* Net sales SEK 42.2 (39.1) b., up 8% year-over-year, excluding
divested operations
* Operating income SEK 8.2 (6.6) b., up 23% year-over-year
* Operating margin 19.3% (16.7%)
* Net income SEK 5.8 (4.6) b., up 27% year-over-year
* Earnings per share SEK 0.37 (0.29), up 28% year-over-year
CEO COMMENTS"We have concluded another quarter with solid performance and market
share gains in a stable growth environment," said Carl-Henric
Svanberg, President and CEO of Ericsson (NASDAQ:ERIC). "Sales growth
in the quarter was primarily driven by Western Europe, and large
turnkey projects in Central and Eastern Europe, Middle East, Africa
and Asia Pacific. Our capability in managing such projects around the
world is a competitive advantage. Margins remain stable, due to the
benefits of scale and technology leadership. Our commitment to
operational excellence continues and operating expenses grew less
than 3 percent versus a sales growth of 8 percent.
Fixed and mobile data traffic accelerates and we have seen a doubling
of traffic in mobile broadband networks over the last six months.
User generated content is becoming a main traffic driver, with
YouTube as a current example of a popular, capacity demanding,
service. As a consequence, transmission is quickly becoming a
bottleneck in many networks. Mobile broadband deployments accelerate
with new 3G licenses in many regions, including India, Eastern
Europe, Middle East and Latin America. In parallel, demand for GSM
remains solid, driven by expansions in China, India, and many other
high-growth markets.
During the quarter, we completed the acquisitions of Redback and
Entrisphere and announced, and got acceptance for, a public offer to
acquire Tandberg Television. Through these moves we strengthen our
position in fiber-to-the-home and IPTV. In combination with Marconi
and our in-house capabilities, the prerequisites for leadership in
next-generation IP networks are now in place.
We are uniquely positioned to benefit from current market conditions.
The year has started well, including encouraging growth in multimedia
and professional services. Vodafone has awarded us the industry's
first European-wide contract for spare parts management. With this
move, Vodafone has taken a new, exciting, trend-setting approach with
considerable cost savings," concluded Carl-Henric Svanberg.
FINANCIAL HIGHLIGHTS
Income statement and cash flow
First quarter Fourth quarter
SEK b. 2007 2006 Change 2006 Change
Net sales, excl.
divested operations 42.2 39.1 8% 54.2 -22%
Net sales 42.2 39.6 7% 54.2 -22%
Gross margin (%) 43.0 43.5 - 42.2 -
EBITDA (%) 23.8 21.8 - 26.3 -
Operating income 8.2 6.6 23% 12.2 -33%
Operating margin (%) 19.3 16.7 - 22.5 -
Operating margin
ex Sony Ericsson (%) 15.5 14.9 - 18.4 -
Income after
financial items 8.3 6.7 24% 12.2 -32%
Net income 5.8 4.6 27% 9.7 -40%
Cash flow
from operations 4.6 2.4 - 11.0 -
EPS, SEK 0.37 0.29 28% 0.61 -35%
Cash EPS, SEK1) 0.40 0.32 - 0.65 -
1) EPS excluding amortization of intangible assets.
The year-over-year sales increase reflects good performance across
all business segments despite the comparison with a strong first
quarter 2006 and a considerably weaker USD.
Gross margin was stable sequentially. Operating expenses increased by
less than half the rate of the sales growth. The increased operating
margin year-over-year, excluding Sony Ericsson, is due to continuous
operational excellence activities, including positive effects from
the Marconi integration.. Operating margin decreased sequentially due
to seasonally lower sales. The growing earnings in Sony Ericsson
contributed significantly to the improved result.
The majority of our sales growth over the last four years has
increasingly been driven by large turnkey projects. This leads to
growing working capital with obvious cash flow effects but builds a
platform for future growth. In this field, our capabilities represent
a clear competitive advantage and therefore support our margins.
Cash flow from operating activities was SEK 4.6 (2.4) b. in the
quarter. Cash flow was positively impacted by an advance payment
equivalent to the dividend from Sony Ericsson of SEK 3.5 b. In 2006
the dividend was paid in the first quarter and amounted SEK 1.2 b.
Cash flow from investing activities was SEK -9.2 b., largely driven
by the acquisition of Redback, Entrisphere and certain shares in
Tandberg Television.
Balance sheet and other performance indicators
Three months Full year
SEK b. 2007 2006 2006
Net cash 29.1 33.7 40.7
Interest-bearing
provisions and liabilities 22.6 32.7 21.6
Days sales
outstanding 107 100 85
Inventory 24.1 23.5 21.5
Of which work
in progress 14.9 14.4 14.2
Inventory turnover 4.2 4.2 5.2
Customer
financing, net 3.8 3.2 3.7
Return on capital
employed (%) 23.8 20.9 27.4
Equity ratio (%) 56.6 50.2 56.2
Deferred tax assets increased in the quarter by SEK 0.6 b. to SEK
14.1 (13.6) b. due to acquired deferred tax assets, mainly in
Redback.
Working capital increased by SEK 4.7 b. in the quarter. This increase
reflects the continued growth of large turnkey projects in Asia
Pacific and Central and Eastern Europe, Middle East and Africa. Days
sales outstanding amounted to 107 days.
During the quarter, approximately SEK 2.5 b. of provisions was
utilized to cover costs incurred of which the majority was related to
previously announced restructuring programs and ongoing product
warranties. New net provisions of SEK 0.8 b. have been made in the
quarter for planned future costs.
SEGMENT RESULTS
From January 1, 2007, Ericsson has implemented a more
customer-oriented organization. As a result, the financial reporting
has been adapted and the first quarter 2007 interim report will
include the business segments Networks, Professional Services and
Multimedia. Sony Ericsson will be reported as before, but with a
higher level of disclosure.
Previously, Ericsson has reported sales of fixed networks, mobile
networks and professional services. Sales of mobile systems include
the mobile parts of Networks, network rollout, with its related parts
of systems integration, and the mobile part of Multimedia. Although
the reporting structure is changed to partly new dimensions, mobile
systems will at least during 2007, be continued to be reported for
comparability and it will remain the basis for our market outlook.
Growth for mobile systems in the first quarter amounted to 6%
year-over-year.
Further details of the changes are included in the section "Financial
statements and additional information".
First quarter
Sales, SEK b. 2007 1) 2006 2) Change
Networks 29.3 28.0 5%
Of which
network rollout 3.8 3.9 -4%
Operating margin (%) 17% 17% -
Professional Services 9.5 8.3 15%
Of which
managed services 2.6 2.3 11%
Operating margin (%) 15% 15% -
Multimedia 3.4 2.8 19%
Operating margin (%) 8% 3% -
Total sales 42.2 39.1 8%
Of which
mobile systems 28.4 26.7 6%
1)Acquired companies are included from date of acquisition.
2)Excludes sales from the in 2006 divested defense business, Ericsson
Microwave Systems.
Networks
The 5% year-over-year sales increase in Networks was driven by growth
in both fixed and mobile networks. The sales decline in North America
due to the Cingular rollout peak in first quarter of 2006 is
overshadowing the underlying growth in other parts of the world.
Outside North America, growth amounted to 14% year-over-year.
Operating margin was stable year-over-year.
The good demand for GSM continues. Growth is primarily driven by new
network deployments and capacity expansions in high-growth markets.
New features are still being added, for example super EDGE with 1
Mbps downlink. 3G/HSPA rollouts continue and new licenses have been
or will be issued in several regions, also in developing countries.
Sales of fixed networks grew slightly, excluding acquired sales, with
increased sales of transmission products more than offsetting a
decline of traditional circuit-switching equipment.
Operator focus on next-generation IP networks is reflected in the
strong demand for Redback's intelligent router program. Demand for
transmission is growing, and in parallel, the quickly growing data
traffic is starting to create bottlenecks in many networks.
Redback is included as of February 1, and added, together with the
acquired Entrisphere, sales of approximately SEK 0.4 b. in the
quarter.
Professional Services
The Professional Services business continued to make advancements
throughout all areas and sales grew by 15% year-over-year. Growth in
local currencies, which better reflects the actual activity level as
services business is local, amounted to 20%. Recurring services
revenues amount to more than 60%.
Our leading position in managed services is solid. Sales growth
amounted to 11%, or 15% in local currencies. The growth rate will
vary over time as a result of larger contract awards. Agreements with
Orange, Mobistar and Vodafone are examples of recent key business
wins. In all current managed services contracts, excluding hosting,
Ericsson is managing networks that together serve more than 120
million subscribers worldwide.
Multimedia
The organization is now established and business development is well
under way. The segment includes service layer products, revenue
management systems, enterprise solutions and mobile platforms as well
as the two companies Tandberg Television and Mobeon, presently being
acquired.
Growth was strong during the quarter with especially encouraging
development in revenue management, primarily prepaid and mediation
solutions, and mobile platforms. Operating margin increased
year-over-year as a result of the good growth and the effects of
restructuring of enterprise solutions operations. As a fairly new
business activity, growth and margins may fluctuate over the coming
quarters.
Sony Ericsson Mobile Communications
For information on transactions with Sony Ericsson Mobile
Communications, please see Financial statements and Additional
information.
First quarter Fourth quarter
EUR m. 2007 2006 Change 2006 Change
Number of units
shipped (m.) 21.8 13.3 63% 26.0 -16%
Average selling
price (EUR) 134 149 - 146 -
Net sales 2,925 1,992 47% 3,782 -23%
Gross margin (%) 30.3 26.3 - 29.0 -
Operating income 346 143 142% 484 -29%
Operating margin (%) 11.8 7.2 - 12.8 -
Net income 254 109 133% 447 -43%
Sony Ericsson continued to build on the success of 2006 with strong
growth in Asia Pacific, Latin America and Europe. The company
captured market share in these markets through low- and mid-tier
products. Gross margin improved both sequentially and year-over-year
whereas operating margin declined sequentially due to lower sales. As
a result of the expanded portfolio, ASP decreased to EUR 134.
A number of new products were announced during the quarter, of which
many already are shipping and have been well received. During the
quarter, two new Cybershot phones, four new Walkman models and the
first HSPA handset, aimed primarily at the North American market,
were announced.
Ericsson's share in Sony Ericsson's income before tax was SEK 1.6
(0.7) b. in the quarter.
REGIONAL OVERVIEW
First quarter Fourth quarter
Sales, SEK b. 2007 2006 Change 2006 Change
Western Europe 12.5 11.5 9% 17.2 -27%
Central and Eastern Europe,
Middle East and Africa 11.4 10.5 9% 15.2 -25%
Asia Pacific 11.8 8.7 36% 13.1 -9%
Latin America 3.3 3.7 -9% 4.8 -31%
North America 3.1 5.3 -41% 4.0 -22%
Western Europe showed better than expected growth, driven by
increased voice traffic and accelerating data traffic in the mobile
broadband networks. This has resulted in growing transmission sales
as well as growing mobile infrastructure investments by operators,
especially in Southern Europe. The strong focus on services remains.
On the multimedia side, TV contracts were signed with Telefónica and
Vodafone Iceland.
In Central and Eastern Europe, Middle East and Africa, sales were
driven by continued good demand for GSM as well as increased
deployments of mobile broadband. The business activity was high in
Africa, particularly in Sub Sahara. Sales in the Middle East were
slower during the quarter but business activity remains high,
including a third mobile license awarded to MTC in Saudi Arabia.
Russia was also somewhat slower, however, preparations for 3G
licenses are being made.
Asia Pacific's strong sales growth year-over-year was primarily
driven by the expected increase in GSM demand in China. After the end
of the quarter, the BSNL court case in India has been withdrawn and
contracts should be awarded shortly. In parallel, the other large
operators in India are planning major expansion projects. The
activity level is high also in countries such as Bangladesh,
Indonesia and Thailand, and in Japan sales almost doubled as a result
of mobile broadband rollouts and increased operator competition.
Latin America is showing signs of recovery after last year's slowdown
in operator investments, primarily in Mexico and Brazil. The strong
subscriber growth continues and builds up the need for further
expansions. GSM is being deployed in several new markets like El
Salvador, Guyana and Peru, and in parallel many operators are
preparing for commercial 3G deployments.
In North America, there is a strong operator focus on triple play and
fixed and mobile broadband. This will lead to accelerating
investments over time and Ericsson has strengthened its presence in
the US market through the recent acquisitions. Sales were down
compared to the strong first quarter in 2006 when the Cingular
rollout peaked.
MARKET DEVELOPMENT
Growth rates based on Ericsson and market estimates.
Fixed and mobile traffic is expected to continue to accelerate over
the coming years due to increased coverage and usage as well as new
multimedia services. As a consequence, operator investments in
infrastructure equipment over the long-term should continue to grow
along historical trends of mid-to high-single digits.
Infrastructure investments have always varied over time and between
regions depending on technology and regulatory developments, as well
as license awards and new technology deployments. There is also a
growing replacement market driven by the benefits from improved
operating expenses, such as lowered power consumption with newer
equipment.
Data traffic in the world's mobile networks is accelerating and
expected to exceed voice traffic in the next three to four years. We
estimate that mobile data traffic tripled in 2006. In addition, the
introduction of HSPA has generated a step up in network traffic
volumes and the packet data traffic has doubled in the last six
months in the 3G/HSPA markets we monitor.
Net additions of mobile subscriptions amounted to 136 million in the
quarter. The total number of subscriptions now amount to 2.88
billion, of which 2.43 billion are GSM/WCDMA. The number of WCDMA
subscriptions grew some 13 million to 113 million.
The fixed broadband market also showed strong development during the
quarter. During 2006, fixed broadband connections grew 69 million to
a total of 280 million.
Growth within the mobile systems market for 2006 is estimated to have
been mid-single digits. Growth was driven by a combination of initial
network rollouts and expansions in high-growth markets as well as 3G
deployments in more mature markets.
Growth within the fixed infrastructure market for 2006 is estimated
to have been mid-single digits. Growth accelerated but varied between
different parts of the network, where IP broadband related products
showed particularly strong development.
The telecom services market for 2006 is estimated to have continued
to show good growth. Increasingly complex networks with new
multimedia services drove demand for professional services. An
increasing interest in managed services could enhance market growth.
It is estimated that growth within the emerging multimedia market for
2006 accelerated but with large variations between different market
segments.
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 believe that the GSM/WCDMA track within the global mobile
systems market, measured in USD, will continue to show mid-single
digit growth.
The addressable market for professional services is expected to show
good growth in 2007.
With our technology leadership and global presence we are well
positioned to take advantage of these market opportunities.
PARENT COMPANY INFORMATION
Net sales for the first quarter amounted to SEK 0.7 (0.6) b. and
income after financial items was SEK 4.0 (2.6) b. Patent license
revenues have been included in net sales from 2007, and 2006 results
have been restated accordingly.
Major changes in the Parent Company's financial position for the
first quarter include increased investments in subsidiaries of SEK
14.6 b. and decreased cash and bank and short-term investments of SEK
10.8 b. These changes are mostly attributable to the Redback and
Entrisphere acquisitions. Current and non-current liabilities to
subsidiaries decreased by SEK 5.7 b. At the end of the quarter, cash
and bank and short-term investments amounted to SEK 43.2 (54.0) b.
In accordance with the conditions of the Stock Purchase Plans and
Option Plans for Ericsson employees, 4,375,087 shares from treasury
stock were sold or distributed to employees during the first quarter.
The holding of treasury stock at March 31, 2007 was 246,638,805 Class
B shares.
OTHER INFORMATION
Acquisition of Redback Networks
On January 25, 2007, Ericsson announced the finalization of the
acquisition of Redback Networks. The acquisition has had a SEK 13.3
b. effect on cash flow during the quarter.
Acquisition of Entrisphere
On February 12, 2007, Ericsson announced its acquisition of
Entrisphere, a company providing fiber access technology. The
acquisition strengthens Ericsson's fixed broadband access portfolio
and its position in converged networks. Fiber technology is essential
for next generation access networks and for High Definition IPTV and
other IP-based services with high demand for bandwidth and cost
efficiency.
Entrisphere, based in the US, employs about 140 persons.
Acquisition of Mobeon
As announced on March 15, 2007, Ericsson will acquire the business
and assets of Mobeon AB, the world's leader in IP messaging
components for mobile and fixed networks. 21% of Mobeon are already
owned by Ericsson, which is also the primary partner and regional
developer of Mobeon's CompEdge series of carrier-class messaging
products.
Mobeon employs approximately 130 persons in Sweden and the UK. Mobeon
will be included in the reporting as of the second quarter, 2007.
Public offer to acquire Tandberg Television
On April 23, 2007 Ericsson announced it has received favorable
rulings from the relevant competitive authorities to acquire all
outstanding shares in Tandberg Television. All conditions in the
terms and conditions set out in the offer document have been met and
Ericsson will complete the offer in accordance with the offer
document.
Ericsson announced its voluntary public cash offer to acquire
Tandberg Television for NOK 106 in cash per share as of February 26,
2007. The aggregate price was approximately SEK 9.8 b. Tandberg
Television is a world-leader in video head-end, encoding and
compression technology critical to maximize picture quality while
minimizing bandwidth in video applications.
Tandberg Television employs approximately 870 people with
headquarters in Southampton, UK and Atlanta, US.
Annual General Meeting
The Annual General Meeting 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 2006 and with April 16,
2007, as the date of record for dividend. The total dividend payment
amounts to SEK 7.9 b.
The Annual General Meeting decided, as previously announced and in
accordance with the proposal from the Board of Directors and with
previous decisions, that Ericsson should have the right to transfer
its own shares on the Stockholm Stock Exchange in order to cover
certain payments that occur in relation to the company's Global Stock
Incentive Plan program 2001, the Stock Purchase Plan 2003, the Long
Term Incentive plans 2004, 2005 and 2006. The Annual General Meeting
voted against the proposed long-term variable compensation plan 2007
and transfer of own stock in connection therewith. The Board of
Directors is now working, in close contact with shareholders, on
different alternatives for implementing the long-term variable
compensation plan 2007.
Stockholm, April 26, 2007
Carl-Henric Svanberg
President and CEO
Date for next report: July 20, 2007
REVIEW REPORT
We have reviewed this report for the period January 1 to March 31,
2007, for Telefonaktiebolaget LM Ericsson (publ). Management is
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 26, 2007
PricewaterhouseCoopers AB PricewaterhouseCoopers AB
Bo Hjalmarsson Peter Clemedtson
Authorized Public Accountant Authorized Public Accountant
EDITOR'S NOTE
To read the complete report with tables, please go to:
www.ericsson.com/investors/financial_reports/2007/3month07-en.pdf
Ericsson invites media, investors and analysts to a press conference
at the Ericsson headquarters, Torshamnsgatan 23, Stockholm, at 09.00
(CET), April 26.
An analyst and media conference call will begin at 14.00 (CET).
Live audio 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@ericsson.com or
press.relations@ericsson.com
Investors
Gary Pinkham, Vice President,
Investor Relations
Phone: +46 8 719 0000
E-mail: investor.relations@ericsson.com
Susanne Andersson,
Investor Relations
Phone: +46 8 719 4631
E-mail: investor.relations@ericsson.com
Glenn Sapadin,
Investor Relations,
North America
Phone: +1 212 843 8435
E-mail: investor.relations@ericsson.com
Media
Åse Lindskog, Director,
Head of Media Relations
Phone: +46 8 719 9725, +46 730 244 872
E-mail: press.relations@ericsson.com
Ola Rembe, Director,
Media Relations
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; and (xii)
plans to launch new products and services.
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 fluctuations; and (vii) the
successful implementation of our business and operational
initiatives.
The full report including tables can also be downloaded from the
attached link.
