Comments from Hans Vestberg, President and CEO
Sales increased by 13% in the quarter. Significant currency movements impacted sales positively and Professional Services had a strong quarter. Profitability improved in segment Global Services while it declined in segment Networks due to changed business mix.
In the quarter, sales growth was strong in India and North East Asia.
Professional Services sales increased YoY with a continued good global demand for our services offering. We signed 27 managed services contracts in the quarter, including a major multi-country contract in Europe.
As anticipated, segment Networks mobile broadband business in North America continued to be slow in the quarter as operators remained focused on cash flow optimization in order to finance major acquisitions and spectrum auctions. The decline in North America was partly offset by a continued fast pace of 4G deployments in Mainland China. As a consequence, the business mix shifted to a higher share of coverage projects in the quarter.
Consumer demand and mobile data traffic growth continued to be strong in North America, creating further need for quality and capacity investments. However, with current visibility, we anticipate the fast pace of 4G deployments in Mainland China to continue and the North American mobile broadband business to remain slow in the short term.
Operating income declined YoY, primarily driven by lower profitability in segment Networks due to the above mentioned change in business mix and increased operating expenses. This was partly offset by significantly improved operating income in segment Global Services, mainly driven by Network Rollout. There were no losses related to the modems business in the quarter.
The underlying margin, excluding restructuring charges and hedge losses, improved YoY. The net currency effect contributed positively to the operating income, considering transaction and translation exposure as well as the negative currency hedge effect.
As a consequence of the ongoing dispute with a major customer, the IPR licensing revenues declined in constant currencies. Reported IPR revenues were stable in the quarter as a majority of these contracts are in USD.
Cost and efficiency program
As part of improving the profitability, we continue to proactively identify efficiency opportunities. The cost and efficiency program is progressing according to plan. The ambition is to achieve savings of approximately SEK 9 b., with full effect during 2017. The program primarily relates to five key areas: portfolio streamlining and ways of working in R&D; structural enhancements in IS/IT; accelerated service delivery transformation; supply chain efficiencies; and structural efficiency gains in G&A.
In the quarter we announced, as part of the program, that 2,200 positions in Sweden, are subject to notice. In addition we will reduce the number of consultants in Sweden by 850.
We ended the quarter with a negative cash flow from operating activities of SEK –5.9 b. mainly due to a change in business mix with less capacity business in North America and a higher share of coverage business in Mainland China. This impacted working capital negatively.
In line with our strategy, we are investing in our targeted areas; IP networks, Cloud, OSS & BSS, TV & Media and Industry & Society. Sales in targeted areas continued to show good growth. At the Mobile World Congress (MWC) in Barcelona, in February, we saw an increased interest from non-operator customers, especially within the area of Industry & Society. Most of our key launches at MWC were related to the targeted areas, including the new Router 6000 Series, the Hyperscale Cloud Solution, Expert Analytics 15.0, a new Media Delivery Network solution and Digital Telco Transformation.
In addition to the launches in the targeted areas we announced the new Ericsson Radio System. The system has an innovative modular architecture, delivering three times the capacity density with 50% improvement in energy efficiency. With the launches at the MWC, we have further strengthened our leadership and ability to deliver on our growth ambitions.