Ericsson reports strong third quarter results

Press release
Oct 20, 2008 04:45 (GMT +00:00)

  • Sales SEK 49.2 (43.5) b., 13% growth, SEK 141.9 (133.3) b. first nine months
  • Operating income SEK 5.7 (5.6) b., excl. restructuring charges of SEK 2.0 b 1).,
    SEK 14.72) (23.0) b. first nine months, excl. restructuring charges of SEK 4.6 b. 1)
  • Operating margin 11.5% (12.9%), excl. restructuring charges,
    10.3% 2) (17.3%) first nine months, excl. restructuring charges
  • Cash flow SEK 3.8 (-1.6) b., SEK 17.0 (7.2) b. first nine months
  • Net income 3) SEK 2.8 (4.0) b., SEK 7.4 2) (16.2) b. first nine months
  • Earnings per share 3) SEK 0.89 (1.25) 4), SEK 2.32 2) (5.10) 4)  first nine months

  • 1) The restructuring charges include SEK 0.2 b in Sony Ericsson
    2) Includes a capital gain of SEK 0.2 b. from divested enterprise PBX operations in Q208
    3) Attributable to stockholders of the Parent Company, excluding minority interests
    4) A reverse split 1:5 was made in June 2008. Comparable figures restated accordingly

    "During the quarter, sales grew by 13% with strong development in all regions except Western Europe," said Carl-Henric Svanberg, President and CEO of Ericsson (NASDAQ:ERIC). "Gross margin increased year-over-year and was stable sequentially. We are seeing initial positive effects from our ongoing cost adjustments. Our financial position is strong with healthy net cash and high payment readiness.

    Our business in the quarter has not been impacted by the financial turmoil. Our customers are generally financially strong. In addition, networks are loaded and traffic shows strong increase. In the present financial turmoil, it is however hard to predict how operators will act and to what extent consumer telecom spending will be affected.

    In this environment, we continue to adjust our cost base. Our cost adjustment program is running according to plan. The charges we announced earlier have now been exceeded. However, given the present market conditions, we will continue with cost adjustment activities in the fourth quarter, although at a slightly lower pace.

    We have a positive longer-term view for our industry, however, as we look into 2009, we continue to plan for a flattish market, and we have measures in place also for tougher conditions," said Carl-Henric Svanberg.

    Income statement and cash flow

    1) Excluding restructuring charges of SEK 2.0 the third quarter 2008, SEK 1.8 b. in the second quarter and SEK 0.8 b. in the first quarter
    2) Including restructuring charges
    3) Attributable to stockholders of the Parent Company, excluding minority interests
    4) A reverse split 1:5 was made in June 2008. Comparable figures are restated accordingly

    Sales were up 13% year-over-year, mainly driven by healthy growth in Networks across all regions except Western Europe. In constant currencies, growth amounted to some 17%. Acquisitions and divestitures had a limited net effect.

    Gross margin, excluding restructuring charges, amounted to 37.0% (35.6%) and was stable sequentially. The year-over-year improvement reflects a better business mix outside Western Europe and improved margins in Professional Services.

    Operating expenses, excluding restructuring charges, amounted to SEK 12.9 (12.0) b. in the quarter. Operating expenses decreased sequentially affected by seasonality and some initial effects of the cost adjustments. 

    Operating income, excluding restructuring charges, amounted to SEK 5.7 (5.6) b. in the quarter. Sony Ericsson showed a small profit, excluding restructuring charges. Excluding Sony Ericsson, Group operating margin improved year-over-year to 11.5% (9.0%).

    Financial net amounted to SEK 0.5 (-0.1) b. with positive effects from foreign exchange as well as interest rates.

    Cash flow from operating activities reached SEK 3.8 (-1.6) b. in the quarter, including a dividend of SEK 1.4 b. from Sony Ericsson. The increase in working capital reflects the strong sales and customary build-up of inventories ahead of the fourth quarter. The cash conversion rate year-to-date amounted to 102% (30%).

    Cash flow from investing activities was SEK -5.5 (-3.6) b. in the quarter of which
    SEK -4.6 b are related to increased short-term investments.  

    Balance sheet and other performance indicators

    1) Excluding restructuring costs

    The net cash position increased sequentially to SEK 30.2 (27.9) b. Cash, cash equivalents and short-term investments amounted to SEK 65.6 (57.1) b. This includes effects from a seven-year loan of SEK 4.0 b. with the European Investment Bank to support the development of LTE in Sweden. Of a total debt position of SEK 27.6 b., SEK 5.0 b. matures in the next twelve months.

    During the quarter, approximately SEK 1.6 b. of provisions were utilized related to warranty and project commitments and other items, of which SEK 0.3 b. were related to restructuring. Additions of SEK 3.4 b. were made, of which SEK 1.5 b. related to restructuring. Reversals of SEK 0.1 b. were made. The net impact on operating income, excluding restructuring charges, was negative by SEK 1.9 b.

    Days sales outstanding increased in the quarter to 115 days due to high business activity, especially in high-growth markets where payment terms are longer. Inventory increased due to customary fourth quarter build-up.

    Cost reductions
    In February 2008, a cost reduction plan of SEK 4 b. in annual savings was announced, including estimated charges of the same size. In the quarter, charges of SEK 1.8 b. have been recognized of which SEK 1.5 have been added to provisions. Year-to-date, charges of SEK 4.4 b. have been recognized of which SEK 3.1 b. have been added to provisions. The cost reductions should have full effect from 2009.

    Further charges will be taken in the fourth quarter with expected annual savings increasing accordingly. Ericsson's share in Sony Ericsson's restructuring charges were SEK 0.2 b. in the quarter.


    1) Excluding restructuring costs
    2) First quarter 2008 is restated for the transfer of the IPX operations from Professional Services to Multimedia
    3) Affected by SEK 0.2 b. due to changed allocation of capitalized development expenses

    Sales in Networks were up 16% year-over-year and 5% year-to-date. Network rollout services grew in line with equipment sales. Build-out of new networks as well as network expansions across all markets except Western Europe continues with particularly strong growth in India, Indonesia, Russia and Brazil,. Margins improved sequentially as well as year-over-year due to improved business mix and lower operating expenses.

    Redback shows strong sales growth as a result of increased international sales while sales in the US were down.

    Professional Services
    Sales in Professional Services grew by 7% both year-over-year as well as year-to-date. Adjusted for the transfer of IPX and local currencies, sales growth amounted to 11% year-to-date. Operating margin improved sequentially, as a result of efficiency gains and a lower proportion of new managed services contracts in early phase.

    Compared to a strong third quarter 2007, managed services sales increased year-over-year by 3% and by 13% year-to-date. During the quarter, six new contracts were signed. The total number of subscribers in managed operations now amount to 225 million, of which 60% are in high-growth markets.

    Sales growth was 10% year-over-year and 16% year-to-date. Organic growth, excluding acquisitions and divestitures, amounted to 23% year-over-year. Revenue management, including LHS, and Tandberg Television showed particularly strong development.

    Operating margin showed an encouraging improvement and reached 3% in the quarter. Multimedia is still in its build-up phase and sales and results will fluctuate between quarters.

    Sony Ericsson Mobile Communications
    For information on transactions with Sony Ericsson Mobile Communications, please see Financial statements and Additional information.

    Units shipped in the quarter were 25.7 million, a sequential increase, but a year-on-year decrease. Sales for the quarter were EUR 2,808 million, a decrease of 10% compared to the third quarter 2007. Gross margin decreased year-on-year as well as sequentially due to continued price pressure at a time of adverse cost trends in the supplier base. New products launched, such as the C902 Cyber-shot(TM) camera phone, have been well received. Income before taxes for the quarter was EUR 12 (384) million, excluding restructuring charges of EUR 35 million.

    The target to reduce operating expenses by EUR 300 million annually by the end of the second quarter 2009 remains, with the full effects expected to appear in the second half of 2009. The plans are progressing in line with expectations. 

    Ericsson's share in Sony Ericsson's income before tax, excluding restructuring charges, was SEK 0.1 (1.7) b. in the quarter.


    Sales in Western Europe declined by 6% year-over-year and is down 5% year-to-date. Spain, Italy and UK were particularly slow while Germany and the Nordic region showed good development. 3G accelerates while spending on GSM is decreasing.

    Sales in Central and Eastern Europe, Middle East and Africa increased 9% year-over-year and by 3% year-to-date. The business activity is increasing throughout the region. Russia and Africa showed particularly good development. Roll out of 2G network coverage in rural areas and deployments of 3G in urban areas characterize the region.

    Asia Pacific sales were up 17% year-over-year and 5% year-to-date. The business activity is generally high in the region although there are uncertainties in some countries. India and Indonesia showed particularly strong growth with major new network rollouts. Japan was up strongly after a temporary slow down. China was down sequentially, reflecting the temporary effects of the Beijing Olympics.

    Latin American sales were up 43% year-over-year and 31% year-to-date. The development was particularly strong in Brazil, presently leading the rollout of mobile broadband in the region. Mexico and Central America also contributed to the positive development. Professional Services show positive development throughout the region.

    North American sales were up 44% year-over-year and 43% year-to-date with sales stabilizing on a higher level. The positive development is a result of the continued build-out and expansion of mobile broadband. Smart phones and other new devices as well as broadband-connected laptops are generating demand for fast and efficient networks.

    Growth rates are based on Ericsson and market estimates.

    The demand for broadband is strong. We expect traffic in mobile and fixed networks to increase tenfold in the next five years mainly driven by internet applications and the introduction of interactive HD-TV. Data traffic in WCDMA networks measured by Ericsson is now four times the volume of voice versus close to three times in the previous quarter. With major 3G rollouts in Brazil, Russia, China, India and Africa, consumers across the world will soon benefit from broadband services and connection to Internet.

    Mobile subscriptions grew by some 178 million in the quarter to a total of 3.8 billion. 260 million are WCDMA subscriptions, up by 24 million in the third quarter. There are 239 WCDMA networks in 101 countries, of which 221 networks are upgraded to HSPA. In the twelve-month period ending June 30, 2008, fixed broadband connections grew by 21% to more than 370 million.


    For 2008 we have found it prudent to plan for a flattish global mobile infrastructure market and for good growth of the professional services market.

    The major macro economic trends are negative but the present financial turmoil has so far no impact on Ericsson's business. Operators are generally financially sound, networks are loaded and traffic shows strong growth. In the present financial environment, it is however hard to predict how operators will act and to what extent consumer telecom spending will be affected.

    In this environment, as we look into 2009, we find it prudent to plan for a flattish development in the global mobile infrastructure market and good growth in the professional services market.


    Net sales for the nine-month period amounted to SEK 4.1 (2.5) b. and income after financial items was SEK 17.6 (13.2) b. During the quarter, dividends to the Parent Company have impacted financial net with SEK 8.9 (1.8) b.

    Major changes in the Parent Company's financial position for the nine-month period include decreased current and non-current receivables from subsidiaries of SEK 9.0 b. and increased cash and bank and short-term investments of SEK 11.1 b. Current and non-current liabilities to subsidiaries decreased by SEK 9.5 b. and other current liabilities increased by SEK 3.7 b. As per September 30, 2008, cash and bank and short-term investments amounted to SEK 56.7 (45.6) b.

    Major transactions and balances with related parties include the following with Sony Ericsson Mobile Communications: revenues of SEK 1.4 (1.8) b.; receivables of SEK 0.5 (0.9) b.; dividend of SEK 3.6 (3.9) b.

    In the third quarter, as decided by the Annual General Meeting 2008, a stock issue and a subsequent stock repurchase of 19,900,000 shares was carried out related to Ericsson's Long-Term Variable Compensation Program (LTV) 2008. In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 1,061,485 shares from treasury stock were sold or distributed to employees during the third quarter. The holding of treasury stock at September 30, 2008, was 62,237,216 shares of Class B.

    Joint venture Ericsson Mobile Platforms and ST-NXP Wireless
    On August 20, Ericsson and STMicroelectronics announced an agreement to merge Ericsson Mobile Platforms and ST-NXP Wireless into a joint venture. The 50/50 joint venture will have the industry's strongest product offering in semiconductors and platforms for mobile applications. Regulatory approvals are still pending.

    Change in number of total shares and votes
    On August 29, Ericsson changed the total number of shares and votes due to the issue of shares to expand the treasury stock as part of the financing of Ericsson's long-term variable compensation program.

    Assessment of risk environment
    Ericsson's operational and financial risk factors and exposures are described under "Risk factors" in our Annual Report 2007. However, the increased activities related to the new Multimedia segment may result in a more volatile quarterly sales pattern. Specific additional risks for the near term are associated with the acquisitions made during 2007, as a timely and effective integration of these is essential to make them accretive as planned.

    Risk factors and exposures in focus for the Parent Company and the Ericsson Group for the forthcoming six-month period include: potential negative effects due to the present serious turmoil in the financial markets on operators' willingness to invest in network development, for example due to lack of borrowing facilities, or increased pressure on us to provide financing; unfavorable product mix in the Networks segment with reduced sales of software, upgrades and extensions and an increased proportion of new network build-outs and break-in contracts, which may result in lower gross margins and/or working capital build-up, which in turn puts pressure on our cash conversion rate; variability in the seasonality could make it more difficult to forecast future sales;  effects of the ongoing industry consolidation among the Company's customers as well as between our largest competitors, e.g. intensified price competition; changes in foreign exchange rates, in particular USD and EUR; fluctuations in interest rates and the potential effect on operators' willingness to invest in network development; and continued political unrest or instability in certain markets.

    Ericsson conducts business in certain countries which are subject to trade restrictions or which are focused on by certain investors. We stringently follow all relevant regulations and trade embargos applicable to us in our dealings with customers operating in such countries. Moreover, Ericsson operates globally in accordance with Group level policies and directives for business ethics and conduct. In no way should our business activities in these countries be construed as supporting a particular political agenda or regime. We have activities in such countries mainly due to that certain customers with multi-country operations put demands on us to support them in all of their markets.

    Please refer further to Ericsson's Annual Report 2007, where we describe our risks and uncertainties along with our strategies and tactics to mitigate the risk exposures or limit unfavorable outcomes.

    Stockholm, October 20, 2008

    Carl-Henric Svanberg
    President and CEO
    Telefonaktiebolaget LM Ericsson (publ)

    Date for next report: January 29, 2009


    We have reviewed this report for the period January 1 to September 30, 2008, for Telefonaktiebolaget LM Ericsson (publ). The board of directors and the CEO are 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 SRS. 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, October 20, 2008

    PricewaterhouseCoopers AB                                       
    Bo Hjalmarsson                                                                                            Peter Clemedtson
    Authorized Public Accountant                                                                        Authorized Public Accountant
    Lead partner                                                                                               


    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), October 20.

    An analysts, investors and media conference call will begin at 14.00 (CET).

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

    Video material will be made available during the day on

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    Phone: +46 8 719 4044
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    Phone: +46 8 719 0000

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    Phone: +46 8 719 4631

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    Disclosure Pursuant to the Swedish Securities Markets Act
    Ericsson discloses the information provided herein pursuant to the Securities Markets Act. The information was submitted for publication at 06.45 CET, on October 20, 2008.

    Safe Harbor Statement of Ericsson under the US 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; (xii) plans to launch new products and services; (xiii) assessments of risks; (xiv) integration of acquired businesses; (xv) compliance with rules and regulations and (xvi) infringements of intellectual property rights of others.
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