Second quarter summary

  • Net sales SEK 32.6 (27.6) b., six months SEK 60.7 (53.5) b.
  • Gross margin 47.8% (35.1%)1)
  • Operating margin 22.8% (0.8%)2), excluding positive non-recurring effect of SEK 0.3 b.
  • Income after financial items SEK 7.8 (0.2) b.2)
  • Net income SEK 5.3 (-2.7) b., six months SEK 8.3 (-7.0) b.
  • Earnings per share SEK 0.33 (-0.17), six months SEK 0.52 (-0.44)


  • 1) Adjusted for restructuring charges in the second quarter 2003 SEK 1.1 b.
    2) Adjusted for restructuring charges in the second quarter 2003, net, SEK 3.8 b.
    3) Includes positive non-recurring effect of SEK 0.3 b.


    Orders booked in the quarter grew by 17% year-over-year and were flat sequentially at SEK 33.1 (28.3) b. Net sales in the quarter grew by 18% year-over-year to SEK 32.6 (27.6) b. and 16% sequentially as a result of ongoing 3G rollouts, continued GSM capacity expansions as well as upgrades to EDGE. Currency exchange effects negatively impacted sales by 6% year-over-year.


    Gross margin increased sequentially to 47.8% (35.1%) due to continued focus on operational excellence, higher volumes and a favorable product mix. The announced operating expense reduction target of an annualized run rate of SEK 33 b., was achieved at the end of this quarter, one quarter earlier than originally anticipated.


    Income after financial items was SEK 7.8 (0.2) b. compared to SEK 4.3 b. in the first quarter, including a non-recurring positive effect of SEK 0.3 b. Net currency exchange effects, compared to rates one year ago, have had a negative impact of SEK -0.7 b. on operating income in the quarter.


    Cash flow before financing was SEK 4.3 (5.1) b. Continued focus on workflow improvements has kept working capital close to flat despite the sales growth. The financial position improved consequently, with a net of financial assets and liabilities, i.e. net cash, of SEK 31.7 b.


    CEO COMMENTS
    "Confidence has returned to the industry. 3G rollouts, GSM capacity expansions as well as EDGE upgrades creates momentum for us," says Carl-Henric Svanberg, president and CEO of Ericsson. "With new and expansion contracts across all regions we are capitalizing on our technology leadership, our large installed base as well as our particularly strong position in high growth markets. Our competitive services offering is gaining operator recognition with eight new contracts for managed services and hosting.


    We show healthy development in all technologies. Our organization's commitment to drive operational excellence creates strong results. Higher than anticipated sales drove an encouraging bottom line performance and it is our continued ambition to deliver best in class margins. We have now reached a point where targeted investments in R&D and customer support should further strengthen our leading position and ability to drive profitable growth.


    The pace of 3G network rollout is accelerated by the growing number of handsets available. Experience from the introductory phase of WCDMA/CDMA2000 puts richer consumer offerings and enhanced system capacity in focus. We will leverage our 3G leadership by the introduction of Ericsson WCDMA Evolved, with HSDPA capabilities. This is a logical evolutionary step that will offer true mobile broadband with speeds of up to 14 Mbit/s.


    It is clear that consumers want to use the same services irrespective of whether they are accessing them from a fixed or mobile network. Our end-to-end solutions, based on converged services and networks, support our customers in meeting these consumer demands. Our long experience in wireline, our leading wireless technology and our IP knowledge, are essential components in driving the convergence necessary to achieve ease-of-use and reachability for private as well as professional users.


    We will reinforce our position as the leading infrastructure provider in the telecom industry through understanding of consumer needs, continued R&D leadership, operational excellence and by being the most innovative and responsive partner to our customers," concludes Carl-Henric Svanberg.


    MARKET VIEW
    Drivers for growth in both developed markets and in high growth markets continue to be positive. The traffic is steadily increasing as a result of new and richer services being offered and more competitive tariff schemes besides the continuously growing number of subscribers. Operators are increasing their focus on business development and activities aimed at growing revenues.


    In developed markets, which are primarily capacity driven, continued 3G deployments, upgrades of GSM networks and rapid build-out of broadband access are driving the development. In addition there is a clear trend toward wireless/wireline convergence based on all-IP technologies. This will create efficiency gains, but equally important enable the new seamless services demanded by consumers.


    In high growth markets we see continued strong development both in subscriber additions and in usage. Investments in low cost coverage in these markets continue to be a strong driver. The cost efficient Ericsson Expander solution has been positively received and opens new business opportunities primarily in developing areas with a number of contracts signed in several countries around the world. In these markets there is also an often underestimated number of advanced users demanding services equivalent to those in developed markets.


    In Europe commercial launches of 3G is ongoing. By year-end WCDMA will be commercially launched across all of Western Europe. In addition, most operators in Europe are in the process of deploying EDGE. Though average minutes of use are substantially below the rest of the world, more attractive tariff schemes and an increasing number of new services should stimulate traffic growth.


    The North American market shows healthy development. Along with convergence, operators in North America early on recognized the need to meet consumer demands for seamless services and the benefits of 3G technology. The consolidation among operators continues. The Cingular/AWS merger will create a strong player, however, the regulatory process is creating a normal temporary slow down in the AWS' investments.


    The subscriber growth in the Asia Pacific region continues, led by China and India, where India is on track to become the world's second largest market in number of mobile subscriptions. In parallel with the ongoing 3G license discussions in China, demand for coverage and capacity expansions in 2G and 2.5G networks remains strong. 3G is being rolled out in a number of markets in South East Asia along with continued demand for 2G and 2.5G.


    Ten new WCDMA networks were commercially launched during the quarter, reaching a total of 37. During the quarter the number of WCDMA subscriptions grew from 4.4 million to almost 7 million. The number of CDMA2000 1X subscriptions has now reached more than 100 million.


    Worldwide subscription penetration is 24% with a total of 1.5 billion subscriptions, of which close to 1.1 billion is in GSM. The global number of subscriptions has been estimated to pass two billion early 2007 with most of the increase coming from high growth markets. Worldwide subscription penetration in 2007 is estimated to reach 30%.


    OUTLOOK
    The traffic growth in the world's mobile networks should generate a slight to moderate growth in the global mobile systems market. In addition to this underlying growth there is an effect from operators catching up on previous years' limited investments. This effect continues but should abate over time. All estimates refer to 2004 compared to 2003 and are measured in USD.


    In the first quarter report 2004 we stated "we estimate that the global mobile systems market in 2004, measured in USD, will show slight to moderate growth, compared to 2003. There is also an element of operators catching up on previous years' limited investments."


    We maintain our view that the addressable market for professional services, also measured in USD, 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.


    CONSOLIDATED ACCOUNTS


    FINANCIAL REVIEW
    All comparative numbers are stated excluding restructuring charges.


    Income
    Orders booked were SEK 33.1 (28.3) b., an increase by 17% year-over-year, driven by generally strong development, especially in Italy, Russia, South East Asia and Brazil. Sequentially, orders booked were flat reflecting continued good demand in Western Europe, Asia Pacific and Latin America. However, North America showed a weaker development both year-over-year and sequentially due to operator consolidation affecting short-term investment plans.


    Sales were SEK 32.6 (27.6) b., an increase of 18% year-over-year. All regions were strong, especially high growth markets such as India, China and Mexico. Currency exchange effected sales negatively by 6%. Sequentially, sales increased by 16% driven by overall strong demand.


    Gross margin increased sequentially by 3.1 percentage points to 47.8% (35.1%), due to continued focus on operational excellence, higher volumes and a favorable product mix.


    Operating expenses amounted to SEK 9.2 (9.7) b. The annualized run rate was SEK 34 (42) b., down from SEK 35 b. in the previous quarter. The announced operating expense reduction target of an annualized run rate of SEK 33 b., was achieved at the end of this quarter, one quarter earlier than originally anticipated.


    Operating income was SEK 7.7 (0.2) b. compared to SEK 4.5 b. the previous quarter, including a non-recurring positive effect of SEK 0.3 b. due to the closure of a subsidiary. Operating margin was 23.7% (0.8%). Income after financial items was SEK 7.8 (0.2) b. compared to SEK 4.3 b. in the first quarter.


    Net effects of currency exchange differences on operating income compared to the rates one year ago were SEK -0.7 b. in the quarter. Excluding effects from currency hedging the effects would have been -0.5 b.


    Net income was SEK 5.3 (-2.7) b. for the quarter.


    Earnings per share were SEK 0.33 (-0.17).


    The number of employees amounted to 50,700 (57,600) at the end of the quarter of which 22,400 (27,700) 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 31.7 (27.0) b. compared to SEK 26.8 b. at the end of the first quarter 2004. Cash improved by SEK 3.6 b. sequentially to SEK 78.0 (73.2) b.


    Days sales outstanding (DSO) for trade receivables were 88 (79), an improvement of 14 days sequentially, mainly due to better collections. Inventory, including work in progress, increased by SEK 0.4 b. sequentially to SEK 14.8 (11.0) b., due to the higher business activity. Inventory turnover was 5.1 (6.1), up sequentially from 4.9.


    Gross customer financing exposure decreased sequentially by SEK 1.8 b. to SEK 9.4 (12.3) b. Net customer financing credits on balance sheet were reduced sequentially by SEK 0.9 b. to SEK 3.0 (4.0) b.


    The equity ratio was 37.5% (34.4%) compared to 35.0% at the end of the previous quarter.
     
    Cash flow
    Cash flow from operations remained strong at SEK 6.5 (5.7) b. Cash flow before financing activities amounted to SEK 4.3 (5.1) b. Cash flow from investing activities was
    SEK -2.2 (-0.6) b. net. The cash flow is affected by increased work in progress as a result of the higher business activity.


    On April 26, Ericsson announced its intention to make a public cash offer for the 28,44% of the shares in its Italian subsidiary Ericsson S.p.A., not already owned by Ericsson. The cash offer has affected cash flow by SEK 1.3 b. during the quarter. Ericsson now holds 88,32% of the shares. Although no final decision to this effect has been taken by the competent bodies, Ericsson intends to proceed with the delisting of the Ericsson S.p.A. shares from the Milan Stock Exchange through the merger between Ericsson S.p.A. and a fully owned unlisted Italian company, in the absence of the conditions for making the residual offer or for exercising the squeeze-out right.


    Payment readiness increased sequentially by SEK 4.7 b. to SEK 83.1 (68.8) b., mainly due to improved earnings.


    Cash outlays of SEK 5.0 b., with regard to restructuring, are expected during 2004. Of this SEK 1.5 b. was paid in the second quarter.


    SEGMENT RESULTS


    SYSTEMS


    1) Adjusted for restructuring charges in the second quarter 2003, net, SEK 1.8 b.


    Systems orders increased year-over-year by 18% to SEK 31.2 (26.3) b. Orders were flat sequentially. Systems sales increased both year-over-year and sequentially by 20% and 16% respectively.


    Mobile Networks orders increased by 27% year-over-year to SEK 25.5 (20.0) b. and grew slightly sequentially. WCDMA equipment and associated network rollout services share of total Mobile Networks sales were stable at approximately 12% and of radio access sales 30% were WCDMA/EDGE related.


    Development within Professional Services was favorable during the quarter with several key contracts signed especially for hosting services. Professional Services represents approximately 16% of total Systems sales.


    OTHER OPERATIONS


    1) Adjusted for restructuring charges in the second quarter 2003 SEK 1.1 b.


    Orders booked, sales and operating income improved both year-over-year and sequentially, mainly attributable to Ericsson Mobile Platforms.


    SONY ERICSSON MOBILE COMMUNICATIONS
    Sony Ericsson Mobile Communications (Sony Ericsson) reported a fourth consecutive quarter of profit with a sales increase of 34% year-over-year while sustaining a consistent level of profitability. Ericsson's share in Sony Ericsson's income after financial items was SEK 0.5 b. compared to SEK 0.5 b. in the previous quarter.


    Units shipped in the quarter reached 10.4 million, a 55% increase compared to the same period last year, reflecting a continued strong demand for its style-oriented line-up of imaging and multi-media phones. Average selling price (ASP) decreased sequentially in line with expectation due to an increase in GSM phones in the overall product mix.


    The company maintained momentum in an increasingly competitive market environment, and has established a solid basis for sustained growth going forward. Sony Ericsson is revising its global market outlook for 2004 to approximately 600 million units from its previously stated level of over 550 million.
     
    Transactions with Sony Ericsson Mobile Communications
     




    On June 30, Sony Ericsson announced it had increased its equity stake in the Chinese factory Beijing Ericsson Putian Mobile Communications Co. Ltd. to 51%, taking over majority ownership of the facility from Ericsson. The name of the factory has been changed to Beijing SE Putian Mobile Communications Co. Ltd. (BMC). BMC operations have been fully consolidated into Sony Ericsson in the second quarter, which had a positive effect on the company's results.


    Parent Company information
    Net sales for the six months period amounted to SEK 0.9 (0.9) b. and income after financial items was SEK 4.5 (3.1) b. Restructuring costs are excluded in income after financial items for 2003.


    Major changes in the company's financial position for the six months period include decreased investments in subsidiaries of SEK 12.7 b. Short- and long-term internal borrowings decreased by SEK 15.6 b. At the end of the quarter, cash and short-term cash investments amounted to SEK 73.3 (68.4) b.


    In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 1,176,180 shares from treasury stock were sold or distributed to employees during the second quarter. The holding of treasury stock at June 30, 2004 was 302,891,773 Class B shares.


    OTHER INFORMATION
    An extraordinary general meeting of shareholders in Telefonaktiebolaget LM Ericsson will be held at Berwaldhallen, Dag Hammarskjölds väg 3 in Stockholm, Sweden, at 5.30 p.m. on Tuesday, August 31, 2004. The extraordinary general meeting will resolve on a proposal for resolution to change the difference in voting rights between shares of series A and series B, and the implementation of a conversion clause by amending the articles of association and the issue of conversion rights to holders of shares of series A. The meeting will further resolve on a proposal from Mr. Einar Hellbom on the abandonment of shares of series A. The notice can be found on www.ericsson.com/press


    Stockholm, July 21, 2004


    Carl-Henric Svanberg
    President and CEO


    Date for next report: October 22, 2004


    Auditors' Report
    We have reviewed the report for the six-month period ended June 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, July 21, 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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    SE-164 83 Stockholm
    Phone: +46 8 719 00 00


    FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION


    Financial Statements                                    Page




    Additional Information                                              Page




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