Ericsson reports fourth quarter and full year results

Press release
Feb 01, 2008 06:29 (GMT +00:00)
[Ericsson discloses the information provided herein pursuant to the Swedish Securities Exchange and Clearing Operations Act and/or the Swedish Financial Instruments Trading Act. The information was submitted for publication at 07.30 CET, on February 1, 2008.]
  • Sales SEK 54.5 (54.2) b. full year SEK 187.8 (179.8) b. organic growth 8% in constant currencies
  • Operating income SEK 7.6 (12.2) b., full year SEK 30.6 (35.8) b.
  • Operating margin 14% (23%), 16% (20%) for full year
  • Cash flow from operations SEK 12.0 (11.0) b., SEK 19.2 (18.5) b. full year
  • Net income SEK 5.6 (9.7) b., full year SEK 21.8 (26.3) b 1)
  • Earnings per share SEK 0.35 (0.61), SEK 1.37 (1.65) full year 1)
  • The Board of Directors will propose an unchanged dividend of SEK 0.50 per share


    "During 2007 we continued to strengthen our competitive position," said Carl-Henric Svanberg, President and CEO of Ericsson (NASDAQ:ERIC). We generated an operating income of SEK 30 b. During the autumn we did however experience significant margin erosion in our networks business.

    The continued rapid build out of mobile communications in emerging markets and our significant market share gains have resulted in a higher proportion of new network builds with initial lower margins. At the same time, we have seen a decline in network expansions and upgrades in mature markets. All this is resulting in a lower margin. The ongoing shift to new switching technologies, where we now build new footprint, has similar characteristics, which adds to this effect.

    The mobile networks market growth slowed during the year. As expected, our sales in the quarter were affected by political unrest in certain emerging markets. Professional services continued to show strong growth with stable margins while Multimedia is in a build-up phase and includes areas with good growth and healthy margins as well as investment areas. Cash flow improved in the fourth quarter leading to a better cash conversion year-over-year.

    We have steadily improved our leading position and market share in an increasingly challenging market. Our ambition is to continue to do so, irrespective of market fluctuations. Industry fundamentals and consumer behavior support a positive longer-term outlook. The market growth however slowed during last year and for 2008 we find it prudent to plan for a flattish mobile infrastructure market. We will intensify our operational excellence programs and reduce our cost base to safeguard our competitive position," said Carl-Henric Svanberg.


    Income statement and cash flow

    1) Attributable to stockholders of the parent company, excluding minority interest.
    The year-over-year sales for the quarter were flat due to less spending from operators on network infrastructure and a continued weakened USD. About 50% of sales are USD related. For the full year, the sales increase amounted to 4%. In constant currencies, estimated organic growth was 8%.

    Gross margin declined year-over-year mainly due to the business mix shift, with high proportion of new network builds and less expansions and upgrades, and the ongoing shift to new switching technologies. Sequentially, gross margin was stable as a result of the prevailing business conditions within mobile networks.

    Operating income amounted to SEK 7.6 (12.2) b. in the quarter and SEK 30.6 (35.8) b. for the full year. Operating expenses amounted to SEK 15.2 (13.2) b in the quarter as a consequence of seasonality and newly acquired companies. Sony Ericsson's pre-tax profit contributed
    SEK 2.3 (2.2) b. to Group operating income in the quarter.

    Cash flow from operating activities reached SEK 12.0 (11.0) b. in the quarter and SEK 19.2 (18.5) b. for the full year. The working capital decreased in the quarter as a result of a high completion rate of turn key projects. This includes a favorable development of current liabilities such as VAT and accrued expenses. In addition, a payment from 3 UK of SEK 1.6 b. has been received following a renegotiated contract. Cash conversion for the full year increased to 66% (57%). Days sales outstanding have increased over the year, reflecting the higher share of sales in markets with longer payment terms.

    Other operating liabilities affected cash flow negatively by SEK 0.9 b. in the quarter as the advance payment from Sony Ericsson to Ericsson Mobile Platforms was consumed.

    Cash flow from investing activities was SEK -27.5 (-14.9) b., attributable to acquisitions of
    SEK 26.3 (18.1) b. during the year. Cash flow from financing activities was SEK 6.3 b. for the full year.

    Balance sheet and other performance indicators

    Deferred tax assets increased in the quarter by SEK 0.2 b. to SEK 11.7 (11.5) b. due to the acquisition of LHS. Deferred tax assets increased during the year by SEK 2.0 b. due to acquisitions and were reduced by SEK 2.5 b. through normal utilization.

    During the quarter, approximately SEK 1.2 b. of provisions was utilized, absorbing costs related to product warranties, customer projects, restructuring and other. Additions of SEK 1.7 b. and reversals of SEK 1.4 b. have been made as a result of risk assessments in the ongoing business.

    At year end equity amounted to SEK 135.1 b., an increase by SEK 14.2 b. compared to previous year.
    Cost reductions
    Cost reductions of SEK 4 b. in annual savings will be made. These reductions will have full effect in 2009. All parts of the business will be affected, but main focus areas are SG&A, sourcing, supply and service delivery. One-time charges are estimated to SEK 4 b. and will be recognized as each activity is decided.

    A reduction of approximately 1,000 employees is expected in Sweden and will be made through voluntary programs as far as possible.


    1) Including cost for Marconi restructuring and career change program of SEK 2.9 b that took place in third quarter 2006.
    2) Defense business divested in third quarter 2006

    Sales in Networks declined by 4% in the quarter, year-over-year. For the full year sales grew by 1%. During the second half of 2007, sales were affected by the shift from capacity expansions and software upgrades to new network buildouts. This shift in business mix, as well as the rollout of new switching technologies, has negatively affected gross margin. Network rollout services increased 61% sequentially, reflecting the higher proportion of large network buildout projects.

    Redback has significantly increased its international sales over the year through leveraging Ericsson's global sales organization. In the US, however, Redback saw a decline in business from one major customer which impacted domestic sales. Redback full year sales grew slightly.

    Sales in Professional Services grew by 15% in the quarter year-over-year and by 16% for the full year. Growth in constant currencies amounted to 19% and 16% respectively. Managed services and systems integration showed the fastest growth. Operating margins remained stable at 15%.

    Ericsson won the managed services contract for T-Mobile in the UK. T-Mobile and 3 UK have agreed on network sharing. Subsequently, the 3 UK managed services contract has been adjusted and the scope somewhat reduced to accommodate this change. Going forward this will affect sales but not margins.


    Sales growth amounted to 7% in the quarter year-over-year and 14% for the full year. Operating margin in the quarter was negative 9% and just below break-even for the full year. Multimedia is in a build-up phase. It includes areas with good growth and healthy margins as well as new areas with significant investments, and sales and results fluctuate.

    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 reached 30.8 million, an 18% increase compared to the same period last year and the company continues to capture market share. Sales and operating income were in level with last year. Average selling price (ASP) increased slightly sequentially, a result of the introduction of new flag-ship Walkman and Cyber-shot phones such as the W910 and K850 models. The trend of lower ASPs during the year reflects the company's direction to broaden its product portfolio.

    Ericsson's share in Sony Ericsson's income before tax was SEK 2.3 (2.2) b. in the quarter and
    SEK 7.1 (5.9) b. for the full year.


    Western Europe sales declined by 10% in the quarter year-over-year and 1% for the full year. The softer development was mainly driven by temporary effects from operator consolidation in the UK and Italy. There is a shift in operator investments from 2G to 3G. The momentum for managed services continued with key wins in UK and Germany.

    Central and Eastern Europe, Middle East and Africa sales were flattish in the quarter and increased 5% for the full year. Sales were mainly driven by network rollout and expansions. Middle East showed a slower development in the fourth quarter. 3G rollouts have started in large number of markets in Central Europe.

    Asia Pacific sales declined by 2% for the quarter and increased by 14% for the full year. China ended strong, and grew 16% for the full year. Pakistan, Bangladesh and Thailand were significantly affected by political unrest. India reported strong sales growth for the full year although growth in the fourth quarter was lower. Australia was down in the quarter as well as for the full year after major rollouts in 2006. The strong subscriber growth continues across the region.

    Latin America sales were up 41% in the quarter and 12% for the full year, with continued 2G expansions and accelerated 3G buildouts. Argentina and Brazil showed strong growth in the quarter.
    North America sales grew by 9% in the quarter, primarily due to strong sales to T-Mobile. For the full year, sales declined by 15%. US operator Verizon Wireless has officially announced LTE as their next-generation technology choice.

    Growth rates based on Ericsson and market estimates.

    The change in the competitive landscape continues, including the ongoing mergers as well as an intensified competition from Chinese vendors.

    Mobile subscriptions grew with some 150 million in the quarter to a total of 3.3 billion. 180 million are WCDMA subscriptions, up by close to 20 million in the fourth quarter. There are 197 WCDMA networks in 87 countries, of which the large majority is upgraded to HSPA. Uptake in data traffic accelerates quickly, and in 3G networks monitored by Ericsson total data traffic now exceeds voice traffic.

    In the twelve-month period ending September 30, 2007, fixed broadband connections grew with 24% to some 320 million.


    Unchanged industry fundamentals and consumer behavior support a positive longer-term outlook. However, for 2008, we are planning for a flattish development in the mobile infrastructure market while the professional services market is expected to show good growth.

    In the third quarter report 2007, we said that we continued to believe that the GSM/WCDMA track within the global mobile systems market, measured in USD, would continue to show mid-single digit growth in 2007. We also said that we continued to believe that the addressable market for professional services would show good growth in 2007. And we said that our early expectation for 2008 was that the current market conditions would prevail.


    Net sales for the year amounted to SEK 3.2 (2.6) b. and income after financial items was
    SEK 14.7 (13.6) b. Patent license fees are included in net sales from 2007, instead of in other operating income and expenses, and 2006 has been restated accordingly.

    Major changes in the Parent Company's financial position for the year include: increased investments in subsidiaries of SEK 30.3 b., mostly attributable to the Tandberg, Redback, Entrisphere and LHS acquisitions; decreased other current receivables of SEK 2.2 b.; decreased cash and bank and short-term investments of SEK 8.4 b.; increased notes and bond loans of SEK 11.1 b. through the bond issue program; current and non-current liabilities to subsidiaries increased by
    SEK 4.7 b.

    As per December 31, 2007, cash and bank and short-term investments amounted to SEK 45.6 (54.0) b.

    Major transactions with related parties include the following transactions and balances with Sony Ericsson Mobile Communications: revenues of SEK 3.0 (1.5) b.; receivables of SEK 0.9 (0.1) b.; dividend of SEK 3.9 (1.2) b.

    In accordance with the conditions of the Stock Purchase Plans and Stock Option Plans for Ericsson employees, 6,408,841 shares from treasury stock were sold or distributed to employees during the fourth quarter and 19,022,349 shares during the year. The holding of treasury stock at December 31, 2007, was 231,991,543 Class B shares.


    The Board of Directors will propose to the Annual General Meeting a dividend of SEK  0.50 (0.50) per share, representing some SEK 8.0 (7.9) b., and Monday April 14, 2008, as record day for payment of dividend.


    The annual report will be made available to shareholders at the Ericsson headquarters, Torshamnsgatan 23, Stockholm, approximately two weeks prior to the Annual General Meeting 2008.


    The Annual General Meeting of shareholders will be held on Wednesday April 9, 2008, 15.00 (CET) in the Stockholm Globe Arena.


    Acquisitions 2007
    On January 25, 2007, Ericsson announced the finalization of the acquisition of Redback Networks.

    On February 12, 2007, Ericsson announced its acquisition of Entrisphere, a company providing fiber access technology.

    On February 26, 2007, Ericsson announced its voluntary public cash offer to acquire Tandberg Television for NOK 106 in cash per share. Tandberg Television was consolidated from May 2007.

    On March 15, 2007, Ericsson announced its intention to acquire the business and assets of Mobeon AB, the world leader in IP messaging components for mobile and fixed networks.

    On June 5, Ericsson announced a voluntary public cash offer to acquire LHS AG for approximately EUR 310 m. LHS was consolidated from October 1, 2007.

    On June 27, the acquisition of Drutt Corporation was closed. Drutt is a leading provider of service delivery platform solutions.

    On December 20, 2007, Ericsson announced the acquisition of HyC Group, a leading Spanish company in TV consultancy and systems integration.

    Class action

    In the autumn 2007, Ericsson was named as a defendant in three putative class action suits filed in the United States District Court for the Southern District of New York. The complaints allege violations of the United States securities laws, principally in connection with Ericsson's October 2007 profit warning. At the conclusion of various pending procedural motions and after plaintiffs file a consolidated amended class action complaint, Ericsson intends to seek the dismissal of the lawsuits.

    Assessment of risk environment

    Ericsson's operational and financial risk factors and exposures are described under "Risk factors" in our Annual Report 2006 and we have determined that the risk environment has not materially changed. 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: 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 a continued weakness or further deterioration of the USD/SEK rate; increases 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 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 2006, where we describe our risks and uncertainties along with our strategies and tactics to mitigate the risk exposures or limit unfavorable outcomes.

    Stockholm, February 1, 2008

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

    Date for next report: April 25, 2008


    We have reviewed this report for the period January 1 to December 31, 2007, 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. 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, February 1, 2008


    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), February 1.

    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

    Henry Sténson, Senior Vice President, Communications
    Phone: +46 8 719 4044
    Gary Pinkham, Vice President,
    Investor Relations
    Phone: +46 8 719 0000

    Susanne Andersson,
    Investor Relations
    Phone: +46 8 719 4631

    Åse Lindskog, Vice President,
    Head of Media Relations
    Phone: +46 8 719 9725, +46 730 244 872 E-mail:   

    Ola Rembe, Vice President
    Phone: +46 8 719 9727, +46 730 244 873

    Telefonaktiebolaget LM Ericsson (publ)
    Org. number: 556016-0680
    Torshamnsgatan 23
    SE-164 83 Stockholm
    Phone: +46 8 719 00 00

    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; (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.
    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 or interest rate fluctuations; and (vii) the successful implementation of our business and operational initiatives.

    The full report including tables attached.