Ericsson reports profit in the third quarter, restructuring excluded

Press release
Oct 30, 2003 06:28 (GMT +00:00)
Third quarter summary
  • Net sales SEK 28.0 b. - book-to-bill above 1 for third consecutive quarter
  • Net income SEK -3.9 b. - adjusted income after financial items SEK 1.0 b.
  • Earnings per share SEK -0.25
  • Adjusted gross margin 35.9% - up 0.8%-points sequentially despite weakening USD
  • Operating expense run rate SEK 38 b. - down SEK 4 b. sequentially
  •  Cash flow before financing SEK 9.1 b. - net of financial assets and liabilities SEK 20.5 b.

  • Book-to-bill was above one for the third consecutive quarter. Order bookings decreased sequentially by 1% to SEK 28.1 (20.5) b. Net sales in the third quarter grew 2% sequentially to SEK 28.0 (33.5) b. Currency exchange effects have had a negative impact on sales of 9% year-over-year.

    Adjusted gross margin improved sequentially by 0.8 percentage points to 35.9% (32.6%) as a result of ongoing restructuring. Operating expense reductions are well on track, reaching an annualized run rate of SEK 38 (52) b. Adjusted income after financial items was SEK 1.0 (-3.6) b. compared to SEK -0.2 b. in the second quarter. Net currency exchange effects have had a negative impact of SEK 0.9 b. on operating income in the quarter.

    Cash flow before financing was SEK 9.1 (-2.7) b. with major contributions from reductions in working capital and customer financing. The financial position was significantly strengthened with a net of financial assets and liabilities of SEK 20.5 b. Payment readiness remains high at SEK 71.4 (66.6) b.

    "Ericsson is back to profit, which is an important milestone, but a lot still remains to be done before we reach good profitability," says Carl-Henric Svanberg, President and CEO of Ericsson. "The cost savings, as well as cash flow and gross margin improvements are the result of dedicated employees with a clear understanding of the need to be in control of our own destiny.

    Our direction is clear. We are targeting an operating expenses run rate of SEK 33 b. by Q3 2004 and will continue to focus on cost and operational excellence. We must respond even quicker to customers' changing needs and leverage our technology and market leadership. This is the way to secure the profitability and cost advantages attainable by the market leader.

    We are well positioned to capture new opportunities and are encouraged by our continued leading position in the market. We have gained a number of key contracts within the rapidly expanding markets for 3G/EDGE and MMS. Our solid 2G GSM position remains an important platform for further business expansion. We also see an increasing interest in our strong service offering where professional services have become a natural extension of our network contracts.

    Leadership in this changing industry requires a clear understanding of operator and consumer needs in different markets. The ability to support operators in their launch of new services, changing business models and high quality standards in end-to-end solutions is crucial. A prerequisite is operational excellence in all aspects of our business," concludes Carl-Henric Svanberg.

    Market View
    Applications with rich consumer experience like sending and receiving pictures, downloading music, accessing e-mail and checking news over the mobile phone are gaining momentum. This drives the need for higher capacity and speeds, improved interoperability and higher quality of service in the mobile networks.

    New service applications are of interest to the operator not only to drive new business but also to attract and retain high volume voice users, as such users are early adopters of new services. Today there are more than 160 commercially launched MMS installations of which we have 50% market share.

    Broadband in fixed networks, with its dramatically improved speed, is growing strongly. Mobility has built its tremendous success on the advantages of convenience and reachability. 3G now combines mobility and broadband capabilities opening obvious new opportunities.

    The number of WCDMA subscriptions is accelerating and by the end of the quarter there were 1.7 million subscriptions. The introduction pace mirrors the rollout of GSM, ten years ago. Major operators are now working toward confirmed launch dates. Within the CDMA standard, the number of CDMA2000 users is growing rapidly.

    The global number of mobile subscriptions continues to grow on pace to reach close to 2 billion subscriptions during 2008. The growth is particularly strong in China, India and Russia partly driven by tariff reductions. Today, world penetration is only 20% with a total of 1.28 billion subscriptions. Asia-Pacific still only has 12% penetration in mobile subscriptions while Western Europe and North America has 80% and 51% respectively. We expect between 165 and 180 million net additions this year.

    The industry is recovering. Operators are successfully reducing debt and strengthening their financial position. The gradual shift in focus from financial restructuring to business development leads us to believe that the market is stabilizing and that the dramatic market decline is behind us.

    We maintain our view that the global mobile systems market, measured in USD, could decline by more than 10% this year compared with 2002. The addressable market for professional services is expected to continue to show good growth.

    We expect to maintain our shares of the mobile systems and professional services markets this year. Due to currency exchange effects, our reported sales in SEK will decline more than the overall market, which is estimated in USD. Due to seasonality, sales for the fourth quarter are expected to show significant sequential growth.

    We expect the mobile systems market in 2004 to be in line with 2003.

    The cost of sales projects contributed to an improvement of the adjusted gross margin to 35.9% (32.6%), a sequential increase of 0.8 percentage points from 35.1%. The targeted annualized run rate of operating expenses of SEK 38 b. was achieved one quarter ahead of schedule and was reduced by SEK 4 b. sequentially. The earlier announced reduction targets in cost of sales and operating expenses by the third quarter 2004 remains.

    Total restructuring charges were SEK 5.4 b. during the quarter and SEK 12.4 b. year-to- date. Estimated total restructuring costs for 2003 remain at SEK 16.3 b., which concludes the announced restructuring programs. Cash outlays in the quarter were SEK 2.7 b.

    During the quarter, headcount was reduced by 4,200, bringing the number of employees to 53,400 (71,700). The previous headcount target remains with total number of employees reaching 47,000 during 2004.



    Both orders and sales were essentially flat compared to the second quarter. The book-to-bill ratio remained above 1.0 for the third consecutive quarter.

    Orders booked were SEK 28.1 (20.5) b. Year-over-year orders increased by 37%, largely due to substantial improvement in demand in China and India. Adjusted for currency exchange effects and cancellations in the third quarter 2002 the increase was 16%.

    Increased order development in Western Europe compensated for weaker order intake in Central and Eastern Europe. Orders in Asia Pacific were slightly down from the second quarter. The Americas was slightly up mainly due to increased orders booked in Latin America and stable demand in the US.

    Sales grew 2% sequentially to SEK 28.0 (33.5) b. but declined 16% year-over-year. Currency adjusted sales were down 7% year-over-year. Sales in Asia Pacific and Latin America increased sequentially with major contributions from China, Japan and Mexico. The increase was offset by lower sales in Europe, while Middle East and Africa sales continued to develop favorably.

    Gross margin adjusted for restructuring costs improved for the third consecutive quarter to 35.9% (32.6%), a sequential increase from 35.1%. Continued cost reductions and improved capacity utilization were the main contributors.

    Adjusted operating expenses were reduced SEK 0.5 b. sequentially to SEK 9.6 (13.7) b. Operating expenses include a SEK 0.5 b. customer financing risk provision. The annualized run rate was SEK 38 (52) b., down from SEK 42 b. in the second quarter.

    Adjusted operating income was SEK 1.3 (-3.2) b. compared to SEK -0.2 b. the previous quarter. Adjusted income after financial items was SEK 1.0 (-3.6) b. compared to
    SEK -0.2 b. in the second quarter. Net effects of currency exchange differences on operating income compared to rates one year ago were SEK -0.9 b. in the quarter and SEK -1.5 b. year-to-date. Excluding effects from currency hedging contracts this effect would have been SEK -2.2 b. year-to-date.

    Net income was SEK -3.9 (-5.0) b. for the quarter. Financial expenses increased somewhat during the quarter due to increased interest rates tied to our credit rating.

    Earnings per share were SEK -0.25 (-0.41).

    Balance sheet and financing
    The financial position improved significantly as the net of financial assets and debt increased sequentially from SEK 11.0 b. to SEK 20.5 (3.8) b. Cash improved by SEK 7.2 b. sequentially.

    Days sales outstanding (DSO) for trade receivables were 93 (109), a decrease by eight days sequentially. Inventory turnover was more than 5.7 (4.3) turns.

    Customer financing risk exposure remained unchanged at SEK 11.8 (24.9) b. in the quarter. Customer financing credits on balance sheet were reduced sequentially from SEK 10.0 b. to SEK 4.3 (12.7) b., largely due to payments received from credits sold in the second quarter, including the France Telecom bonds. Certain credit commitments expired unutilized, reducing the balance of outstanding commitments from SEK 11.0 in the second quarter to SEK 6.7 (14.0) b.

    A credit facility of USD 1 b. scheduled to expire in 2004 was extended to 2007.

    The equity ratio was 34.5% (36.0%) compared to 36.0% at the end of the previous quarter.

    Cash flow
    Cash flow before financing activities improved significantly sequentially and amounted to SEK 9.1 (-2.7) b. of which net payments received for customer financing credits contributed with SEK 5.3 b. Cash flow from investing activities was SEK -0.8 b. net.

    Payment readiness increased sequentially by SEK 2.6 b. to SEK 71.4 (66.6) b. Payment readiness is expected to remain at approximately SEK 70 b. at year-end, including repayments of approximately SEK 2.2 b. of debt scheduled for the fourth quarter.



    Systems orders grew sequentially to SEK 26.5 (17.9) b. Orders for Mobile Networks increased by 7%, mainly driven by 3G orders, WCDMA as well as CDMA2000.

    Systems sales increased 3% sequentially to SEK 25.9 (30.6) b., with encouraging strong performance in professional services. The GSM/WCDMA track decreased by 4% sequentially and was down 9% year-over-year, adjusted for currency exchange effects. The WCDMA equipment and associated network rollout services share of total Mobile Network sales remained stable.

    Sales of Professional Services increased by 8% sequentially to SEK 4.4 (4.3) b., and now represents 17% of total Systems sales. Adjusted for currency exchange effects year-over-year growth was 12%.

    Benefits of the restructuring programs contributed to the increase of adjusted operating income to SEK 1.2 (-1.1) b.


    Orders booked for comparable units, excluding divested operations, declined 17% year-over-year and 13% sequentially.

    Sales for comparable units were flat year-over-year as well as sequentially. Adjusted operating income improved sequentially partly due to some positive one-time effects.

    The operating results of Sony Ericsson Mobile Communications (SEMC) improved in the quarter. Ericsson's share in earnings was SEK 0.2 (-0.6) b., compared to SEK -0.2 b. in the second quarter. This improvement was due to positive market acceptance of new imaging phones, supply chain improvements and increased operating efficiency. Year-over-year, GSM unit shipments increased 73% and shipments to the Japanese market increased 130%, primarily driven by high demand for imaging phones.

    SEMC expects to be profitable for the second half of 2003. Volume and sales are expected to grow during the fourth quarter but due to an increased proportion of lower priced models in the product mix the current level of profitability may not be sustained in the next quarter.
    Transactions with Sony Ericsson Mobile Communications (SEMC)

    Parent Company information
    Net sales for the nine-month period amounted to SEK 1.3 (1.2) b. and income after financial items, excluding restructuring costs, was SEK 3.5 (0.3) b.

    Major changes in the company's financial position for the nine-month period were increased current and long-term commercial and financial receivables from subsidiaries of SEK 23.2 b., which were financed primarily through increased internal borrowings of SEK 26.6 b. At the end of the quarter, cash and short-term cash investments amounted to SEK 65.3 (59.3) b.

    In accordance with the conditions of the 2001 Stock Purchase Plan for Ericsson employees, 2,010,687 shares from treasury stock were sold or distributed to employees during the third quarter. The holding of treasury stock at September 30, 2003 was 307,542,178 Class B shares.

    Stockholm, October 30, 2003

    Carl-Henric Svanberg
    President and CEO

    Date for next report: February 6, 2004

    Auditors' Report
    We have reviewed the report for the nine-month period ended September 30, 2003, 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 third quarter report does not comply with the requirements for interim reports in the Annual Accounts Act.

    Stockholm, October 30, 2003

    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.

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