Ericsson reports first quarter 2008 results

Press release
Apr 25, 2008 05:29 (GMT +00:00)
[Ericsson discloses the information provided herein pursuant to the Securities Markets Act and/or the Financial Instruments Trading Act. The information was submitted for publication at 07.30 CET, on April 25, 2008.]

  • Sales SEK 44.2 (42.2) b., organic growth in constant currencies 9%
  • Operating income SEK 4.3 (8.2) b., excl. restructuring charges of SEK 0.8 b.
  • Operating margin 9.7% (19.3%), excl. restructuring charges of SEK 0.8 b.
  • Cash flow SEK 4.7 (4.6) b., cash conversion 83% (80%)
  • Net income SEK 2.6 (5.8) b. 3), incl. restructuring charges of SEK 0.8 b.
  • Earnings per share SEK 0.17 (0.37) 3)

    "Our business developed well in the quarter, considering the present market environment and the declining USD," said Carl-Henric Svanberg, President and CEO of Ericsson (NASDAQ:ERIC). "We still find it prudent to plan for a flattish mobile infrastructure market in 2008. The ongoing cost reductions as we adjust to such a scenario are running according to plan.

    The sales development in the quarter reflects the demand for mobile infrastructure, especially in high-growth markets. Sales are picking up in the US while Western Europe remains slow. The proportion of new network builds in high-growth markets, especially in India, is increasing. In combination with a weaker USD, this continues to put pressure on our margins.

    Professional Services continue to show good growth with increasing demands in all areas, especially in managed services and systems integration. In Multimedia, we continue to invest in R&D in new business opportunities which reduce profitability. Multimedia's result was also affected by Sony Ericsson's lower sales which impacted sales of mobile platforms.

    The rollout of mobile broadband continues throughout the world. HSPA will be the dominant standard for many years and is now an effective alternative to fixed broadband. Mobile broadband will play a significant role in bridging the digital divide. Furthermore, it is encouraging that LTE, the evolution of HSPA, is supported by the largest operators around the world. We are investing significantly in this technology to secure leadership also in this area," said Carl-Henric Svanberg.

    Income statement and cash flow

    1) Excluding restructuring charges of SEK 0.8 b., of which SEK 0.2 b. in cost of sales and SEK 0.6 b. in operating expenses in 2008.
    2) Including restructuring charges of SEK 0.8 b.
    3) Attributable to stockholders of the Parent Company, excluding minority interest.
    The year-over-year sales increased by 5%. Growth was negatively affected by a continued weakened USD. Organic growth in constant currencies is estimated to 9% and acquisitions added 2%.

    Gross margin amounted to 38.6% (43.0%) and declined year-over-year, mainly due to the business mix with a high proportion of new network buildouts. Sales of software and IPRs were slightly higher in the quarter.

    Operating income amounted to SEK 4.3 (8.2) b. in the quarter. Operating expenses amounted to SEK 14.1 (11.8) b. in the quarter due to the impact of the acquired companies, including amortization of intangibles, and increased R&D investments, mainly in LTE, mobile platforms and IPTV. Sony Ericsson's pre-tax profit contributed SEK 0.9 (1.6) b. to Group operating income in the quarter.

    Cash flow from operating activities reached SEK 4.7 (4.6) b. in the quarter. The cash flow includes a dividend from Sony Ericsson of SEK 2.2 b. In the first quarter 2007, Sony Ericsson made an advance payment equivalent to a dividend of SEK 3.5 b. The working capital was slightly up. Cash conversion for the quarter amounted to 83% (80%). Days sales outstanding have increased by eight days in the quarter.

    Cash flow from investing activities was SEK 3.2 (-9.2) b. First quarter 2007 was impacted by acquisitions.

    Balance sheet and other performance indicators

    1) Excluding effects from restructuring.

    During the quarter, approximately SEK 0.8 b. of provisions was utilized for costs related to product warranties, customer projects, restructuring and other. Additions of SEK 2.0 b., including restructuring charges of SEK 0.7 b., and reversals of SEK 0.6 b. have been made as a result of risk assessments in the ongoing business.

    At the end of the period, equity amounted to SEK 134.6 b., an increase by SEK 7.3 b. compared to same period last year.
    Cost reductions
    As announced in the fourth quarter report 2007, cost reductions of SEK 4 b. in annual savings will be made. These reductions will have full effect in 2009. Restructuring charges are estimated to SEK 4 b. and will be recognized as each activity is decided.

    During the first quarter, restructuring costs of SEK 0.8 b., of which SEK 0.2 b. in cost of sales and SEK 0.6 b. in operating expenses, have been taken, primarily for reductions in Western Europe. Charges for the restructuring program in Sweden that was announced in April will be effected in the second quarter 2008.


    1) Excluding effects from restructuring.


    Sales in Networks grew by 2% year-over-year despite a negative impact from the USD decline. The sales increase was driven by increased sales of GSM in high-growth markets, especially in China and India. This is reflected in the strong growth in Network rollout services which is a lower margin business. Sales of software and IPRs were slightly higher in the quarter. The EBITDA margin was 15%, flat sequentially.

    The demand for GSM remains healthy and the business activity is increasing, particularly in India and China. 3G rollouts are ongoing throughout the world, including major rollouts in Russia and Latin America. The largest proportion of R&D investments in Networks is spent on WCDMA and an increasing part on LTE. Several major operators have announced plans to upgrade their networks to 14.4 Mbps and Ericsson will introduce 21 Mbps during the second half of the year.

    Redback has significantly increased its sales outside the US through leveraging Ericsson's global sales organization. Since the acquisition, Ericsson has signed agreements for the delivery of Redback-based solutions with more than 100 carriers in over 65 countries.

    Sales in Professional Services grew by 8% year-over-year with a growth in constant currencies of 10%. As expected, managed services sales decreased sequentially with the reduced scope of the
    3 UK contract announced in the fourth quarter 2007 but increased 20% year-over-year. Operating margin in Professional Services declined to 13% (15%) due to the high proportion of new managed services contracts in a start-up phase. With increased network complexity, system integration is a growth area but sales will vary with customer projects.


    Sales growth amounted to 16% year-over-year, largely driven by acquisitions. The business activity has been high in the quarter with important reference contracts in IPTV as well as increased traction in Tandberg Television.

    Within segment Multimedia, revenue management, service delivery platforms, Tandberg Television and mobile platforms account for the vast majority of sales and generate good growth and margins. The strategy is to leverage these leading positions and invest in new areas for future growth, such as IPTV, IMS and enterprise applications. In these areas, sales are still low and R&D investments are significant.

    Sales and operating income for mobile platforms were negatively affected by approximately
    SEK 0.3 b. in the quarter following Sony Ericsson's lower sales in the first quarter.

    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 22.3 million, a 2% increase compared to the same period last year. Sales declined by 8% year-over-year due to a slowing market growth in the mid-to-high end phones in markets where Sony Ericsson has a strong presence. Gross margin was one percentage point lower than first quarter 2007, reflecting a less favorable product mix.

    Ericsson's share in Sony Ericsson's income before tax was SEK 0.9 (1.6) b. in the quarter. During the quarter, Ericsson received a dividend from Sony Ericsson of SEK 2.2 b. A second dividend payment is planned for this year.


    Western Europe sales declined by 7% year-over-year. The trend of operator consolidation continues. Germany showed good growth, driven by managed services. UK was affected by an overall slow market. The adjusted scope of the managed services contract with 3 UK affects sales but not margins. Spain also showed slower sales in the quarter compared to a strong first quarter 2007.

    The overall business activity is high in Central and Eastern Europe, Middle East and Africa although sales were flat year-over-year. During the quarter, Africa and parts of the Middle East showed strong performance. In Russia 3G rollouts are underway.

    Asia Pacific sales were up 5% year-over-year. India was up significantly, offsetting a slower investment level in Bangladesh due to political uncertainty. China showed good growth while Japan and Australia were down due to tough year-over-year comparisons.

    Latin America sales were up 25% year-over-year. Continued 2G expansions as well as new 3G rollouts in Brazil and Mexico contributed to the strong development.

    North America sales grew by 39% year-over-year, due to investments in WCDMA/HSPA. A higher level of IPR-related sales also contributed to the sales growth. The spectrum auction has been concluded and the successful bidders are planning for mobile broadband rollouts over the coming years.

    Growth rates based on Ericsson and market estimates.

    Mobile broadband rollouts continue and are expanding to new markets throughout the world. The strong data traffic growth confirms consumer interest in the new multimedia services that are made available.

    The concluded 700 MHz auction in the US, the upcoming Chinese telecom reform as well as other license auctions around the world should pave the way for deployments of new networks. The tariff competition continues to be strong in many markets, driving traffic growth further.

    HSPA will be the dominant mobile broadband standard for many years. Furthermore, the support from the world's largest operators underpins LTE's status as the next global standard.

    Mobile subscriptions grew with some 160 million in the quarter to a total of 3.48 billion. 205 million are WCDMA subscriptions, up by 22 million in the first quarter. There are 211 WCDMA networks in 91 countries, of which 185 networks are upgraded to HSPA.

    In the twelve-month period ending December 31, 2007, fixed broadband connections grew by 20% to some 335 million.


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


    Net sales for the first quarter amounted to SEK 2.0 (0.7) b. and income after financial items was SEK 4.4 (4.0) b. 

    Major changes in the Parent Company's financial position for the first quarter include decreased current and non-current receivables from subsidiaries of SEK 5.8 b. and increased cash and bank and short-term investments of SEK 5.5 b. Current and non-current liabilities to subsidiaries decreased by SEK 2.5 b. At the end of the quarter, cash and bank and short-term investments amounted to SEK 51.1 (45.6) b.

    Major transactions with related parties include the following transactions and balances with Sony Ericsson Mobile Communications: revenues of SEK 0.6 (0.5) b.; receivables of SEK 0.7 (0.9) b.; dividend of SEK 2.2 (2.6) b.

    In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 7,291,951 shares from treasury stock were sold or distributed to employees during the first quarter. The holding of treasury stock at March 31, 2008, was 224,699,592 shares of class B.


    Annual General Meeting

    The Annual General Meeting (AGM) decided, as previously announced and in accordance with the proposal from the Board of Directors, on a dividend payment of SEK 0.50 per share for 2007 and with April 14, 2008, as the date of record for dividend. The total dividend payment amounts to SEK 8.0 b.

    In accordance with the proposal from the Board of Directors, the AGM resolved on a reversed split of shares 1:5, to the effect that five shares of class A and five shares of class B, respectively, are consolidated into one share of class A and one share of class B respectively. The record date for the reversed split is June 4, 2008.

    In accordance with the Board of Directors' proposals, the AGM resolved the completion of LTV 2007 (Long Term Variable compensation). The AGM also resolved the implementation of LTV 2008, including directed issue of shares, directed acquisition offer and transfer of shares. In addition, the AGM resolved the transfer of treasury stock for previously decided LTV programs. For more details, see

    Divestiture of enterprise PBX solutions

    On February 18, 2008, Ericsson entered into an agreement to divest its enterprise PBX solutions business, part of segment Multimedia, to Aastra Technologies. The agreement includes transfer of approximately 630 employees. The transaction is expected to close in April 2008.

    Delisting from London Stock Exchange

    As of April 15, 2008, Ericsson has delisted its class B shares from the London Stock Exchange.

    Assessment of risk environment

    Ericsson's operational and financial risk factors and exposures are described under "Risk factors" in our Annual Report 2007 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 2007, where we describe our risks and uncertainties along with our strategies and tactics to mitigate the risk exposures or limit unfavorable outcomes.

    Stockholm, April 25, 2008

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

    Date for next report: July 22, 2008


    We have reviewed this report for the period January 1 to March 31, 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. 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, April 25, 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), April 25.

    An analysts, investors and media conference call will begin at 15.00 (CET).

    Live webcasts of the press conference and conference call as well as supporting slides will be available at and
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    Phone: +46 8 719 4044
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    Investor Relations
    Phone: +46 8 719 0000

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    Investor Relations
    Phone: +46 8 719 4631

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    Head of Media Relations
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    Telefonaktiebolaget LM Ericsson (publ)
    Org. number: 556016-0680
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    SE-164 83 Stockholm
    Phone: +46 8 719 00 00

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