ST-Ericsson

¹⁾ Operating income adjusted for amortization of acquired intangibles and restructuring charges

Net sales in the quarter showed a -18% decrease sequentially, due to the impact of the ongoing portfolio transition, to seasonal effects as well as the number of days in the quarter.

The sequential change in operating loss mostly reflects lower sales, the effect of an unfavorable product mix and the lower contribution from European funding programs which positively impacted the previous quarters.

Inventory declined due to continued control of the supply chain.

Net cash was USD 120 million at the end of the quarter with a sequential decline of USD 109 million mainly due to the operating loss and cash outflows related to restructuring.

The restructuring runs according to plan.

ST-Ericsson is reported in US GAAP. Ericsson's share in ST-Ericsson's income before tax, adjusted to IFRS, was SEK -0.5 b. in the quarter, including restructuring charges of SEK -0.1 b. Ericsson Mobile Platforms incurred a loss of SEK -0.5 b. in January 2009, which was included in the result in segment ST-Ericsson. The reported result in the segment in the first quarter 2009 was therefore SEK -0.7 b.  

As of January 1, 2010, the geographical reporting is changed. Instead of five geographical areas, ten regions are reported which mirrors the new internal geographical organization.

North America sales increased 99% year-over-year and 1% sequentially. The integration of acquired CDMA assets progresses well. The very strong data traffic increase continues in North America due to mobile broadband adoption. Smartphones and laptops with embedded modules and dongle type devices are important drivers. Ericsson's position in North America was further strengthened in the first quarter with the 4G/LTE award from AT&T.

Latin America sales decreased by -9% year-over-year and by -32% sequentially. With data traffic uptake operators are looking into mobile broadband investments, including required backhaul capacity. New 3G licenses are planned to be auctioned in the region later this year (Brazil, Costa Rica and Mexico). There is continued good development in services, especially managed services. The tragic earthquakes in Chile and Haiti highlighted the importance for us to be able to support our customers in responding to emergencies.

Northern Europe and Central Asia sales decreased by -20% year-over-year and by -34% sequentially. The decrease is mainly related to sales of mobile network infrastructure while services sales are stable. Northern Europe saw good demand for mobile broadband as well as modernization of fixed networks. Central Asia still saw low investment levels.

Western and Central Europe sales decreased -3% year-over-year and -15% sequentially. Development in the region showed large variations, where Western Europe and especially UK developed favorably and Germany showed stable development, while parts of Central Europe were still slow. 4G/LTE and network modernization is high on operators agendas, services remain strong and represent half of the sales in the quarter.

Mediterranean sales decreased -17% year-over-year and -28% sequentially. The demand for increased mobile broadband capacity continues, but operator investments in Spain and Greece remain low. Operators focus on operational efficiency leads to continued good demand for managed services and consulting. The year-over-year sales were negatively impacted by the reduced scope by a managed services agreement in Italy but improved sequentially.

Middle East sales were flat year-over-year and down -22% sequentially, with mixed development across the region. Services sales were strong in the quarter, especially in Saudi Arabia. Sales of mobile network infrastructure declined although we saw a strong quarter in Turkey and in some of the Gulf countries.

Sub-Saharan Africa sales decreased by -48% year-over-year and -37% sequentially. The region continued to be impacted by the global economic climate which is reflected in decreased operator investments. The region is predominately a market where 2G rollouts are in operators' focus. However, 3G is picking up from low levels. Furthermore, the interest for managed services is increasing among operators. Operator consolidation is also taking place in the region, which temporarily reduced investments.

India sales decreased -43% year-over-year and -33% sequentially due to cautious operator investments pending 3G auctions. The decline in business volumes mainly affected mobile networks infrastructure sales while recurring services business maintained its good development. During the quarter, Ericsson secured a USD 1.3 b. agreement with Bharti to expand and upgrade Airtel's network in 15 of India's 22 telecom circles. Subscription growth continues, driven by tariff competition among operators.

China and North East Asia sales decreased -15% year-over-year and by -33% sequentially. However, the comparison year-over-year is tough due to the large 3G rollouts in China in the first quarter 2009. Mainland China operators' focus is still on achieving a successful 3G introduction, with subscriber take up and high network quality. In Japan, the high mobile data growth continues.

South East Asia and Oceania sales decreased -32% both year-over-year and sequentially. The year-over-year comparison is tough due to significant deals and major network expansions in the first quarter 2009. Operators
in many markets, such as Bangladesh, Indonesia and the Philippines, continued to be cautious with investments. There is continued uncertainty over timing of 3G licenses in Bangladesh and Thailand. In markets where 3G has been deployed we see continued growth in mobile broadband usage. In Vietnam, major 3G rollouts are taking place.

Other includes sales of for example embedded modules, cables, power modules as well as licensing and IPR. 

Market development

Growth rates are based on Ericsson and market estimates

Operator investment activities continued to vary between regions and countries. Operators in a number of developing markets were still cautious with investments. In markets with strong data traffic uptake, network quality and efficiencies are high on operators' agendas.

While the global mobile infrastructure market declined by more than 10% in 2009, measured in USD, we believe that the fundamentals for longer-term positive development for the industry remain solid. Ericsson is well positioned to drive and benefit from this development.

Global mobile data traffic has surpassed voice traffic. In addition, 3G/WCDMA traffic has surpassed GSM traffic. Ericsson's findings show that mobile data traffic globally grew 280% during the last two years and is forecast to double annually over the next five years. The data traffic growth is contributing to operator revenue growth as more and more consumers use data traffic generating devices, such as smartphones and laptops.

The growth in mobile and fixed internet traffic is mainly driven by video, 24/7 connectivity, and IPTV.

With operators' focus on increased network quality and efficiency, the ability to deal with high data volumes while maintaining telecom grade service levels is key. This also drives demand for services targeting the operational efficiency of operators, such as managed services and consulting.

As a consequence of the strong growth in mobile data traffic, there are signs of operator price plans for mobile data starting to move beyond bundles and flat rates to variable or tiered pricing, where high-speed and volume users pay more.

Mobile subscriptions grew by 184 million in the quarter to a total of 4.8 billion, returning to higher growth levels. Global mobile penetration is now 70%. China and India alone accounted for 44% of net additions with 28 and 53 million respectively.

The global number of new WCDMA subscriptions grew by 39 million in the quarter to a total of 490 million, of which 225 million are estimated to be HSPA. In the fourth quarter 2009, fixed broadband connections grew to 457 million, adding 19 million subscribers.

Voice traffic is still the main revenue source for operators even though data represents an increasing share. For many large operators, mobile data revenues constitute 25% of total service revenues or more. In addition to capacity enhancements, operators face the challenge of converting to all-IP broadband networks. This will include increased deployments of broadband access, routing and transmission equipment along with next-generation service delivery and revenue management systems.

There is continued good growth in professional services, fueled by operators' desire to reduce operating expenses and improve efficiency in network operation and maintenance. The move toward all-IP and increased network complexity will create further demand for systems integration and consulting. 

Parent Company information

Net sales for the first quarter amounted to SEK 0.0 (0.2) b. and income after financial items was SEK -0.6 (1.4) b. A write-down of intangible assets in the amount of SEK 0.9 b. was made during the first quarter.

Major changes in the Parent Company's financial position for the first quarter include; decreased current and non-current receivables from subsidiaries of SEK 7.9 b.; increased cash, cash equivalents and short-term investments of SEK 3.0 b. and decreased current and non-current liabilities to subsidiaries of SEK 5.3 b.

At the end of the quarter cash, cash equivalents and short-term investments amounted to SEK 65.4 (62.4) b.

Guarantees to Sony Ericsson Mobile Communications AB are reported as contingent liabilities and amounted to SEK 1.5 (0.8) b.

In accordance with the conditions of the long-term variable remuneration program (LTV) for Ericsson employees, 1,276,203 shares from treasury stock were sold or distributed to employees during the first quarter. The holding of treasury stock at March 31, 2010, was 77,702,330 Class B shares.  

Annual General Meeting of Shareholders

The Annual General Meeting (AGM) decided, as previously announced and in accordance with the proposal by the Board of Directors, on a dividend payment of SEK 2.00 per share for 2009 and with April 16, 2010, as the date of record for the dividend. The total dividend payment amounts to SEK 6.4 (6.0) b.

In accordance with the Board of Directors' proposals, the AGM resolved the completion of LTV 2009 (Long Term Variable compensation). The AGM also resolved the implementation of LTV 2010, including transfer of shares. In addition, the AGM resolved the transfer of treasury stock for previously decided LTV programs. For more details, see www.ericsson.com/investors

Other information

Acquisition of Nortel's GSM business completed

On March 31, 2010, Ericsson completed the acquisition of Nortel's North American GSM business. On November 25, 2009, Ericsson announced it had entered into an agreement for these assets. More than 350 employees from Nortel will be integrated into the Ericsson Group over the coming months. The acquired operations are expected to be accretive to Ericsson's earnings within a year after closing.
 

All shares in LHS acquired

On February 23, 2010, Ericsson announced that it had acquired all shares in LHS. The remaining minority shareholders in LHS AG have sold their shares in a squeeze out process. A delisting of LHS from the Deutsche Börse, Frankfurt am Main, was finalized during the quarter.

Acquisition of Pride Spa completed 

In the quarter, Ericsson completed the acquisition of Pride Spa in Italy, a consulting and systems integration company. The intention to acquire Pride Spa was announced on January 12, 2010.  

Changes in Ericsson's executive leadership team

On February 8, 2010, Ericsson announced that Mats H Olsson, head of China and North East Asia, and Angel Ruiz, head of North America, have been appointed members of the executive leadership team.

In parallel, it was announced a reorganization from 23 market units to ten regions. Effective July 1, 2010, Marita Hellberg, current head of corporate HR, takes on HR in region China and North East Asia. A new head of HR will be announced separately.

Key events after end of the quarter

On April 21, 2010, Ericsson announced it had entered into share purchase agreement to acquire Nortel's majority shareholding (50%+1 share) in LG-Nortel, the joint venture of LG Electronics and Nortel Networks. The acquisition will significantly expand Ericsson's footprint in the Korean market and provide Ericsson with a well established sales channel and strong R&D capability in the country. The purchase price is USD 242 m. on a cash and debt free basis. The new name of the joint venture will be LG-Ericsson. The transaction is subject to customary regulatory approvals.

On April 20, 2010, Ericsson announced it had signed a memorandum of understanding to establish a strategic cooperation with Chinese Datang Telecom Technology & Industry Holdings Co Ltd to jointly developed advanced TDD solutions. As part of the memorandum of understanding Ericsson will start integrating Datang's current TD-SCDMA radio access network equipment into its own 3G mobile communications offering.

Assessment of risk environment 

Ericsson's operational and financial risk factors and uncertainties are described under "Risk factors Assess­ment of risk environment" in our Annual Report 2009.

Risk factors and uncertainties in focus during the forthcoming six-month period for the Parent Company and the Ericsson Group include:

• potential negative effects of the continued uncertainty in the financial markets and the weak economic business environment on operators' willingness to invest in network development as well as uncertainty regarding the financial stability of suppliers, for example due to lack of borrowing facilities, or reduced consumer telecom spending, or increased pressure on us to provide financing;
• effects on gross margins and/or working capital of the product mix in the Networks segment between sales of software, upgrades and extensions as well as break-in contracts;
• effects on gross margins of the product mix in the global services segment including proportion of new network build-outs and share of new managed services deals with initial transition costs
• a volatile sales pattern in the Multimedia segment or variability in our overall sales seasonality could make it more difficult to forecast future sales;
• results and capital needs of our two major joint ven­tures, Sony Ericsson and ST-Ericsson, which both are negatively affected to a larger extent than our three other segments by the current economic slowdown;
• effects of the ongoing industry consolidation among our customers as well as between our largest competitors, e.g. intensified price competition;
• changes in foreign exchange rates, in particular USD and EUR;
• political unrest or instability in certain markets;
• effects on production and sales from restrictions with respect to timely and adequate supply of materials, components and production capacity and other vital services on competitive terms;
• effects on production and sales from restrictions in transport facilities as a result of the Iceland volcanic activities.

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 2009, where we describe our risks and uncertainties along with our strategies and tactics to mitigate the risk exposures or limit unfavorable outcomes.

Stockholm, April 23, 2010

Hans Vestberg, President and CEO

Telefonaktiebolaget LM Ericsson (publ)

Date for next report: July 23, 2010

Auditors' review report

We have reviewed this report for the period January 1 to March 31, 2010, for Telefonaktiebolaget LM Ericsson (publ). The board of directors and the CEO are responsible for the preparation and presentation of this interim report in accordance with IAS 34 and the Annual Accounts Act. Our responsibility is to express a conclusion on this interim report 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 SRS. 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 interim report is not prepared, in all material respects, in accordance with IAS 34 and the Swedish Annual Accounts Act regarding the Group and with the Swedish Annual Accounts Act regarding the Parent Company.

Stockholm, April 23, 2010

PricewaterhouseCoopers AB 
             

Peter Clemedtson
Authorized Public Accountant

Editor's note

To read the complete report with tables, please go to: www.ericsson.com/investors/financial_reports/2010/3month10-en.pdf

Ericsson invites media, investors and analysts to a press conference at the Ericsson headquarters, Torshamnsgatan 23, Stockholm, at 09.00 (CET), April 23.

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  

Video material will be published during the day on www.ericsson.com/broadcast_room

For further information, please contact

Henry Sténson, Senior Vice President, Communications
Phone: +46 10 719 4044
E-mail: investor.relations@ericsson.com or media.relations@ericsson.com
 

Investors

Susanne Andersson, Investor Relations
Phone: +46 10 719 4631
E-mail: investor.relations@ericsson.com
 

Andreas Hedemyr, Investor Relations
Phone: +46 10 714 3748
E-mail: investor.relations@ericsson.com

Media

Åse Lindskog, Vice President,
Head of Public and Media Relations
Phone: +46 10 719 9725, +46 730 244 872
E-mail: media.relations@ericsson.com

Ola Rembe, Public and Media Relations
Phone: +46 10 719 9727, +46 730 244 873
E-mail: media.relations@ericsson.com

Telefonaktiebolaget LM Ericsson (publ)
Org. number: 556016-0680
Torshamnsgatan 23
SE-164 83 Stockholm
Phone: +46 10 719 0000
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 April 23, 2010.

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.