Ericsson reports continued good development
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Date: Thursday, July 21 2005
* Net sales SEK 38.4 (32.6) b. in the quarter, SEK 69.9 (60.7) b.
first six months
* Net income SEK 5.8 (5.0) b. in the quarter, SEK 10.5 (7.6) b. first
six months 1)
* Earnings per share SEK 0.37 (0.31) in the quarter, SEK 0.66 (0.48)
first six months 1)
CEO COMMENTS
"We report yet another quarter of robust performance," says
Carl-Henric Svanberg, President and CEO of Ericsson. "Our
employees' impressive drive for operational excellence and
responsiveness to customer needs continues to yield positive
results. Technology leadership, long customer relationships and
deep consumer understanding are key factors behind our leading
position.
The activity level in emerging markets is accelerating, which means
more people have access to communication services. In parallel,
operators seek new ways of working to meet the global trends of
increased tariff competition and convergence of technologies and
services. We continue to focus on supporting our customers in
reducing the total cost of network ownership and developing new
business models. Our competitive technology and services offering
is a distinct advantage in this environment.
The services area develops strongly and operators show growing
interest in our offering, particularly in outsourcing of network
operations, and the synergies we are able to leverage throughout
the value chain. Hosting and content services are also in high
demand as operators continue to develop their business to meet
consumer needs," concludes Carl-Henric Svanberg.
FINANCIAL HIGHLIGHTS
2004 numbers restated in accordance with IFRS, please see
www.ericsson.com/investors/doc/ifrs_statement.pdf. IAS 39
implemented as of January 1, 2005, related to financial
instruments.
Income and cash flow
Second quarter First quarter Six-month period
SEK b. 2005 2004 Change 2005 Change 2005 2004 Change
Net sales 38.4 32.6 18% 31.5 22% 69.9 60.7 15%
Gross 45.9% 47.8% - 48.5% - 47.1% 46.4% -
margin
Operating 8.3 7.3 14.5% 6.6 26% 14.9 11.2 33%
income
Operating 21.6% 22.2% - 21.0% - 21.3% 18.4% -
margin
Income after 8.5 7.3 - 6.7 - 15.2 11.1 -
financial items
Net income 1) 5.8 5.0 - 4.6 - 10.5 7.6 -
Earnings per 0.37 0.31 - 0.29 - 0.66 0.48 -
share 1)
Cash flow
before
financial 5.4 4.3 - -6.5 - -1.1 7.2 -
investing
activities
Cash flow
before
financial
investing 5.4 4.3 - 1.8 - 7.2 7.2 -
activities
excl.
pension trust
funding
1) Attributable to stockholders of the parent company,
excluding minority interest.
Sales were up 18% year-over-year and showed a sequential increase
of 22%. The ongoing network rollout in the North American market is
well under way and invoicing included equipment worth close to two
billion Swedish crowns originally planned for the third quarter.
Currency exchange effects negatively affected sales in the quarter
by 2%, compared to currency exchange rates one year ago. In
constant currencies, sales for the quarter grew by 20%. For the
six-month period, currency exchange effects impacted sales
negatively by 3%.
Gross margin was 45.9% in the quarter. The software content was
somewhat lower in the quarter, and the services proportion grew
compared to the previous quarter. The operating margin was 21.6%, a
slight increase compared to the previous quarter.
Net effects of currency exchange differences on operating income
compared to the rates one year ago were SEK -1.2 b. in the quarter.
Financial net amounted to SEK 0.2 b. for the quarter.
Cash flow before financial investing activities was SEK 5.4 b. in
the second quarter. As previously reported, cash flow in the first
quarter of 2005 was negatively affected by SEK 8.3 b. by the
transfer of cash and cash equivalents into a Swedish pension trust.
Balance sheet and other performance indicators
Six months Three months Full year
SEK b. 2005 2005 2004
Net cash 42.4 43.1 42.9
Interest-bearing provisions and
liabilities 29.8 28.4 33.6
Days sales outstanding 90 97 75
Inventory turnover 4.4 4.0 5.7
Net customer financing 4.4 4.2 3.6
Equity ratio 46.5% 46.5% 43.8%
The financial position is strong. Net cash decreased by SEK 0.7 b.
in the quarter to SEK 42.4 (43.1) b., mainly as a consequence of
the dividend payment of SEK 4.0 b.
Days sales outstanding were 90 days, an improvement by seven days
compared to the first quarter. Inventories, including work in
progress, were slightly up in the quarter by SEK 1.3 b. to SEK 19.3
(18.0) b., due to currency exchange effects. Excluding currency
exchange effects, inventories, including work in progress, were
flat in the quarter.
Net change of deferred tax assets amounted to SEK 0.3 b. in the
second quarter. The balance decreased from SEK 20.8 b. at year-end
to SEK 18.9 b.
Cash outlays with regards to restructuring amounted to SEK 0.4 b.
for the quarter. Approximately SEK 2.3 b. of restructuring charges
remains to be paid out during 2005 and beyond.
MARKET AND BUSINESS HIGHLIGHTS
There is continued growth in the GSM market where emerging markets
show particularly good development in both network coverage and
capacity.
Tariff competition is intensifying in Western Europe. This
stimulates both traffic growth and the evolution of new business
models and services. In parallel, richer services and more complex
technology has made total cost of network ownership, including
operating expenses, an obvious priority for operators.
As a consequence, operator focus on the services area is
increasing. In this environment, our services offering is a key
ingredient in assisting operators to lower costs and offer rich
content services. An important step in helping our customers meet
consumer demands is the recently announced Napster agreement, which
will enable operators to offer branded music download services
efficiently.
The WCDMA rollout continues, and Cingular Wireless' rapid buildout
plan in the US is driving the industry forward. When complete,
Cingular's buildout will have contributed to doubling the installed
WCDMA base outside of Japan. More attractive handsets with more
competitive prices also contribute to the fast WCDMA network
expansions.
Our successful HSDPA offering is proving to be a crucial part of
operator considerations in timing WCDMA deployments. With HSDPA,
operators will be able to offer their customers even richer
services including music and film downloads, TV, and enterprise
applications. Triple play, which brings together telephony,
Internet and broadcast media, continues to be a focus for both
mobile and fixed operators.
In parallel, operators are considering fixed/mobile convergence
also as a way of reducing operating expenses. A key element in this
development is the deployment of all-IP softswitch-based networks.
Ericsson announced several strategic wins during the quarter in
this area, of which BT's 21st Century all-IP network was the most
noteworthy.
Regional overview
Western Europe sales grew 7% year-over-year. Also this quarter,
Italy and Spain showed strong development, and the region as a
whole continues to benefit from ongoing 3G deployments and GSM
capacity enhancements.
Central Europe, Middle East and Africa sales grew 27%
year-over-year and was the largest region. The development was
solid across the markets with particularly good development in
Nigeria and Turkey. There is a continued strong GSM development as
well as an increased focus on 3G.
Asia Pacific sales were up by 8% year-over-year. China and India
showed particularly strong development. While operators are
evaluating different 3G technologies and performing large-scale
trials with WCDMA, they continue to invest in GSM capacity
enhancements to accommodate the strong subscriber growth.
North American sales are recovering. Growth year-over-year of 31%
indicates a market rebound following operator consolidation. The
ongoing network rollout in the North American market is well under
way and invoicing included equipment worth close to two billion
Swedish crowns originally planned for the third quarter.
Latin America shows continued positive development, and sales grew
by 28% year-over-year through strong GSM sales. Argentina and
Brazil, in particular, contributed to the year-over-year growth.
Subscriber growth
During the quarter, four new WCDMA networks were commercially
launched, bringing the total to 65. We are a supplier to 38 of
these networks. The number of subscriptions grew from 21 million to
more than 28 million during the quarter and WCDMA is now by far the
fastest growing 3G technology. The number of CDMA2000 1xEV-DO
subscriptions grew by two million and has reached 14 million.
We continue to see a steady increase in both subscribers and usage,
which further contributes to the solid long-term industry growth.
Net subscriber additions were more than 100 million in the quarter.
At the end of the quarter, worldwide subscription penetration is
30%, with more than 1.9 billion total subscriptions, of which
almost 1.5 billion are GSM.
OUTLOOK
All estimates are measured in USD and refer to market growth
compared to previous year.
The traffic growth in the world's mobile networks is expected to
continue as a result of both new services and new subscribers. For
2005 we now believe that the global mobile systems market, measured
in USD, will show moderate growth compared to 2004.
We previously estimated the global mobile systems market, measured
in USD, to show slight growth compared to 2004.
We maintain our view that the addressable market for professional
services is expected to continue to show good growth.
With our technology leadership and global presence we are well
positioned to take advantage of these market opportunities.
SEGMENT RESULTS
2004 numbers restated in accordance with IFRS, please see
www.ericsson.com/investors/doc/ifrs_statement.pdf. IAS 39
implemented as of January 1, 2005, related to financial
instruments.
Systems
Second quarter First quarter Six-month period
SEK b. 2005 2004 Change 2005 Change 2005 2004 Change
Net sales 36.1 30.4 19% 29.0 25% 65.1 56.5 15%
Mobile 28.8 24.3 19% 23.5 23% 52.2 45.4 15%
Networks
Fixed 1.1 1.1 0% 1.0 8% 2.2 2.0 8%
Networks
Professional 6.2 5.0 25% 4.5 38% 10.7 9.1 18%
Services
Operating 8.2 5.9 6.2 14.4 9.4
income
Operating 23% 20% - 21% - 22% 17% -
margin
Sales in Mobile Networks grew by 19% year-over-year. In constant
currencies, sales grew 21% year-over-year and 18% for the six-month
period.
In the evolution from GSM to WCDMA most customers are deploying
networks that combine GSM and WCDMA. The growth in the GSM/WCDMA
track was approximately 22% in the quarter. Of radio access sales,
54% was WCDMA/EDGE related. The strong subscriber growth continues
and supports the growth in Mobile Networks sales.
Sales within Professional Services have developed favorably during
the quarter and grew approximately 25% year-over-year. In constant
currencies the growth was 27% year-over-year. Supporting the strong
growth the number of employees in services grew by 1,500 in the
quarter.
Other Operations
Second quarter First quarter Six-month period
SEK b. 2005 2004 Change 2005 Change 2005 2004 Change
Net 2.7 2.8 -5% 2.7 -2% 5.4 5.3 2%
sales
Operating -0.1 0.6 - 0.0 - 0.0 0.6 -
income
Operating -4% 20% - 2% - -1% 11% -
margin
Other Operations show a sequential sales decline of 2%. This
includes 17% growth in Ericsson Mobile Platforms. Operating income
of SEK -0.1 b. is affected by ongoing restructuring in Ericsson
Power Modules and increased R&D investments in Enterprise and
public safety.
SONY ERICSSON MOBILE COMMUNICATIONS
For information on transactions with Sony Ericsson Mobile
Communications please see Financial statements and additional
information.
Sony Ericsson Mobile Communications (Sony Ericsson) reported units
shipped up 14% year-over-year and 26% sequentially. Sales increased
by 7% year-over-year. Ericsson's share in Sony Ericsson's income
before tax was SEK 0.4 b. for the quarter, compared to SEK 0.5 b.
in the same period previous year.
PARENT COMPANY INFORMATION
Net sales for the six months period amounted to SEK 0.7 (0.9) b.
and income after financial items was SEK 5.3 (4.5) b.
Major changes in the Parent Company's financial position for the
six months period include increased short- and long-term
receivables from subsidiaries of SEK 6.6 b. and decreased other
current receivables of SEK 4.8 b. Current and long-term liabilities
to subsidiaries decreased by SEK 7.3 b. and other current
liabilities increased by SEK 2.4 b. At the end of the quarter, cash
and short-term cash investments amounted to SEK 67.2 (71.7) b.
In accordance with the conditions of the Stock Purchase Plans and
Option Plans for Ericsson employees, 5,294,648 shares from treasury
stock were sold or distributed to employees during the second
quarter. The holding of treasury stock at June 30, 2005 was
292,992,667 Class B shares.
Stockholm, July 21, 2005
Carl-Henric Svanberg
President and CEO
Date for next report: October 21, 2005
AUDITOR'S REPORT
We have reviewed the report for the second quarter ended June 30,
2005, for Telefonaktiebolaget LM Ericsson (publ.). We conducted our
review in accordance with the recommendation issued by FAR. A
review is limited primarily to enquiries of company personnel and
analytical procedures applied to financial data and thus provides
less assurance than an audit. We have not performed an audit and,
accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes
us to believe that the interim report does not comply with the
requirements for interim reports in the Annual Accounts Act and IAS
34.
Stockholm, July 21, 2005
Bo Hjalmarsson Peter Clemedtson Thomas Thiel
Authorized Public Accountant Authorized Public Authorized
Accountant Public
Accountant
PricewaterhouseCoopers AB PricewaterhouseCoopers AB
EDITOR'S NOTE
To read the complete report with tables please go to:
www.ericsson.com/investors/financial_reports/2005/6month05-en.pdf
Ericsson invites the media, investors and analysts to a press
conference at the Ericsson headquarters, Torshamnsgatan 23,
Stockholm, at 09.00 (CET), July 21.
An analyst and media conference call will begin at 15.00 (CET).
Live audio webcast of the press conference and conference call as
well as supporting slides will be available at
www.ericsson.com/press and www.ericsson.com/investors.
FOR FURTHER INFORMATION PLEASE CONTACT
Henry Sténson, Senior Vice President, Communications
Phone: +46 8 719 4044
E-mail: investor.relations@ericsson.com or
press.relations@ericsson.com
Investors
Gary Pinkham, Vice President,
Investor Relations
Phone: +46 8 719 0000;
E-mail: investor.relations@ericsson.com
Susanne Andersson, Investor Relations,
Phone: +46 8 719 4631
E-mail: investor.relations@ericsson.com
Glenn Sapadin, Investor Relations,
North America
Phone: +1 212 843 8435;
E-mail: investor.relations@ericsson.com
Media
Pia Gideon, Vice President,
Market and External Communications
Phone: +46 8 719 2864, +46 70 519 8903; E-mail:
press.relations@ericsson.com
Åse Lindskog, Director,
Head of Media Relations
Phone: +46 8 719 9725, +46 730 244 872; E-mail:
press.relations@ericsson.com
Ola Rembe, Director,
Media Relations
Phone: +46 8 719 9727, +46 730 244 873; E-mail:
press.relations@ericsson.com
Telefonaktiebolaget LM Ericsson (publ)
Org. number: 556016-0680
Torshamnsgatan 23
SE-164 83 Stockholm
Phone: +46 8 719 00 00
www.ericsson.com
Safe Harbor Statement of Ericsson under the Private Securities
Litigation Reform Act of 1995;
All statements made or incorporated by reference in this release,
other than statements or characterizations of historical facts, are
forward-looking statements. These forward-looking statements are
based on our current expectations, estimates and projections about
our industry, management's beliefs and certain assumptions made by
us. Forward-looking statements can often be identified by words
such as "anticipates", "expects", "intends", "plans", "predicts",
"believes", "seeks", "estimates", "may", "will", "should", "would",
"potential", "continue", and variations or negatives of these
words, and include, among others, statements regarding: (i)
strategies, outlook and growth prospects; (ii) positioning to
deliver future plans and to realize potential for future growth;
(iii) liquidity and capital resources and expenditure, and our
credit ratings; (iv) growth in demand for our products and
services; (v) our joint venture activities; (vi) economic outlook
and industry trends; (vii) developments of our markets; (viii) the
impact of regulatory initiatives; (ix) research and development
expenditures; (x) the strength of our competitors; (xi) future cost
savings; and (xii) plans to launch new products and services.
In addition, any statements that refer to expectations, projections
or other characterizations of future events or circumstances,
including any underlying assumptions, are forward-looking
statements. These forward-looking statements speak only as of the
date hereof and are based upon the information available to us at
this time. Such information is subject to change, and we will not
necessarily inform you of such changes. These statements are not
guarantees of future performance and are subject to risks,
uncertainties and assumptions that are difficult to predict.
Therefore, our actual results could differ materially and adversely
from those expressed in any forward-looking statements as a result
of various factors. Important factors that may cause such a
difference for Ericsson include, but are not limited to: (i)
material adverse changes in the markets in which we operate or in
global economic conditions; (ii) increased product and price
competition; (iii) further reductions in capital expenditure by
network operators; (iv) the cost of technological innovation and
increased expenditure to improve quality of service; (v)
significant changes in market share for our principal products and
services; (vi) foreign exchange rate fluctuations; and (vii) the
successful implementation of our business and operational
initiatives.
The full report including tables can also be downloaded from the
following link.
hugin.info/1061/R/1003232/154033.pdf
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