Third quarter summary

  • Net sales SEK 31.8 (28.0) b., nine months SEK 92.5 (81.5) b.
  • Gross margin 47.1% (35.9%)1)
  • Operating margin 22.7% (5.2%)2)
  • Income after financial items SEK 7.0 (1.1) b.2)
  • Net income SEK 4.8 (-3.9) b., nine months SEK 13.0 (-11.0) b.
  • Earnings per share SEK 0.30 (-0.25), nine months SEK 0.82 (-0.69)




  • 1) Adjusted for restructuring charges in the third quarter 2003 SEK 1.1 b.
    2) Adjusted for restructuring charges in the third quarter 2003, net, SEK 5.4 b.
    3) Includes positive non-recurring effect of SEK 0.3 b.


    Net sales in the quarter grew by 14% year-over-year to SEK 31.8 (28.0) b. and were slightly down sequentially mainly due to seasonality but also the gradually abating effect of operators' catch up spending. Currency exchange effects negatively impacted sales by 6% year-over-year. Orders booked in the quarter grew by 3% year-over-year to SEK 29.0 (28.1) b. and was down sequentially.


    Gross margin was 47.1% (35.9%) compared to 47.8% in the second quarter. Income after financial items was SEK 7.0 (1.1) b. compared to SEK 7.5 b. excluding the non-recurring positive effect of SEK 0.3 b. in the second quarter. Net currency exchange effects, compared to rates one year ago, have had a negative impact of SEK -1.0 b. on operating income in the quarter.


    Cash flow before financing was SEK 5.2 (9.1) b., compared to SEK 4.3 b. the previous quarter. Work in progress has increased due to higher business activities. The financial position improved, with a net of financial assets and liabilities, i.e. net cash, of SEK 36.8 (20.5) b.
     
    CEO COMMENTS


    "We are proud to report continued solid performance," says Carl-Henric Svanberg, president and CEO of Ericsson. "Through leveraging our industry leadership we are experiencing good progress throughout the world and across technologies. Understanding of consumer needs, technology leadership and responsiveness to our customers, will be key to further reinforce our leading position.


    We continue to see healthy margin levels and strong results. This is a tribute to our employees' ever-present focus on serving the needs of our customers and delivering operational excellence. It is our ambition to continue to deliver best in class margins.


    Consumer convenience is crucial for our industry's future development. Consumers want personal, reliable and easy-to-use services with broadband capabilities in both the fixed and mobile environment. Converging technologies will enable seamless services regardless of access method. Our ability to provide end-to-end solutions, cutting-edge infrastructure, handset technology and network integration, will be key to success.


    Ericsson's 3G Evolved, with HSDPA-capabilities, is a cornerstone in providing mobile broadband for richer consumer experiences. Our strong position in 3G and technology leadership has enabled us to take an early lead in HSDPA.


    We are enjoying the benefits of our restructuring which enabled us to increase our focus on future growth areas. We are well positioned for profitable growth and continued market leadership," concludes Carl-Henric Svanberg.


    MARKET VIEW
    The underlying growth drivers remain solid. Voice and data traffic is increasing steadily as a result of new services as well as the introduction of more efficient technology. Revenue growth via new services and increased usage is in focus for operators. Net subscriber additions continue at a high level.


    Europe continues to show strong development as a result of continued 3G roll out and GSM capacity enhancements. Spending on WCDMA radio networks is quickly catching up with GSM in Western Europe. Operators' more aggressive tariffing strategies add to the market dynamic. In Russia, Central Europe, Middle East and Africa the activity level is high with several new networks being rolled out and strong subscriber growth.


    The Asia Pacific region continues to develop well with increasing usage and subscriber growth. Minutes of use per mobile subscriber are increasing steadily with India and China presently showing double the European levels. Japan is in the lead in 3G deployments and is experiencing strong subscriber take up and dramatic increases in data usage.


    The North American market continues to show healthy development with increasing focus on quality of service. The Cingular/AWS merger regulatory process continues to affect the market. Latin America, where operator consolidation has taken place, now shows strong growth. The development is particularly encouraging in Brazil and Mexico with improving GSM coverage and capacity expansions.


    During the quarter, nine new WCDMA networks were commercially launched, reaching a total of 45. During the quarter the number of WCDMA subscriptions grew from approximately 7 million to more than 10 million. The number of CDMA2000 1xEV-DO subscriptions has now reached more than 9 million.


    Worldwide subscription penetration is 25% with a total of 1.6 billion subscriptions, of which more than 1.1 billion are in GSM. The global number of subscriptions could pass 2 billion already during 2006 and is expected to pass 2.5 billion by 2009.


    OUTLOOK


    The traffic growth in the world's mobile networks should generate a slight to moderate growth in the global mobile systems market 2004. In addition to this underlying growth there is an effect from operators catching up on previous years' limited investments. This effect has started to abate and we expect the market to gradually return to a more normal growth pattern.


    The temporary catch up effect inflates the total mobile systems market growth in 2004. Therefore, compared to total growth in 2004, we expect the global market for mobile systems to show slight growth in 2005. Excluding this catch up effect in 2004, we estimate a moderate underlying market growth in 2005.


    We maintain our view that the addressable market for professional services is expected to continue to show good growth.


    All estimates are measured in USD and refer to market growth compared to previous year.


    With our technology leadership and global presence we are well positioned to take advantage of these market opportunities.


    CONSOLIDATED ACCOUNTS
     
    FINANCIAL REVIEW
    All comparative numbers are stated excluding restructuring charges.


    Income
    Orders booked were SEK 29.0 (28.1) b., an increase of 3% year-over-year, driven by strong development in Latin America, Central Europe, Middle East and Africa as well as South East Asia. India shows particularly exciting development during the year with significantly strengthened market leadership. Sequentially, orders booked decreased mainly reflecting temporarily lower bookings in China as well as the continued effect of operator consolidation in North America. Third quarter orders also reflect an SEK -0.8 b. order adjustment in Costa Rica.


    Sales were SEK 31.8 (28.0) b., an increase of 14% year-over-year, reflecting good performance in Latin America, Europe and Africa. Currency exchange effected sales negatively by 6%. Sequentially, sales decreased slightly by 2%.


    Gross margin decreased sequentially by 0.7 percentage points to 47.1% (35.9%).


    Operating expenses amounted to SEK 8.9 (9.4) b. as a result of reductions in headcount and lower IS/IT related costs. This item also includes an increase in customer financing risk provisions by SEK 0.4 b.


    Other operating revenues declined sequentially from SEK 0.8 b. to SEK 0.5 b. This item also includes revenues from IPR licensing that shows stable development.


    Operating income was SEK 7.2 (1.5) b. compared to SEK 7.4 b., excluding a non-recurring positive effect of SEK 0.3 b., in the second quarter. Operating margin was 22.7% (5.2%). Income after financial items was SEK 7.0 (1.1) b. compared to SEK 7.8 b. in the second quarter. Net effects of currency exchange differences on operating income compared to the rates one year ago were SEK -1.0 b. in the quarter. Excluding effects from currency hedging the effects would have been SEK -0.5 b.


    Financial net has been negatively affected by SEK 0.2 b. due to the repurchase of bonds.


    Net income was SEK 4.8 (-3.9) b. for the quarter.


    Earnings per share were SEK 0.30 (-0.25).


    The number of employees amounted to 50,300 (53,400) at the end of the quarter of which 21,800 (25,200) are in Sweden.
     
    Balance sheet and financing
    Numbers within brackets indicate year-end 2003.


    The financial position remained strong with net of financial assets and debt, i.e. net cash, at SEK 36.8 (27.0) b. compared to SEK 31.7 b. at the end of the second quarter 2004. Cash was reduced by SEK 5.4 b. sequentially to SEK 72.6 (73.2) b.


    Debt has been reduced by SEK 10.5 b. through repayment of maturing debt as well as repurchase of bonds.


    Days sales outstanding (DSO) for trade receivables remained flat at 88 (79) days. Inventory, including work in progress, increased by SEK 1.7 b. sequentially to SEK 16.5 (11.0) b., due to the higher business activity. Inventory turnover was 4.8 (6.1), down sequentially from 5.1.


    Gross customer financing exposure increased sequentially by SEK 0.4 b. to SEK 9.8 (12.3) b. Net customer financing credits on balance sheet increased sequentially by SEK 0.4 b. to SEK 3.4 (4.0) b.


    The equity ratio was 40.9% (34.4%) compared to 37.5% at the end of the previous quarter.
     
    Cash flow
    Cash flow from operations remained strong at SEK 6.5 (9.9) b. Cash flow before financing activities amounted to SEK 5.2 (9.1) b. Cash flow from investing activities was
    SEK -1.3 (-0.8) b. net. The cash flow was negatively affected by increased work in progress as a result of the higher business activity.


    Payment readiness decreased sequentially by SEK -1.1 b. to SEK 82.0 (71.4) b.


    Cash outlays of SEK 5.0 b., with regard to restructuring, are expected during 2004. Of this SEK 1.1 b. was paid in the third quarter.

    SEGMENT RESULTS


    SYSTEMS


    1) Adjusted for restructuring charges in the third quarter 2003, net, SEK 4.2 b.


    Systems orders increased year-over-year by 3% to SEK 27.4 (26.5) b. and decreased sequentially. Systems sales increased 14% year-over-year and decreased sequentially by 2%.


    The growth in the GSM/WCDMA track year-over-year is approximately 25%. WCDMA equipment and associated network rollout services share of total Mobile Networks sales has increased to 15% and of radio access sales 32% were WCDMA/EDGE related.


    Sales development within Professional Services was favorable during the quarter and grew 15% year-over-year in local currencies and now represents approximately 16% of total Systems sales. Bookings fluctuate between quarters and the overall development and portfolio build up is encouraging.


    OTHER OPERATIONS
     




    1) Adjusted for restructuring charges in the third quarter 2003 SEK 1.1 b.
     
    Orders booked increased year-over-year but decreased sequentially. Sales were up both year-over-year and sequentially. The decrease in operating income for Other operations is attributable to completing agreed redundancy activities in Ericsson Microwave Systems.


    SONY ERICSSON MOBILE COMMUNICATIONS


    Sony Ericsson Mobile Communications (Sony Ericsson) reported continued growth in sales and profit. Sales increased by 29% year-over-year and net income improved significantly for the same period. Ericsson's share in Sony Ericsson's income after financial items was SEK 0.6 b. compared to SEK 0.5 b. in the previous quarter.


    Units shipped in the quarter reached 10.7 million, a 51% increase compared to the same period last year, reflecting an enhanced portfolio with the launch of new products such as the first GSM mega pixel camera phone and a second 3G UMTS handset. Average selling price (ASP) increased sequentially in line with company expectation due to new mid and high-end Japanese and GSM products beginning to ship.


    Transactions with Sony Ericsson Mobile Communications






    PARENT COMPANY INFORMATION


    Net sales for the nine months period amounted to SEK 1.2 (1.3) b. and income after financial items was SEK 7.6 (3.5) b. Restructuring costs are excluded in income after financial items for 2003.


    Major changes in the company's financial position for the nine months period include decreased investments in subsidiaries of SEK 13.0 b. and increased short- and long-term receivables from subsidiaries of SEK 14.4 b. Notes and bond loans decreased by SEK 9.8 b. At the end of the quarter, cash and short-term cash investments amounted to SEK 67.1 (68.4) b.


    In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 1,029,239 shares from treasury stock were sold or distributed to employees during the third quarter. The holding of treasury stock at September 30, 2004, was 301,862,534 Class B shares.


    OTHER INFORMATION
     
    With reference to the previously announced public cash offer for the 28.44% of the shares in Ericsson's Italian subsidiary, Ericsson S.p.A, not already owned by Ericsson, Ericsson now owns more than 90% of the shares in Ericsson S.p.A. As a consequence, Ericsson is obliged to launch a residual tender offer on all the floating shares issued by Ericsson S.p.A. Upon completion of this process, and in accordance with Borsa Italia regulation, Ericsson S.p.A will be delisted.


    In accordance with the decision by the extraordinary general meeting on August 31, 2004, the process of changing the difference in voting rights between A and B shares in Ericsson has commenced. Following the change in voting rights each A share confers to one vote and each B share confers one tenth of a vote. After the end of the quarter, as announced on October 5, shareholders in Ericsson have in the first conversion round tendered 265,519,834 B-shares for conversion to the same number of A-shares, which means that 40,46% of the conversion rights have been used for conversion. As a result of the first conversion round, the total number of shares in Ericsson is now 921,738,474 A-shares and 15,210,520,204 B-shares. The A-shares are now representing 37.7% of the voting rights in Ericsson and the B-shares are representing 62.3% of the voting rights.


    Stockholm, October 22, 2004


    Carl-Henric Svanberg
    President and CEO


    Date for next report: February 10, 2005


    AUDITORS' REPORT


    We have reviewed the report for the nine-month period ended September 30, 2004, 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.


    Stockholm, October 22, 2004






    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.


    A glossary of all technical terms is available at: http://www.ericsson.com/about and in the Annual Report.



     
    FOR FURTHER INFORMATION PLEASE CONTACT


    Henry Sténson, Senior Vice President, Communications
    Phone: +46 8 719 4044
     
    Investors
     
    Gary Pinkham, Vice President, Investor Relations
    Phone: +46 8 719 0000; E-mail: investor.relations@ericsson.com


    Lotta Lundin, Investor Relations
    Phone: +46 8 719 6553; E-mail: investor.relations@ericsson.com


    Glenn Sapadin, Investor Relations
    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)
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    Torshamnsgatan 23
    SE-164 83 Stockholm
    Phone: +46 8 719 00 00




    The full report including tables can be downloaded from the following link.