[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 October 25, 2007.]
* Net sales SEK 43.5 (41.3) b. in the quarter, up 6%, SEK 133.3
(125.6) b. first nine months
* Operating income SEK 5.6 (8.8) b. in the quarter, down 36%, SEK
23.0 (23.6) b. first nine months
* Operating margin 13% (21%) in the quarter, 17% (19%) first nine
months
* Cash flow from operations SEK -1.6 (4.8) b. in the quarter, SEK 7.2
(7.5) b. first nine months
* Net income SEK 4.0 (6.2) b. in the quarter, down 36%, SEK 16.2
(16.5) b. first nine months 2)
* Earnings per share SEK 0.25 (0.39) in the quarter, SEK 1.02 (1.04)
first nine months 2)
CEO COMMENTS"The sharp decline in profit this quarter is mainly due to weaker
sales of mobile network upgrades and expansions combined with
continued high sales of new network buildouts," said Carl-Henric
Svanberg, President and CEO of Ericsson (NASDAQ:ERIC). "This changed
business mix within Networks affected Group margins negatively. All
other businesses performed as expected.
Our networks business continues to develop most rapidly where new
network buildouts and break-in contracts are predominant and pricing
pressure is most intense. This has so far been offset by higher
margin sales of software, expansions and upgrades to our installed
base. While we expect such higher margin sales to gradually resume,
new network buildouts will continue to weigh on Networks' margins for
several quarters.
The Professional Services segment continued to show strong growth and
stable margins. The Multimedia segment also showed a strong growth
with operating income slightly above breakeven level, reflecting the
mix of businesses with healthy margins and investments in new
business areas.
In infrastructure, scale is critical for success. In this period of
vendor consolidation, we have chosen to secure our scale advantage in
mobile networks through organic growth. This strategy has been
effective but comes at a certain cost. Now that we have reestablished
our scale advantage we will now capitalize on our gains and leading
position," said Carl-Henric Svanberg.
FINANCIAL HIGHLIGHTS
Income statement and cash flow
Third quarter Second quarter Nine months
SEK b. 2007 2006 Change 2007 Change 2007 2006 Change
Net sales 43.5 41.3 6% 47.6 -9% 133.3 125.6 6%
38.2% 41.5%
Gross margin 35.6% 1) - 43.0% - 40.6% 1) -
EBITDA margin 17.4% 25.4% - 23.9% - 21.8% 23.2% -
Operating income 5.6 8.8 -36% 9.3 -39% 23.0 23.6 -3%
Operating margin 12.9% 21.2% - 19.4% - 17.3% 18.8% -
Operating margin
ex Sony Ericsson 9.0% 16.5% - 16.4% - 13.7% 16.0% -
Income after
financial items 5.6 8.9 -37% 9.3 -40% 23.1 23.8 -3%
Net income 2) 4.0 6.2 -36% 6.4 -38% 16.2 16.5 -2%
EPS, SEK 2) 0.25 0.39 -36% 0.40 -38% 1.02 1.04 -2%
Cash flow from
operating
activities -1.6 4.8 - 4.2 - 7.2 7.5 -
1) Including cost for Marconi restructuring and career change program
of SEK 2.9 b that took place in third quarter 2006 of which SEK 1.7
b. affected gross margin.
2)Attributable to stockholders of the parent company, excluding
minority interest.
The year-over-year sales increase amounted to 6%, of which 4% was
organic growth. The USD has continued to weaken during the quarter
and affected reported sales growth negatively.
The decline in gross margin is mainly due to the business mix. In
addition, the year-over-year growth in network rollout affected Group
gross margins negatively.
Operating income amounted to SEK 5.6 (8.8) b. in the quarter and SEK
23.0 (23.6) b. year-to-date. The lower operating income and margin is
the result of a mix shift with lower high margin upgrade sales and
increased lower margin roll outs of new networks. Sony Ericsson's
pre-tax profit contributed 4% to Group operating margin in the
quarter.
Cash flow from operating activities reached SEK -1.6 (4.8) b. in the
quarter and SEK 7.2 (7.5) b. year-to-date. Working capital increased
by SEK 7.7 b. as a result of ongoing larger projects and in
preparation for a seasonally strong fourth quarter. Cash conversion
for the first nine months decreased to 30%, mainly due to lower net
income and increased working capital. With regards to cash flow from
operations, the capital redemption from Sony Ericsson of SEK 1.4 b.
was offset by a similar amount of reduction of the advance payment to
Ericsson Mobile Platforms.
Balance sheet and other performance indicators
Nine Six Three Full
months months months year
SEK b. 2007 2007 2007 2006
Net cash 11.5 16.1 29.1 40.7
Interest-bearing
provisions and liabilities 32.5 32.6 22.6 21.6
Trade receivables 56.8 55.3 52.4 51.1
Days sales
outstanding 115 106 107 85
Inventory 25.6 24.6 24.1 21.5
Of which work
in progress 14.0 14.1 14.9 14.2
Inventory turnover 4.5 4.4 4.2 5.2
Payable days 59 64 67 54
Customer
financing, net 3.8 3.7 3.8 3.7
Return on
capital employed 21% 24% 24% 27%
Equity ratio 56% 54% 57% 56%
Deferred tax assets decreased in the quarter by SEK 1.2 b. to SEK
11.5 (14.3) b.
During the quarter, approximately SEK 1.3 b. of provisions was
utilized related to restructuring, product warranties, customer
projects and other. Additions of SEK 0.9 b. and reversals of SEK 0.7
b. have been made, leading to a net negative impact on the income
statement of SEK 0.2 b. in the quarter and SEK -1.1 b. year-to-date.
Net impact on the income statement has been negative every quarter
since 2003.
SEGMENT RESULTS
Third quarter Second quarter Nine months
2006 2006
SEK b. 2007 1) Change 2007 Change 2007 1) Change
Networks sales 28.5 29.2 -2% 33.7 -15% 91.5 88.7 3%
Of which
network rollout 4.0 3.5 14% 4.3 -7% 12.1 10.9 11%
Operating
margin 8% 9% - 19% - 15% 15% -
EBITDA margin 13% 14% - 24% - 20% 21% -
Professional
Services sales 11.0 8.7 26% 10.3 7% 30.8 26.3 17%
Of which
managed
services 3.4 2.2 50% 2.9 15% 8.9 7.0 27%
Operating
margin 15% 12% - 15% - 15% 14% -
EBITDA margin 17% 13% - 16% - 16% 15% -
Multimedia
sales 4.0 3.1 31% 3.6 10% 11.0 9.3 18%
Operating
margin 1% 3% - 0% - 3% 2% -
EBITDA margin 6% 4% - 5% - 7% 3% -
Unallocated
sales - 0.3 - - - - 1.3 -
Total sales 43.5 41.3 6% 47.6 -9% 133.3 125.6 6%
Of which
Mobile Systems 28.5 28.0 2% 32.7 -13% 89.6 85.5 5%
1) Including cost for Marconi restructuring and career change program
of SEK 2.9 b that took place in third quarter 2006.
Networks
Sales in Networks declined mainly due to lower sales of expansions
and upgrades of mobile networks as well as software. Sales of lower
margin network buildouts and break-ins currently represent an
increasing part of the networks business. It is this shift in
business mix that is negatively affecting group gross margin rather
than a change in the underlying margins of the different types of
businesses. Adjusted for Marconi and career change program
restructuring costs Networks' operating margin was 18% and EBITDA
margin was 23% in the third quarter 2006.
Sales of optical and radio transmission systems for back/long-haul
showed good growth.
The alignment of Ericsson's and Redback's sales channels is running
according to plan, however with some negative effects on Redback's
sales during this transition. Significant resources have been
redeployed from other parts of Ericsson to support Redback's rapid
expansion, including integrating their technology into other Ericsson
products.
Professional Services
Sales in Professional Services grew by 26% year-over-year and
continue to outpace the market. Managed services grew by 50%
year-over-year. More than two thirds of Professional Services
revenues are currently of a recurring nature. Operating margins were
stable mainly due to good performance in other product areas within
services, which helped to offset startup costs for several new
managed services contracts.
Multimedia
Sales growth was 31% year-over-year of which 14% is acquired.
Operating income in the quarter was slightly above breakeven level.
The areas mobile platforms, service delivery platforms, Tandberg
television and charging are all showing strong growth with healthy
margins. IPTV, IMS and Messaging are new business development areas
with significant R&D investments but with limited sales.
Sony Ericsson Mobile Communications
For information on transactions with Sony Ericsson Mobile
Communications, please see Financial statements and Additional
information.
Third quarter Second quarter Nine months
EUR m. 2007 2006 Change 2007 Change 2007 2006 Change
Number of
units shipped
(m.) 25.9 19.8 31% 24.9 4% 72.6 48.8 49%
Average selling
price (EUR) 120 147 -18% 125 -4% 126 147 -14%
Net sales 3,108 2,913 7% 3,112 0% 9,145 7,177 27%
Gross margin 31% 31% - 30% - 30% 29% -
Operating margin 13% 15% - 10% - 12% 11% -
Income
before taxes 384 433 -11% 327 17% 1,073 796 35%
Net income 267 298 -10% 220 21% 741 550 35%
Units shipped in the quarter reached 26 million, a 31% increase
compared to the same period last year. Sales for the quarter were EUR
3,108 m., representing a year-on-year increase of 7%. Income before
taxes for the quarter was EUR 384 m., representing a year-on-year
decrease of 11% and reflecting the exceptional third quarter the
company experienced in 2006. Net income for the quarter was EUR 267
m. In line with Sony Ericsson expectations, the increase in low and
mid-tier priced phones in the product portfolio in the third quarter
resulted in a decline in ASP to EUR 120.
As communicated by Sony Ericsson at the beginning of the year a
capital redemption of total EUR 300 million was paid to the parent
companies in the third quarter.
Ericsson invoiced Sony Ericsson EUR 156 million in the quarter,
mainly for mobile platforms, which was deducted from the balance of
the advance payment made to Ericsson in the first quarter.
Ericsson's share in Sony Ericsson's income before tax was SEK 1.7
(2.0) b. in the quarter.
REGIONAL OVERVIEW
Third quarter Second quarter Nine months
Sales, SEK b. 2007 2006 Change 2007 Change 2007 2006 Change
Western Europe 12.3 11.7 6% 12.4 -1% 37.3 36.0 4%
Central and Eastern
Europe,Middle East
and Africa 12.0 10.9 10% 11.5 4% 34.4 32.1 7%
Asia Pacific 12.0 11.6 3% 16.6 -28% 40.9 33.9 21%
Latin America 4.2 4.2 1% 4.1 4% 11.6 11.7 0%
North America 3.0 2.9 3% 3.0 -1% 9.1 11.9 -24%
The market in Western Europe showed a year-over-year sales growth of
6%, primarily driven by managed services and increased demand for
broadband transmission. Sales of mobile networks were down somewhat
due to less than expected sales of upgrades and expansions,
especially in the UK and Italy.
Central and Eastern Europe, Middle East and Africa returned to good
growth, 10% year-over-year. Sales were mainly driven by network
rollout and expansions as well as managed services.
Asia Pacific was flattish due to lower mobile systems sales in China.
The underlying business activity is ongoing at a stable level, but
invoicing varies quarter by quarter due to the nature of the Chinese
market. Australia was down compared to same period last year when a
nation-wide HSPA network was rolled out. Excluding China and
Australia, sales growth was 17% in the region.
Latin American sales were up 1% year-over-year. The market is driven
by continued 2G expansions as well as initial 3G rollouts. There is
also an increased demand for managed services. North American sales
have returned to growth, primarily as a result of a more favorable
comparison year-over-year.
MARKET DEVELOPMENT
Growth rates based on Ericsson and market estimates.
Mobile subscriptions grew with some 156 million in the quarter to
3.16 billion. 2.7 billion are GSM/WCDMA subscriptions. 157 million
are WCDMA subscriptions, growing by some 18 million in the quarter.
There are 179 WCDMA networks in 80 countries, of which 138 are
upgraded to HSPA services.
In the twelve-month period ending June 30, 2007, fixed broadband
connections grew by some 14 million per quarter to a total of
approximately 300 million.
PLANNING ASSUMPTIONS
For the fourth quarter of 2007, our planning assumptions are Group
sales of SEK 53-60 b. and operating margins in the mid-teens,
including Sony Ericsson.
MARKET OUTLOOK FOR MOBILE INFRASTRUCTURE AND SERVICES
All estimates are measured in USD and refer to market growth compared
to previous year.
For 2007, we continue to believe that the GSM/WCDMA track within the
global mobile systems market, measured in USD, will continue to show
mid-single digit growth.
We also continue to believe that the addressable market for
professional services will show good growth in 2007.
For 2008, our early expectation is that the current market conditions
will prevail.
PARENT COMPANY INFORMATION
Net sales for the nine-month period amounted to SEK 2.5 (1.9) b. and
income after financial items was SEK 13.2 (12.5) b. Patent license
fees have been included in net sales from 2007, instead of in other
operating revenues, and 2006 has been restated accordingly.
Major changes in the Parent Company's financial position for the
nine-month period include: increased investments in subsidiaries of
SEK 23.4 b., mostly attributable to the Tandberg, Redback,
Entrisphere and LHS acquisitions; decreased other current and
non-current receivables from subsidiaries of SEK 4.3 b.; decreased
cash and bank and short-term investments of SEK 19.7 b., mainly
related to the acquisitions mentioned, payment of dividend for 2006
of SEK 7.9 b. to shareholders and cash from new non-current
borrowings; increased notes and bond loans by SEK 11.0 b. through the
bond issue program; decreased current and non-current liabilities to
subsidiaries by SEK 19.3 b.
As per September 30, 2007, cash and bank and short-term investments
amounted to SEK 34.3 (54.0) b.
Major transactions and balances with related parties include the
following with Sony Ericsson Mobile Communications: revenues of SEK
1,753 (899) m.; liabilities of SEK 489 (0) m.; dividend and capital
redemption of SEK 3,949 (1,160) m.
In accordance with the conditions of the Stock Purchase Plans and
Option Plans for Ericsson employees, 4,178,626 shares from treasury
stock were sold or distributed to employees during the third quarter.
The holding of treasury stock at September 30, 2007, was 238,400,384
Class B shares.
OTHER INFORMATION
Acquisitions and public offerings
On September 28, 2007, Ericsson announced that it had purchased
shares and received acceptances representing together approximately
85% of the outstanding shares and voting rights of LHS. The
additional statutory acceptance period was closed on October 8, 2007,
resulting in additional 0.04% of the outstanding shares. All
conditions to the offer have been fulfilled. Ericsson intends to
complete the offer in accordance with the procedure described in the
offer document.
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 our 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 our customers as well as
between our largest competitor, 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 our customers' willingness to
invest in network development;
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,
which remains valid also for 2007.
Stockholm, October 25, 2007
Carl-Henric Svanberg
President and CEO
Telefonaktiebolaget LM Ericsson (publ)
Date for next report: February 1, 2008
REVIEW REPORT
We have reviewed this report for the period January 1 to September
30, 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, October 25, 2007
PricewaterhouseCoopers AB
Bo Hjalmarsson Peter Clemedtson
Authorized Public Accountant Authorized Public Accountant
Lead partner
EDITOR'S NOTE
To read the complete report with tables, please go to:
www.ericsson.com/investors/financial_reports/2007/9month07-en.pdf
Ericsson invites media, investors and analysts to a press conference
at the Ericsson boat yard, Torshamnsgatan 21, Stockholm, at 09.00
(CET), October 25.
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
Investors
Gary Pinkham, Vice President,
Investor Relations
Phone: +46 8 719 0000
E-mail: investor.relations.se@ericsson.com
Susanne Andersson,
Investor Relations
Phone: +46 8 719 4631
E-mail: investor.relations.se@ericsson.com
Media
Åse Lindskog, Vice President,
Head of Media Relations
Phone: +46 8 719 9725, +46 730 244 872
E-mail: press.relations@ericsson.com
Ola Rembe, Vice President
Phone: +46 8 719 9727, +46 730 244 873
E-mail: 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
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.
