Ericsson reports strong development securing new business

Press release
Jul 21, 2006 05:29 (GMT +00:00)
  • Net sales SEK 44.2 (38.4) b. in the quarter, SEK 83.3 (69.9) b. first six months
  • Operating income SEK 8.3 (8.3) b. in the quarter, SEK 14.9 (14.9) b. first six months
  • Operating margin 18.7% in the quarter, 19.6% excl. amortization of Marconi intangible assets
  • Net income SEK 5.7 (5.8) b. in the quarter, SEK 10.3 (10.5) b. first six months 1)
  • Earnings per share SEK 0.36 (0.37) in the quarter, SEK 0.65 (0.66) first six months 1)

    "In the changing industry environment we have leveraged our scale, technology leadership and global presence to advance our leading position in mobile systems as well as in services," says Carl-Henric Svanberg, President and CEO of Ericsson. "We have secured a large number of key contracts during the quarter, adding to our strong business momentum. With the Marconi assets as a cornerstone, we are also building a leading position in next-generation converged networks.

    The ongoing consolidation in our industry is a natural process, driven by the need for critical mass in R&D, marketing and supply. As market leader our strategy based on organic growth and bolt-on acquisitions remains. With our scale advantage and an organization focused on innovation and operational excellence, we are well positioned to continue to win market share. Our ability to achieve a healthy balance between long-term growth and short-term profitability will be key to success.

    The deployment of 3G/HSPA continues, led by North America and countries in Asia, Central and Eastern Europe, Middle East and Africa. HSPA capabilities enable Internet to go mobile and enhance the consumer experience of using high-speed data services. This will also open tremendous opportunities to people living in countries with limited wireline communications.

    Telecommunication is an important driver for economic and social development. We have now reached some 2.5 b. mobile subscriptions in the world. Through an intense cost focus throughout the industry, there are continued opportunities for further penetration. The GSM technology has by far the majority of users and, through its superior economies of scale, strongly contributes to making our vision of 'communication for all' a reality," concludes Carl-Henric Svanberg.

    Income statement and cash flow

    1)Attributable to stockholders of the parent company, excluding minority interest.

    Sales in the quarter were up 15% year-over-year with good performance in basically all areas and with services being especially strong.

    Gross margin was 42.0% (45.9%) during the quarter, reflecting the increased proportion of services sales and the integration of the former Marconi operations.

    The operating margin increased sequentially from 16.9% to 18.7% (21.6%), primarily due to continued cost rationalization as well as strong performance by Sony Ericsson. Operating margin amounted to 19.6% excluding amortization of intangible assets related to Marconi. Operating income remained unchanged at SEK 8.3 (8.3) b. year-over-year.

    The financial net was 0.0 (0.2) b. in the quarter.

    Net income in the quarter was SEK 5.7 (5.8) b. and earnings per share were SEK 0.36 (0.37).

    Cash flow before financial investing activities was SEK -2.0 (5.4) b. in the quarter, mainly due to a sequential increase of customer financing of SEK 1.5 b. and increased accounts receivable following the completion of several large contracts late in the quarter.

    Balance sheet items and other performance indicators

    Net cash decreased by SEK 5.8 b. to SEK 27.9 (39.3) b. during the quarter, due to the increased receivables and payment of dividend of SEK 7.2 b. for 2005 in April. In the quarter, bond loans of SEK 9.6 b. matured and were repaid. During the quarter, the pension liability decreased by SEK 1.1 b., mainly due to the change in discount rate in the pension liability in Sweden from 3.5% to 4.0%. The equity ratio was 53.9% (44.9%).

    Days sales outstanding were 95 days, a sequential decrease of six days. Inventories, including work in progress, were down in the quarter by SEK 0.4 b. to SEK 23.1 (19.3) b. and inventory turnover improved to 4.5 from 4.2 times in the previous quarter.

    Deferred tax assets were reduced by SEK 2.1 b. in the quarter, from SEK 16.8 b. at March 31 to SEK 14.6 b., reflecting utilization of tax loss carry forwards.


    Long-term industry growth drivers remain solid. New technologies and richer services will continue to drive and accelerate traffic in the world's networks. The number of mobile subscriptions in the world is expected to pass three billion in 2007. The GSM/WCDMA track represents more than 80% of all mobile subscriptions around the world and the vast majority of the growth. New and more innovative solutions and more affordable handsets are expected to continue to expand the market.

    Fixed and mobile broadband enable new user applications with rich content and interactivity, such as IPTV, chatting, gaming and music services. IPTV is expected to be a main driver of new traffic in converging networks when triple play becomes a reality. TV services are expected to grow strongly also in mobile networks, driven by users that want instant access to on-demand business, sports and news updates.

    WCDMA/HSPA networks are key components in offering users richer services. Currently Ericsson is a supplier to more than 40 HSPA networks under deployment around the world, of which half are in commercial operation. The number of WCDMA subscriptions grew by approximately 13 million to more than 68 million during the quarter. Seven new WCDMA networks were commercially launched during the quarter, bringing the total to 100 WCDMA networks, of which Ericsson is a supplier to 55.

    Services continues to be a key area as operators seek to lower operating costs and free up time for customer interaction and business development. We have a clear leadership through our early start and presently manage networks with 65 million subscribers and provide around-the-clock support to networks with 725 million subscribers. Through our economies of scale and proven expertise, we are able to offer our customers not only first-class operations but also considerable savings.

    Regional overview

    Western Europe sales were up by 26% compared to the same quarter last year. Growth is primarily driven by strong services sales and the added Marconi business. Mobile systems sales were flat. The strong tariff competition and falling roaming charges drive traffic growth and increase operators' need for network expansions as well as intensify their focus on total cost of ownership.

    Central and Eastern Europe, Middle East and Africa sales grew by 24% compared to the same quarter last year. The activity level was especially high in Pakistan, Russia, Saudi Arabia and South Africa. The growth is primarily in GSM, but 3G sales are increasing and during the quarter several contracts for WCDMA/HSPA were received in the region.

    Asia Pacific sales grew by 55% compared to the same quarter last year, primarily driven by strong growth in Australia, China, India, Indonesia and Japan. During the quarter, China showed strong increase year-over-year and there is a steady demand and rollout activity. Contracts are however large and completion and invoicing tend to fluctuate between quarters.

    North America sales were down 42% year-over-year. Sales were down 17% when adjusted for the extra SEK 2 b. invoicing in the second quarter 2005 related to planned later deliveries. The ongoing HSPA build-out continues according to plan. The 2G build-out also continues, however, operators' reductions of excess inventory have short-term effects on our sales. The upcoming spectrum auctions presently affect the market but should stimulate new network rollouts.

    Latin America sales declined by 14% compared to the same quarter last year. As expected, operators are investing less after two exceptionally strong rollout years. There is, however, in many markets a continued need for investments in quality and coverage. Planning for 3G has started, and in parallel further CDMA operators investigate the benefits of changing to GSM/WCDMA.

    Subscription growth

    The growth rate for net mobile subscription additions continues with record levels for the first half of 2006 with more than 200 million subscriptions. At the end of the quarter, worldwide subscription penetration reached 38% with close to 2.5 billion subscriptions in total, of which two billion are GSM. The global number of subscriptions is expected to pass three billion during 2007.

    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. GSM/WCDMA represents over 80% of the total global mobile systems market. It is our primary market and our outlook will therefore be limited to the GSM/WCDMA track.

    For 2006 we believe that the GSM/WCDMA track within the global mobile systems market, measured in USD, will show moderate growth compared to 2005.

    Our previous outlook included all standards and was: For 2006 we continue to believe that the global mobile systems market, measured in USD, will show moderate growth compared to 2005.

    We continue to believe that the addressable market for professional services will show good growth in 2006.

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



    Sales of mobile networks were up by 7% compared to the same quarter last year. Adjusted for the extra SEK 2 b. invoicing in the second quarter 2005 related to planned later deliveries, sales of mobile networks increased by 15% in the quarter. The larger proportion of initial network build-outs reflects our strong position in the market.

    Sales of fixed networks increased by SEK 1.4 b. year-over-year to SEK 2.5 b., of which Marconi added approximately SEK 2.0 b.

    Sales of network rollout and professional services increased 30%, compared to the same quarter last year. During the quarter, strong growth in network rollout continued due to a high proportion of new networks being built. Sales of professional services developed strongly during the quarter and grew 31% compared to the same quarter last year. Approximately SEK 0.5 b. of this is services business related to Marconi.

    Other Operations

    Cables and Ericsson Mobile Platforms continued to show strong performance. The restructuring of Power Modules is generating the expected results. As previously announced, the defense operations will be sold to Saab AB with closing expected before the end of the third quarter.

    For information on transactions with Sony Ericsson Mobile Communications, please see Financial statements and additional information.
    Sony Ericsson Mobile Communications (Sony Ericsson) more than doubled year-on-year income before taxes. Units shipped in the quarter reached 15.7 million, a 33% increase compared to the same period last year, and generated a market share increase both on a year-on-year and sequential basis. Sales for the quarter were EUR 2.272 m., a year-on-year increase of 41%, reflecting a successful product portfolio. Income before taxes was EUR 211 m. in the quarter, a year-on-year increase of 143%. Ericsson's share in Sony Ericsson's income before tax was SEK 1.0 (0.4) b.

    Growth in the global handset market continued to outpace expectations, and Sony Ericsson now forecasts the global market outlook for 2006 to be above 950 million units, up from the previous estimate of above 900 million units.


    Net sales for the six-month period amounted to SEK 0.3 (0.7) b., and income after financial items was SEK 6.6 (5.3) b.

    Major changes in the Parent Company's financial position for the period include a decrease of net liabilities (current and non-current receivables and liabilities) to subsidiaries of SEK 14.2 b., largely related to the acquisitions of Marconi assets in the first quarter, repayment of bond loans of SEK 9.6 b. and a payment of dividend for 2005 to shareholders of SEK 7.1 b. in the second quarter, resulting in reduced cash and short-term investments of SEK 32.0 b.

    In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 1,849,309 shares from treasury stock were sold or distributed to employees during the second quarter. The holding of treasury stock at June 30, 2006, was 262,234,352 Class B shares.


    Marconi integration

    The integration of the acquired Marconi assets is running according to plan. During the quarter, approximately 1,000 employees have been identified for lay-offs. The remaining 600 will be identified in the third quarter 2006 and provisions will be made for all restructuring costs before year-end. The product portfolio and supply chain integration is on plan with targeted savings by year-end 2007.

    Through the restructuring process, service portfolios, softswitch solutions, broadband access and transmission products are being integrated. As a consequence, it will become increasingly difficult to accurately isolate and track the Marconi business. Marconi sales are estimated to be SEK 2.5 b. in the quarter, with an operating loss of approximately SEK 0.2 b. In addition, amortization of intangible assets amounts to SEK 0.4 b.

    Sale of defense business

    As announced on June 12, 2006, Ericsson has agreed to sell its defense business, Ericsson Microwave Systems AB, and its 40% holding in Saab Ericsson Space to Saab AB. Ericsson will retain the National Security and Public Safety business and parts of the Power Systems business. The retained units have around 300 employees. The retained activities will be reported as part of the Systems segment. The purchase price is SEK 3.8 b. in cash and the agreement involves transfer of approximately 1,250 employees. The estimated value of the current assets and liabilities held for sale amount to approximately SEK 3.0 b. respectively. The transaction is expected to close in September 2006.

    As announced on June 12, 2006, the expected capital gain of approximately SEK 3.0 b. is of similar magnitude as the previously announced restructuring costs, mainly related to the Marconi acquisition and the Career Change Offer in Sweden, giving a neutral effect in total on Ericsson's income after financial items for 2006.

    Recommended public offer in Netwise

    As announced on June 5, 2006, Ericsson issued a recommended cash offer of SEK 60 per share to the shareholders and holders of warrants in Netwise AB to transfer all shares in and all warrants issued by Netwise to Ericsson. Netwise B-shares are listed on Nya Marknaden in Sweden. Ericsson and Netwise today have an ongoing cooperation and see further possibilities in combining Netwise's cutting-edge IP competence and applications for the enterprise segment with Ericsson's global presence.

    The acceptance period for the offer runs up to and including August 2, 2006. The estimated date for payment to shareholders is August 27, 2006. The total value of the offer amounts to SEK 300 m. For further information on the offer, please see:

    Stockholm, July 21, 2006

    Carl-Henric Svanberg
    President and CEO

    Date for next report: October 19, 2006


    We have reviewed the interim report for the period January 1 to June 30, 2006, for Telefonaktiebolaget LM Ericsson (publ). Management is responsible for the preparation and presentation of this interim financial information in accordance with IAS 34 and the Annual Accounts Act. Our responsibility is to express a conclusion on this interim financial information based on our review.

    We conducted our review in accordance with the Standard on Review Engagements SÖG 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by FAR. A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Standards on Auditing in Sweden RS and other generally accepted auditing practices. The procedures performed in a review do not enable us to obtain a level of assurance that would make us aware of all significant matters that might be identified in an audit. Therefore, the conclusion expressed based on a review does not give the same level of assurance as a conclusion expressed based on an audit.

    Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information is not, in all material respects, in accordance with IAS 34 and the Annual Accounts Act.
    Stockholm, July 21, 2006


    To read the complete report with tables, please go to:

    Ericsson invites 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 14.00 (CET).

    Live audio webcasts of the press conference and conference call as well as supporting slides will be available at and


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