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View Annual Report “Focus is to improve profitability and create a strong base for future value growth” Ericsson Annual Report 2016 ericsson in brief Ericsson’s vision is a Networked Society where every person industry- leading high performing solutions for Networks, IT & Cloud and every industry is empowered to reach their full potential. The and Media. The aim is to develop, produce and offer products and potential of the Networked Society lies in transformation through services with excellent and sustainable performance, at the right mobility. Transformation in the way people organize their individual cost. In the fast developing ICT (Information and Communications lives and carry out vital tasks. Transformation in the way we work, Technology) landscape, the ambition is to be a preferred transfor- the way we share information, and the way we do business. mation partner for existing and new customers. Transformation in the way we consume and the way we create. Ericsson has its headquarters in Stockholm, and the Ericsson To realize the vision of a Networked Society, Ericsson provides share trades on Nasdaq Stockholm and on NASDAQ, New York. Net sales Operating income Cash flow from operating activities SEK billion SEK billion SEK billion 222.6 6.3 14.0 (2015: 246.9) (2015: 21.8) (2015:20.6) STRATEGIC Consumer Electronics World Economic Forum Mobile World Congress CEO Hans Vestberg EVENTS 2016 Show in Las Vegas Annual Meeting in Barcelona steps down – CFO Jan January 6–9 in Davos February 22–25 Frykhammar replaces January 20–23 July 25 JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER JANUARY 2017 contents The business .......................................... Changes in Ericsson’s organization and in the Company’s CEO dialogue .................................................. 2 reporting structure This is Ericsson ................................................ 6 Profit improvement ........................................... 8 Starting July 1, 2016, Ericsson has implemented a series of organizational This is the market ........................................... 10 The customers ................................................ 14 and structural changes. The new organizational structure focuses on meeting Networks ........................................................ 16 changing customer requirements and on capturing market opportunities to IT & Cloud ....................................................... 19 strengthen strategy execution and drive growth and profitability. Media ............................................................. 22 The financial reporting during 2016 has been based on the same segment Global presence .............................................. 24 structure as 2015 with the three reporting segments Networks, Global Ser- Customer Group Industry and Society ............. 26 vices and Support Solutions. Customer Group IPR & Licensing .................... 28 From January 1, 2017, financial reporting is done according to a new The People ..................................................... 30 structure, with three new financial reporting segments, Networks, IT & Cloud Sustainability and corporate responsibility ....... 32 and Media. The new segments contain both products and services and the Reporting structure 2016 ................................ 35 structure aligns company reporting with strategy execution in a simpler and Letter from the Chairman ................................ 37 more transparent way. Results ................................................... In this Annual Report, Ericsson’s operations are described according to Board of Directors’ report* ............................. 38 the new organizational structure, while all financial data except for impairment Consolidated financial statements* ................ 53 testing of intangible assets and goodwill are made according to the prior fin- Notes to the consolidated ancial reporting structure Networks, Global Services and Support Solutions. financial statements* ..................................... 65 Parent Company financial statements* .......... 100 Notes to the Parent Company financial statements* ..................................... 106 Risk factors* ................................................ 119 2016 segment structure Auditor’s report ............................................ 128 Forward-looking statements ......................... 133 Networks Global services Support solutions Corporate Governance .......................... Corporate Governance report, 2016 ............. 134 Remuneration report .................................... 162 Shareholders ......................................... Ericsson and the Capital market .................... 166 2017 segment structure Share information ......................................... 170 Networks IT & Cloud Media Other information ................................... Ten-year summary ....................................... 174 Alternative Performance Measures (APM) ..... 176 Financial terminology and Exchange rates ............................................ 181 Read more at page 36 Glossary ...................................................... 182 Shareholder information ............................... 183 * Chapters covered by the Auditor’s report. Media and entertain- Ericsson Investor Börje Ekholm's first Q4 report ment conference IBC Update in New York day as CEO January 26, 2017 in Amsterdam November 9–10 January 16, 2017 September 8–12 JANUARY FEBRUARY MARCH APRIL MAY JUNE JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER JANUARY 2017 Contact Investor Relations [email protected] The business – Ericsson in brief Ericsson | Annual Report 2016 1 THE BUSINESS – CEO dialogue shifting focus from growth to profitability Ericsson’s CEO Börje Ekholm and Jan Frykhammar, who served as CEO July 2016 – mid January 2017, discuss a number of issues concerning 2016 and important topics for the Company going forward. What’s your reflection on the year 2016? Börje | After 10 years as member of the board I got the question if I wanted to assume the day- Jan | The negative trend with low mobile broad to-day leadership of Ericsson. One of the major band investments accelerated through 2016, reasons to why I accepted was that I believe that especially in markets with a weak macro-eco- Ericsson is a great company and that there is nomic environment. As a result, the leadership great business potential to exploit. This com- team and I have been fully committed to the pany has connected billions of people and soon work to reduce cost and improve efficiency, in we will connect many machines. Another reason order to secure resilience and competitiveness to accepting the job is that I do not have anything for the company. The cost and efficiency pro- against challenges – on the contrary. They trig- gram, which was intensified in the second half of ger me. Thus, I look forward to refining the strat- 2016, is expected to reduce the annual run rate egy to focus investments into areas where of operating expenses, excluding restructuring Ericsson both can and must win. Even if I have charges, to SEK 53 billion in the second half of a decade of experience working for Ericsson 2017. This is to be compared with SEK 63 billion as a board member, I am assuming this new for full-year 2014. responsibility with humility, understanding there is much left for me to learn. Börje | Operators continued to be cautious with investments in equipment as their revenues How will Ericsson restore profitability? overall have come under pressure. This was reflected in our results in 2016 which did not Jan | As reported in 2016, the cost and effi- reach our expectations. The short-term reality ciency program is progressing towards the is that growth is limited and we have to adjust to target. During the year, we have pushed for that and prioritize what to focus on. The first task strong accountability and focus on performance is to establish profitability and adjust the size of throughout the company. The program has been our operations to the demand level. expanded to adjust the organization to lower sales volumes, and the priority has been to exe- What do you consider to be the most cute on the cost-out activities and to reduce important event during 2016? working capital. During 2016, operating expenses were sig- Jan | This has been a very special year for me. nificantly reduced through headcount reduc- I took on the role as a CEO mid-year with the tions around the world. As the sales decline ambition to stay until the search for a new CEO impacted the gross margin negatively, we also was completed. intensified the focus on reducing cost of sales, During 2016 our ambition was to unite the and thereby improving the gross margin. company around the shift in focus from growth to profitability. The successful execution of the intensified activities during the second half of the year is a clear sign that the mindset of the orga- nization has changed, enabling us to continue our work to improve profitability. 2 Ericsson | Annual Report 2016 Our task is to make our customers successful, which in turn will make us successful.” Börje Börje | Only consistent profitability and strong three months visiting a majority of Ericsson’s Earnings per share, diluted cash flow will provide us the freedom to continue largest customers. In fact, the whole organiza- investing in our research & development and into tion has been very active in 2016 in addressing sek our future growth. In the near term,
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