Ericsson reports strong gross margin development and full year profit before restructuring charges

Fourth quarter and twelve months summary
  • Net sales SEK 36.2 (36.7) b., full year SEK 117.7 (145.8) b.
  • Net income SEK 0.1 (-8.3) b., full year SEK -10.8 (-19.0) b.
  • Earnings per share SEK 0.01 (-0.58), full year SEK -0.69 (-1.51)
  • Adjusted gross margin 41.6% (32.6%) - up 5.7%-points sequentially1
  • Adjusted income after financial items SEK 5.5 (-2.1) b., full year SEK 2.8 (-14.0) b 2
  • Cash flow before financing SEK 4.6 b. - net cash SEK 27.0 b.
  • Restructuring charges of SEK 4.0 (6.3) b., full year SEK 16.5 (12.0) b.
  • Press release
    Feb 06, 2004 06:30 (GMT +00:00)

    1 Adjusted for restructuring charges SEK 0.8 (3.5) b. and for the full year SEK 4.8 (5.6) b.
    2 Adjusted for restructuring charges, non-operational capital gains/losses, net, and capitalization of development expenses, net, SEK 3.6 (5.9) b. and for the full year SEK 14.9 (8.8) b.

    Book-to-bill was below one as expected due to seasonally strong sales in the fourth quarter. Orders booked increased sequentially by 5% to SEK 29.5 (30.7) b. Net sales in the quarter grew 29% sequentially to SEK 36.2 (36.7) b. Currency exchange effects have had a negative impact on sales of 9% year-over-year.

    Adjusted gross margin improved sequentially by 5.7 percentage points to 41.6% (32.6%) as a result of ongoing restructuring with cost of sales reductions, favorable product mix, as well as higher capacity utilization in the seasonally strong fourth quarter. Operating expense reductions are on track, reaching an annualized run rate of SEK 37 (51) b. Adjusted income after financial items was SEK 5.5 (-2.1) b. compared to SEK 1.0 b. in the third quarter. Net currency exchange effects, compared to rates one year ago, have had a negative impact of SEK 1.6 b. on operating income in the quarter.

    Cash flow before financing was SEK 4.6 (1.6) b. primarily due to improved earnings and further capital rationalization. The financial position was strengthened with a net of financial assets and liabilities, i.e. net cash, of SEK 27.0 b. Payment readiness has further increased to SEK 75.3 (66.3) b.

    "The mobile infrastructure market has definitely stabilized, traffic continues to grow and operators are increasing their focus on network quality and capacity. The year ended with strong sales and we continue to further enhance our leading position," says Carl-Henric Svanberg, President and CEO of Ericsson.

    "Significant improvements in operating profit, gross margin and cash flow have been achieved through increased efficiency and cost of sales reductions. This is the result of the focus on returning the company to profitability including the accelerated efforts in reducing cost of sales. Although the major restructuring is over, with minor adjustments remaining to be completed, by the third quarter 2004, our relentless work to increase efficiency and cost awareness will continue.

    As market leader we have together with our customers gained key learnings in the early stages of the 3G rollout. This experience provides important advantages and we are encouraged by the 3G sales during the quarter. This year will be important for our industry as commercial launches of 3G gather speed in preparation for a mass market in 2005.

    We have the most comprehensive experience from all around the world and in all standards. Our leading position in both 2G and 3G is a decisive competitive advantage in supporting operators in all markets and phases of development. We have built this strong position on our cutting-edge technology, large volumes with economies of scale and our ability to offer end-to-end solutions.

    Understanding consumer needs is increasingly important in this industry. The key challenge for both operators and us, as a business partner, is to understand which services consumers want, what they are willing to pay for them, and how to adapt business models accordingly. We must support our customers and partners in developing their business, choosing the right technology and operating it most efficiently. This will continue to be a key focus area going forward," concludes Carl-Henric Svanberg.

    Market View
    Operators have considerably strengthened their financial position and are increasing their efforts in service and network quality. Many operators in mature, capacity driven markets are signaling constraints after several years of limited investments and the increasing use of voice and mobile data services. 3G is the main focus but there is also a need for investments in capacity enhancements of both 2G and 2.5G.

    In addition, tariffing plays an important role for traffic development. The strong traffic growth in North America over the years has mainly been driven by flat rate pricing. Recently, similar tariffing schemes have started to surface in Europe and Asia-Pacific and are likely to stimulate traffic growth.

    In emerging markets subscriber growth continues to be strong. In certain markets such as China, India and Russia, there is a continuous need for further capacity enhancements driven by the strong traffic growth.

    Most of these markets are still primarily driven by coverage. Low tariffs and low subscriber spend have so far been important limiting factors for profitable build out. With technology optimized for coverage it is possible to address far more consumers with maintained healthy profitability. Growth potential in these markets is therefore likely to be higher than earlier projections.

    Today, worldwide subscription penetration is only 21% with a total of 1.34 billion subscriptions. The global number of mobile subscriptions is estimated to reach two billion during 2008. We believe that our solutions for operators in emerging markets could increase this growth rate.

    The number of GSM subscriptions is expected to exceed one billion during the first quarter 2004. The growth in number of WCDMA subscriptions is gaining momentum and by the end of the quarter there were 2.8 million subscriptions. EDGE is playing an increasingly important role as a complement to WCDMA in rural areas. Within the CDMA2000 1X standard, the number of users is growing rapidly and by the end of the quarter there were 70 million subscriptions.

    More and more operators are considering outsourcing of network integration and management. We recognized this potential early on, and based on our competitive advantage in end-to-end solutions and our large installed base, we have the market's strongest service portfolio.

    We believe that the market has stabilized and our view is that the global mobile systems market in 2004, measured in USD, will be in line with, or show slight growth, compared to 2003. This compares with our previous expectation that the mobile systems market in 2004 would be in line with 2003. The addressable market for professional services, also measured in USD, is expected to continue to show good growth.

    We expect sales for the first quarter to show a sequential decrease due to seasonality but to show moderate growth year-over-year. However, we are monitoring the sustainability of this growth trend as some part could be operators catching up on last years limited investments.

    Operational realignment
    Annualized operating expense run rate was SEK 37 b., a SEK 1 b. reduction sequentially. The earlier announced reductions targeting an annualized operating expense run rate of SEK 33 b. by the third quarter 2004 remain. Total restructuring charges were SEK 4.0 b. during the quarter.

    Total restructuring costs for 2003 were SEK 16.5 b., including SEK 0.4 b. for associated companies, concluding the announced restructuring charges. Restructuring costs refer mainly to severance pay, unutilized real estate and write down of assets. Cash outlays in the quarter were SEK 2.6 b. Of the originally anticipated cash outlays of SEK 20 b. associated with the restructuring, SEK 9.1 b. remains at year-end, of which approximately SEK 5 b. is expected to be paid in 2004. The cash flow effect after 2004 refers mainly to unutilized real estate.

    During the quarter, headcount was reduced by 1,800, bringing the number of employees to 51,600 (64,600). The previous headcount target remains with total number of employees reaching 47,000 during 2004.



    Order intake was SEK 31.0 b. However, due to a SEK 1.5 b. adjustment of prior years' order backlog, orders booked were SEK 29.5 (30.7) b., an increase by 5% sequentially. The increase was driven by particularly strong development in the Americas and Asia-Pacific, compensating for weaker order intake in the Middle East and Western Europe. Central and Eastern Europe showed sequential growth. Adjusted for currency exchange effects the year-over-year increase was 9%.

    Sales grew 29% sequentially to SEK 36.2 (36.7) b. Most markets increased with major contributions from China, India and the US. Though year-over-year sales were almost flat, adjusted for currency exchange effects, sales were up 8%.

    Adjusted gross margin improved for the fourth consecutive quarter to 41.6% (32.6%), a sequential increase from 35.9%. Ongoing restructuring with cost of sales reductions, favorable product mix, as well as higher capacity utilization were the main contributors to the improved gross margin.

    Adjusted operating expenses amounted to SEK 10.5 (14.3) b. Operating expenses include a SEK 0.5 b. increase in customer financing risk provisions. Adjusted operating income was SEK 6.0 (-2.3) b. compared to SEK 1.3 b. the previous quarter. Adjusted income after financial items was SEK 5.5 (-2.0) b. compared to SEK 1.0 b. in the third quarter. Adjusted income after financial items was SEK 2.8 (-14.0) b. for the full year.

    Net effects of currency exchange differences on operating income compared to the rates one year ago were SEK -1.6 b. in the quarter and SEK -3.1 b. for the full year. Excluding effects from currency hedging this effect would have been SEK -4.0 b. for the full year.

    Net income was SEK 0.1 (-8.3) b. for the quarter and SEK -10.8 (-19.0) b. for the full year.

    Earnings per share were SEK 0.01 (-0.58) and SEK -0.69 (-1.51) for the full year.

    Balance sheet and financing
    The financial position improved significantly as the net of financial assets and debt, i.e. net cash, increased sequentially from SEK 20.5 b. to SEK 27.0 (4.8) b. Cash improved by SEK 3.7 b. sequentially.

    Days sales outstanding (DSO) for trade receivables were 79 (92), a decrease by 14 days sequentially. Inventory turnover was more than 6.1 (5.1) turns.

    Gross customer financing exposure increased sequentially by SEK 0.5 b. to SEK 12.3 (21.8) b. Net customer financing credits on balance sheet were reduced sequentially by SEK 0.3 b. to SEK 4.0 (14.0) b.

    A one-time payment was made to a Swedish pension management company, reducing our pension liability by SEK 3.5 b. SEK 2.1 b. in long-term maturities were repaid during the quarter. The equity ratio was 34.4% (36.4%) compared to 34.5% at the end of the previous quarter.

    Cash flow
    Cash flow from operations, adjusted for restructuring and pension payment, was SEK 11.0 b. Cash flow before financing activities remained strong and amounted to SEK 4.6 (1.6) b. Cash flow from investing activities was SEK -0.1 b. net.
    Payment readiness increased sequentially by SEK 3.9 b. to SEK 75.3 (66.3) b.



    Systems orders increased sequentially by 4% to SEK 27.6 (28.5) b. Orders for Professional Services increased by 72% sequentially.

    Systems sales increased 30% sequentially to SEK 33.6 (33.2) b. driven by good growth in both GSM and WCDMA. Despite the weak USD, sales were flat year-over-year.

    The GSM/WCDMA track increased significantly both sequentially and year-over-year by 38% and 9%, respectively. Adjusted for currency exchange effects the year-over-year increase was 18%. WCDMA equipment and associated network rollout services share of total Mobile Networks sales was stable at 13%.

    Sales of Professional Services increased significantly by 30% sequentially to SEK 5.7 (5.5) b., and continue to represent 17% of total Systems sales. Adjusted for currency exchange effects the year-over-year increase was 13%.

    Orders booked for comparable units, excluding divested operations, were SEK 2.3 (2.5) b.

    Sales for comparable units were up sequentially at SEK 3.2 (3.8) b.

    Adjusted operating income was positive at SEK 0.1 (-1.2) b., indicating good progress in restructuring activities.

    Sony Ericsson Mobile Communications (Sony Ericsson) reported profit for the second consecutive quarter. Ericsson's share in earnings, adjusted for restructuring costs, was SEK 0.3 (-0.3) b., compared to SEK 0.2 b. in the third quarter. Following restructuring in the first half of the year Sony Ericsson has established a solid operational platform. With a full portfolio of products now gaining momentum, the company is well positioned to exploit the opportunities in the fast growing mobile multimedia market.

    The strategic focus areas of GSM and Japanese standards posted a 50% and 15% year-on-year growth in shipments, respectively, with the T610 phone continuing to capture market share in all markets. In the quarter, new high-end and entry-level GSM products were introduced as well as two new handsets for the Japanese market.

    Transactions with Sony Ericsson Mobile Communications

    Parent Company information

    Net sales for the fourth quarter amounted to SEK 1.6 (2.0) b. and income after financial items, excluding restructuring costs, was SEK 3.2 (2.5) b.

    The financial statements for 2002 have been revised due to changes in accounting principles. These changes have not affected the consolidated financial statements.

    Major changes in the company's financial position for the full year include decreased current and long-term commercial and financial receivables from subsidiaries of SEK 25.2 b. and increased cash and short-term cash investments of SEK 9.1 b. Short- and long-term internal borrowings decreased by SEK 9.6 b. Notes and bond loans, including short-term portion, have decreased by SEK 11.8 b. At the end of the year, cash and short-term cash investments amounted to SEK 68.4 (59.3) b.

    In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 1,402,225 shares from treasury stock were sold or distributed to employees during the fourth quarter. The holding of treasury stock at December 31, 2003, was 306,139,953 Class B shares.

    Dividend proposal

    The Board of Directors will propose to the Annual General Meeting that no dividend is paid out for 2003.

    Annual report

    The annual report will be made available to shareholders at our head office at Torshamnsgatan 23, Stockholm, two weeks prior to the Annual General Meeting 2004.

    Annual General Meeting of shareholders

    The Annual General Meeting of shareholders will be held on Tuesday, April 6, 2004, 3 p.m., in Stockholm Globe Arena.

    Stockholm, February 6, 2004

    Carl-Henric Svanberg
    President and CEO

    Date for next report: April 23, 2004

    Auditors' Report

    We have reviewed the report for the fourth quarter ended December 31, 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 fourth quarter report does not comply with the requirements for interim reports in the Annual Accounts Act.

    Stockholm, February 6, 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: and in the Annual Report.

    To read the full report, please go to:
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