Comments from Hans Vestberg, President and CEO
Reported sales in the quarter increased by 8% YoY. Sales, adjusted for comparable units and currency, decreased by -1%. Sales in North America grew YoY as well as QoQ. Profitability improved YoY, with higher IPR licensing revenues and lower operating expenses as main contributors. Network Rollout continued on its path to sustainable profitability.
We saw a recovery in segment Networks in the quarter. In North America, the mobile broadband investments remained stable, with additional hardware sales in the quarter. 4G deployments in Mainland China recovered after a weak third quarter. Emerging markets such as India, Indonesia and Mexico remained strong while markets such as Russia, Brazil and parts of the Middle East continued to be weak, mainly due to macro-economic developments. Investments in Europe were driven by the transition from 3G to 4G and capacity enhancements. Operators increased their investments in telecom core networks, driven by deployment of new service offerings such as VoLTE (Voice over LTE).
In the quarter, sales growth in segment Global Services was mainly driven by growth in Systems Integration and Managed Services while Network Rollout sales declined.
We ended the year with good YoY sales development in TV and Media which contributed to growth in Segment Support Solutions.
Our IPR strategy, to generate value from our investments in R&D, has been successful and over the last five years we have more than tripled our IPR licensing revenues. After the recent announcements of two important patent license agreements, we now have agreements with the majority of handset suppliers.
Targeted growth areas
In 2015, we had good progress in all our targeted growth areas and we continued to invest in order to establish leadership. Sales grew by more than 20% YoY, reaching SEK 45 b., corresponding to 18% of group sales.
The strategic partnership with Cisco, announced in the quarter, will give us strong end-to-end network solutions with a complete IP portfolio. As a result of the partnership, we will extend our addressable market and expect to generate USD 1 b. or more of additional sales by 2018. Additional sales are expected to be accretive to operating income in 2016.
Operating margin increased to 15% (9%) YoY with improvements in all segments. The major contributors to the profit improvement were higher IPR licensing revenues and lower operating expenses, mainly in segment Networks. The effort to restore Network Rollout to a sustainable profitable business is progressing well, with a break-even operating income, excluding restructuring charges, for the second half of 2015.
Cost and efficiency program
The global cost and efficiency program is progressing according to plan, with the target to achieve net annual savings of SEK 9 b. during 2017 compared with 2014. Operating expenses, excluding restructuring charges, for the second half of 2015, declined by almost 10% compared with same period last year. We will continue to address operating expenses and increase efforts to further reduce cost of sales in order to improve the gross margin.
After a strong cash flow from operating activities in the fourth quarter, we delivered a full-year cash flow of SEK 20.6 b., exceeding the cash conversion target of more than 70%.
Although company performance improved in the quarter, there is still a need for further improvements. Our focus in 2016 will be:
1. Core business – While market conditions are challenging in certain parts of the world, we continue our work to capture business opportunities as more markets shift to 4G. At the same time we will work to extend our technology leadership also in the emerging 5G market.
2. Targeted growth areas – After a period of investing, in order to create growth, we also need to improve earnings. This will involve stronger focus on software sales and recurring business as a complement to the already strong Professional Services business.
3. Cost and efficiency – We are confident in our ability to achieve our SEK 9 b. cost and efficiency program by 2017. We are closely monitoring market and business development and will take all necessary actions to remain competitive across the entire business.
As we deliver in these areas, in combination with our other ongoing strategic initiatives, we are well positioned to create future shareholder value. Consequently, the Board of Directors will propose a dividend of SEK 3.70 (3.40) per share for 2015, an increase of 9% compared with last year.