solutions for number portability), the portfolio is still in an early investment phase and focus is on generating sales and scaling the business. Within IoT, Ericsson offers global connectivity management for billions of IoT devices and connections. The main go-to-market model is via mobile operators, leveraging access to licensed spectrum. In Q4 2019, Ericsson divested its enterprise cloud billing solution in line with the focused business strategy.

Red Bee Media

The target remains to achieve a sustainable business by continuing to develop the business as an independent and focused media services entity within Ericsson.

Media Solutions

51% of the MediaKind business was divested on February 1, 2019. After the transaction, Ericsson carries 49% of the MediaKind results as “share in earnings of JV and associated companies”.

Financing activities

Cash flow from financing activities was SEK -6.9 (-4.1) b. Dividends of SEK 4.5 (3.4) b. were paid out. The impact of lease liabilities was SEK -3.0 (0.0) b.

Free cash flow

The improved result and focus on free cash flow, in combination with limited investing activities, resulted in free cash flow of SEK 6.1 (3.0) b. and in free cash flow excluding M&A of SEK 7.6 (4.3) b. The negative effect of payments related to the resolution of the US SEC and DOJ investigations was more than offset by improved income and working capital efficiency.

Effects of implementation of IFRS 16 “Leases”

Cash flow from operating activities had a positive impact of SEK 0.6 b. from the implementation of IFRS 16 “Leases”. Financing activities were negatively impacted by amortization of the leasing liability of the same amount.

Fourth quarter comments

Gross cash decreased by SEK -4.0 b. QoQ. Ericsson drew on the credit facility of USD 150 million from the Nordic Investment Bank (NIB), which was signed in December 2019 to support investments in R&D for 5G technology. Part of the new funds, USD 98 million, replaced a credit with NIB that was set to mature in 2021, resulting in a net increase in funding of USD 52 million. The new facility is set to mature in 2025. In addition, a credit facility agreement of EUR 250 million was signed in the quarter with the European Investment Bank (EIB). The credit facility is undrawn.

Net cash decreased by SEK 2.9 b. QoQ as a result of the negative free cash flow. Net cash does not include lease liabilities.

Liabilities for post-employment benefits decreased in the quarter, to SEK 35.8 b. from SEK 37.3 b.

Full-year comments

Gross cash increased to SEK 72.2 (69.0) b. while net cash decreased to SEK 34.5 (35.9) b.

Liabilities for post-employments benefits increased to SEK 35.8 (28.7) b. mainly due to lower discount rates. The Swedish defined benefit obligation (DBO) has been 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 as of December 31, 2019.

The average maturity of long-term borrowings was 2.7 years as of December 31, 2019, a decrease from 3.4 years 12 months earlier.

Ericsson has an unutilized revolving credit facility of USD 2.0 b., which will expire in 2022.

Ericsson drew on the credit facility of EUR 250 million, from the European Investment Bank (EIB), which was granted in 2018 to support R&D activities for 5G. The facility is set to mature in 2024.

Ericsson signed a new credit facility agreement of EUR 250 million with the European Investment Bank (EIB) in Q4 2019. The credit facility is undrawn.

Ericsson drew on the credit facility of USD 150 million, from the Nordic Investment Bank (NIB), which was signed in December 2019 to support investments in R&D for 5G technology. Part of the new funds, USD 98 million, replaced a credit with NIB that was set to mature in 2021, resulting in a net increase in funding of USD 52 million. The new facility is set to mature in 2025.

In July, Moody’s changed their outlook on Ericsson’s long-term rating from stable to positive. The rating of Ba2 was unchanged. In September, Standard & Poor’s changed their rating outlook on Ericsson from stable to positive. The rating BB+ remained unchanged. In 2019, Ericsson solicited Fitch for credit rating services. Fitch’s long-term rating for Ericsson is BBB- (“investment grade”) with stable outlook.

The capital turnover remained at 1.4 (1.4) times.

Income after financial items was SEK -3.1 (5.8) b.

At the end of the year, gross cash (cash, cash equivalents, short-term investments and interest-bearing securities, non-current) amounted to SEK 56.7 (58.1) b.