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Ericsson (NASDAQ:ERICY) * Sales SEK 48.5 (47.6) b., 7% growth in constant currencies, SEK 92.7 (89.8) b. first six months * Operating income SEK 4.7 1) (9.3) b., excl. restructuring charges of SEK 1.8 b., SEK 9.0 (17.4) b. first six months, excl. restructuring charges of SEK 2.6 b. * Operating margin 9.7% 1) (19.4%), excl. restructuring charges of SEK 1.8 b., 9.7% (19.4%) first six months, excl. restructuring charges of SEK 2.6 b. * Cash flow SEK 8.5 (4.2) b., SEK 13.3 (8.8) b. first six months * Net income 2) SEK 1.9 1) (6.4) b., incl. restructuring charges of SEK 1.8 b., SEK 4.5 (12.2) b. first six months, incl. restructuring charges of SEK 2.6 b. * Earnings per share 2) SEK 0.60 1) (2.02) 3), SEK 1.43 (3.85) 3) first six months
1) Includes a capital gain of SEK 0.2 b. from divestment of enterprise PBX operations 2) Attributable to stockholders of the Parent Company, excluding minority interests. 3) A reverse split 1:5 was made in June 2008. Comparable figures restated accordingly.
CEO COMMENTS
"The overall business activity shows stable development," said Carl-Henric Svanberg, President and CEO of Ericsson (NASDAQ:ERIC). "With no major changes in the market environment, we still find it prudent to plan for a flattish mobile infrastructure market in 2008 and our focus on adjusting our cost base remains.
Sales have continued to pick up in the US, Western Europe has remained slow while we see good development in most high-growth markets. The continued decline of the USD impacts sales growth and margins negatively also in this quarter.
Networks showed a sequential margin improvement despite a continued high proportion of buildouts of new networks in high-growth markets, including accelerating volumes to India. Professional Services continues to develop favorably with stable margins and Multimedia shows good growth with a lower operating loss.
In the wireless market, expansions of GSM, buildouts of HSPA and early discussions on LTE continue in parallel and these technologies will coexist for many years. Access to telephony as well as Internet, with multimedia solutions for e-business, e-health, e-learning, e-banking etc, are key elements for sustainable development. This is driving buildouts of mobile communications in high-growth markets as well as the buildout of broadband in mature markets" said Carl-Henric Svanberg.
1) Excluding restructuring charges of SEK 1.8 b. in the second quarter 2008 and SEK 0.8 b. in the first quarter 2008. 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 growth in constant currencies is estimated to 7% year-over-year. Sales were up 2% year-over-year including negative effects from the continued decline in USD. Effects of acquisitions and divestments equaled out in the quarter.
Gross margin amounted to 37.0% (43.0%) and declined year-over-year, mainly due to the shift in business mix with a high proportion of new network buildouts. Sales related to software and IPRs were back to a more normal level after last quarter's slightly higher level.
Operating expenses amounted to SEK 14.0 (13.1) b. in the quarter. The increase year-over-year is mainly attributable to acquired companies, including amortization of intangibles, and increased R&D investments.
Operating income amounted to SEK 4.7 (9.3) b. in the quarter, including a capital gain of SEK 0.2 b. from the divestment of the enterprise PBX solutions business. Sony Ericsson's pre-tax profit contributed SEK 0.0 (1.5) b. to Group operating income in the quarter.
Cash flow from operating activities reached SEK 8.5 (4.2) b. The working capital was flat despite higher sales. Collections have been strong and days sales outstanding have decreased by 3 days to 107 in the quarter. Current liabilities increased significantly during the quarter, some of which are normal fluctuations due to project activities. The increase was mainly due to increased payables, accrued expenses and various other current liabilities. As a result, cash conversion amounted to 193% (35%).
Cash flow from investing activities was SEK -2.0 (-7.9) b. in the quarter, including a positive impact of SEK 0.6 b. from the divestment of the enterprise PBX solutions business.
Balance sheet and other performance indicators
Six months Three months Full year SEK b. 2008 2008 2007 Net cash 27.9 28.3 24.3 Interest-bearing provisions and liabilities 29.2 32.0 33.4 Trade receivables 56.7 56.4 60.5 Days sales outstanding 107 110 102 Inventory 26.6 24.5 22.5 Of which work in progress 16.3 13.8 12.5 Inventory turnover 4.7 1) 4.6 1) 5.2 Payable days 56 57 57 Customer financing, net 2.4 2.7 3.4 Return on capital employed 12% 1) 12% 1) 21% Equity ratio 55% 56% 55%
1) Excluding effects from restructuring.
Deferred tax assets increased in the quarter by SEK 1.2 b. to SEK 12.8 (11.6) b.
During the quarter, approximately SEK 1.3 b. of provisions were utilized related to warranty and project related commitments, restructuring activities and other. Additions of SEK 2.7 b. were made, of which SEK 0.9 b. related to restructuring. Reversals of SEK 0.2 b. were made. Consequently, the net impact on operating income excluding restructuring charges was negative by SEK 1.6 b.
Cost reductions As announced in the fourth quarter report 2007, cost reductions of SEK 4 b. in annual savings are being made. These reductions will have full effect in 2009. Restructuring charges are estimated to SEK 4 b. in total and will be recognized as each activity is decided.
During the quarter, restructuring charges of SEK 1.8 b. were recognized, of which SEK 0.9 b. was added to provisions. The charges cover product- and supply rationalization, with some consequences for capitalized development. The charges also covers costs for lay offs in Western Europe, including Sweden. Year-to-date, restructuring charges of SEK 2.6 b. have been recognized.
Restructuring charges 2008 Isolated quarters, SEK b. Q2 Q1 Cost of sales -0.6 -0.2 Research and development expenses -1.1 -0.6 Selling and administrative expenses -0.1 -0.0 Total -1.8 -0.8
SEGMENT RESULTS
Networks Sales in Networks were down 1% year-over-year. The continued USD decline contributed negatively to the sales development. There is a steady demand for GSM equipment in high-growth markets, especially in Asia, which drives the growth for network rollout services. The margins improved slightly sequentially. Still, the proportion of buildouts of new networks in high-growth markets, including accelerating volumes in India, remains high and puts pressure on Networks' margins. Sales related to software and IPRs in the quarter returned to a more normal level.
1) Excluding effects from restructuring. 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.
Redback's international sales show good development while sales in US are down. Redback technology is being gradually integrated into Ericsson's product development.
Professional Services Sales in Professional Services grew by 7% year-over-year. In the quarter, the IPX operations were transferred to segment Multimedia, negatively impacting Professional Services sales by 2%-points year-over-year. Adjusted for this and in constant currencies, sales growth amounted to 11%. Operating margin was stable sequentially.
Managed services sales increased both year-over-year and sequentially, despite the reduced scope of the 3 UK contract announced in the fourth quarter 2007. During the quarter, six new contracts were signed. The total number of subscribers in managed operations now amount to 210 million, of which more than 50% are in high-growth markets.
Multimedia Sales growth was 16% year-over-year despite the decline in USD. Effects from divested activities more or less offset the sales effects of acquired businesses and the transfer of the IPX operations. Operating income was slightly below break even level. The income includes the previously announced capital gain of SEK 0.2 b. from the divestment of the enterprise PBX solutions business.
Tandberg Television and LHS show encouraging development. 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.
Second quarter First quarter Six months EUR m. 2008 2007 Change 2008 Change 2008 2007 Change Number of units shipped (m.) 24.4 24.9 -2% 22.3 9% 46.7 46.7 0% Average selling price (EUR) 116 125 -7% 121 -4% 118 129 -9% Net sales 2,820 3,112 -9% 2,702 4% 5,522 6,037 -9% Gross margin 23% 30% - 29% - 26% 30% - Operating margin 0% 10% - 7% - 3% 11% - Income before taxes 8 327 -98% 193 -96% 201 689 -71% Net income 6 220 -97% 133 -95% 139 474 -71%
Units shipped in the quarter reached 24.4 million. Sales for the quarter were EUR 2,820 m., representing a year-over-year decrease of 9% due to exchange rate fluctuations, continued slowing market growth in mid-to-high end phones and increased competition. Gross margin also decreased, reflecting a less favorable product mix, particularly in Europe, and increased price competition in general. Income before taxes for the quarter was EUR 8 m. Net income for the quarter was EUR 6 m.
Sony Ericsson is targeting EUR 300 million in cost savings on an annual basis with full effect expected to appear within a year and restructuring charges of the same magnitude as annual savings. Challenging market conditions are expected to prevail for Sony Ericsson for at least the rest of 2008, and in particular for the third quarter.
Ericsson's share in Sony Ericsson's income before tax was SEK 0.0 (1.5) b. in the quarter.
REGIONAL OVERVIEW
Second quarter First quarter Six months Sales, SEK b. 2008 2007 Change 2008 Change 2008 2007 Change Western Europe 12.1 12.4 -3% 11.7 4% 23.8 24.9 -5% Central and Eastern Europe, Middle East and Africa 11.2 11.5 -2% 11.1 1% 22.4 22.5 0% Asia Pacific 15.8 16.6 -5% 12.9 22% 28.7 28.9 -1% Latin America 5.0 4.1 21% 4.2 19% 9.1 7.4 23% North America 4.4 3.0 47% 4.3 2% 8.7 6.1 43%
Sales in Western Europe declined year-over-year. Operators launching HSPA are experiencing strong traffic growth but most have not yet exhausted the initial capacity installed during the coverage buildout. The continued tariff competition drives fixed-to-mobile broadband migration. The Nordic and Baltic region showed good sales growth while the rest of Western Europe showed mixed development, with lower business activity in markets such as the UK and Spain offsetting the growth in other countries.
Sales in Central and Eastern Europe, Middle East and Africa declined somewhat year-over-year. The business activity is high with continued buildout of mobile communications throughout the region. In the period, however, sales were down in parts of Eastern Europe and Middle East. The region is characterized by continued roll out of 2G network coverage in rural areas combined with increasing deployments of 3G in urban areas. In addition, there is a growing interest in managed services.
Asia Pacific sales were down 5% year-over-year. Excluding Australia and Japan, sales were up 6%. Australia was down due to completion of major network deployments last year. In Japan, the network rollout continues although sales vary between quarters. The business activity is generally high in the region with particularly strong growth in India, where rollout of new networks accelerates. Sales in China showed stable development and the decline year-over-year reflects a tough comparison with a strong second quarter 2007.
Latin American sales were up 21% year-over-year with particularly strong development in Brazil, Mexico and Chile. The region is driven by continued 2G expansions, 3G rollouts and increased demand for managed services. In parallel, there is a growing wireline modernization, including investments in optical and fiber access.
North American sales were up 47% year-over-year as a result of increased operator spending on triple play and HSPA. Consumers show a quickly growing interest in fixed and mobile broadband and related services. The strong growth also reflects the lower sales volumes previous year.
MARKET DEVELOPMENT Growth rates are based on Ericsson and market estimates.
There is continued strong underlying growth in fixed and mobile broadband subscriptions. There is good momentum for HSPA, with ongoing rollouts across the world, and the support for LTE has been further strengthened with Chinese operators committing to the standard.
The industry consolidation among operators and our competitors continues and the price competition is intense. Large mergers and network sharing result in short-term effects on operator investments. During the quarter, the Chinese telecom reform was announced and it is expected that 3G licenses will be issued once the reform is implemented. The tariff competition among operators continues to be strong in many markets, with price plans moving toward bundles and flat plans.
Mobile subscriptions grew by some 170 million in the quarter to a total of 3.66 billion. 236 million are WCDMA subscriptions, up by 31 million in the second quarter. There are 220 WCDMA networks in 94 countries, of which 198 networks are upgraded to HSPA.
In the twelve-month period ending March 31, 2008, fixed broadband connections grew by 21% to more than 352 million.
PLANNING ASSUMPTIONS
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.
PARENT COMPANY INFORMATION
Net sales for the six-month period amounted to SEK 3.1 (1.7) b. and income after financial items was SEK 7.0 (8.3) b.
Major changes in the Parent Company's financial position in the six-month period include decreased current and non-current receivables from subsidiaries of SEK 10.8 b. and increased cash and bank and short-term investments of SEK 1.9 b. Notes and bond loans decreased by SEK 3.3 b. and current and non-current liabilities to subsidiaries decreased by SEK 3.9 b. During the second quarter, the dividend payment of SEK 8.0 b. decided by the Annual General Meeting, was made. As per June 30, 2008, cash and bank and short-term investments amounted to SEK 47.5 (45.6) b.
Major transactions and balances with related parties for the first six months include the following with Sony Ericsson Mobile Communications: revenues of SEK 0.8 (1.2) b.; receivables of SEK 0.5 (0.2) b.; received dividend of SEK 2.2 (2.6) b.
In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 1,541,217 shares from treasury stock, after adjustment for the reverse split, were sold or distributed to employees during the second quarter. The holding of treasury stock at June 30, 2008 was 43,398,701 shares of Class B.
OTHER INFORMATION
New Head of Business Unit Networks Johan Wibergh has been appointed Senior Vice President and Head of Business Unit Networks effective July 1, 2008.
Reverse split Ericsson's Annual General Meeting resolved on a reverse split 1:5 of the company's shares. The first day of trading in the company's A and B shares after the reverse split was June 2, 2008. The record date for the reverse split was June 4, 2008. In the reverse split, five shares of class A and five shares of class B, respectively, were consolidated into one share of class A and one share of class B, respectively. Further, the ratio between the B share and an American Depositary Share (ADS), traded on NASDAQ, was changed to 1:1.
Divestment of enterprise PBX solutions business On May 1, 2008, the enterprise PBX solutions business was divested to Aastra Technologies. Sales in 2007 amounted to approximately SEK 3.0 b. The capital gain was SEK 0.2 b. The deal was announced on February 18, 2008.
Divestment of shares in Symbian On June 24, 2008, Ericsson announced that it will accept Nokia's cash offer to acquire Ericsson's shares in Symbian Limited. Ericsson owns 15.6% of the shares. The divestment is expected to be completed in the second half of 2008. The book value of the shares has been increased by 0.8 b. to fair value, which is reported directly in equity. The capital gain is estimated to be approximately EUR 75 m. and will be recognized through the income statement when the transaction takes place. Sony Ericsson will also accept Nokia's cash offer.
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: 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 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.
BOARD ASSURANCE
The Board of Directors and the CEO certify that the financial report for the first six months gives a fair view of the performance of the business, position and profit or loss of the Company and the Group, and describes the principal risks and uncertainties that the Company and the companies in the Group face.
Stockholm, July 22, 2008
Telefonaktiebolaget LM Ericsson (publ) Org. Nr. 556016-0680
Sverker Martin-Löf Michael Treschow Marcus Wallenberg Deputy chairman Chairman Deputy chairman Roxanne S. Austin Sir Peter L. Bonfield Anders Nyrén Member of the board Member of the board Member of the board Börje Ekholm Ulf J. Johansson Nancy McKinstry Member of the board Member of the board Member of the board Anna Guldstrand Monica Bergström Jan Hedlund Member of the board Member of the board Member of the board Carl-Henric Svanberg Member of the board and President and CEO
AUDITORS' REVIEW REPORT
We have reviewed this report for the period January 1 to June 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. 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 22, 2008
PricewaterhouseCoopers AB
Bo Hjalmarsson
Peter Clemedtson Authorized Public Accountant Authorized Public Accountant Lead partner
Date for next report: October 24, 2008
EDITOR'S NOTE
To read the complete report with tables, please go to: www.ericsson.com/investors/financial_reports/2008/6month08-en.pdf
Ericsson invites media, investors and analysts to a press conference at the Ericsson headquarters, Torshamnsgatan 23, Stockholm, at 09.00 (CET), July 22.
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 www.ericsson.com/press and www.ericsson.com/investors.
FOR FURTHER INFORMATION, PLEASE CONTACT
Henry Sténson, Senior Vice President, Communications Phone: +46 8 719 4044 E-mail: investor.relations.se@ericsson.com or press.relations@ericsson.com
Telefonaktiebolaget LM Ericsson (publ) Org. number: 556016-0680 Torshamnsgatan 23 SE-164 83 Stockholm Phone: +46 8 719 00 00 www.ericsson.com
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 07.30 CET, on July 22, 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. 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) 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.
