Ericsson increases income before taxes by more than 300%

Interim Report Six months ended June 30, 2000 July 21, 2000 Ericsson increases income before taxes by more than 300% and confirms leadership in mobile Internet * Order intake up 45 percent, driven by Mobile Systems. * Leadership in mobile Internet confirmed - over 50 commercial agreements for GPRS and 3G. * Infrastructure business success continues - operating margin doubled to 18 percent for Network Operators. * Consumer Products: Sales up 40 percent. Component shortages from a key supplier created a loss. Firm actions to restore profitability are taken. * Outlook for 2000: Sales growth more than 25 margin around 10 percent. SEK b. Second quarter Six months 2000 1999 Chang 2000 1999 Chang e e Orders 64.7 52.2 24% 144.2 99.7 45% Sales 65.0 50.8 28% 124.1 92.4 34% Income before taxes (IBT) 12.6 3.0 325% 18.6 4.3 337% IBT adjusted * 6.7 3.0 127% 12.8 4.3 200% EPS (SEK) 1.28 0.31 313% 1.82 0.44 314% EPS adjusted (SEK) 0.59 0.31 90% 1.13 0.44 157% * EPS US GAAP (SEK) 1.17 0.36 225% 1.80 0.56 221% Cash flow before - financing activities 7.2 -7.9 1.0 18.7 * excl. non-operational capital gains and pension refund SUMMARY Ericsson reports income before taxes of SEK 18.6b. for the first six months of 2000, an increase of more than three hundred percent over the result of the first half of 1999. Sales of infrastructure for mobile communications continued to be the main contributor to the success. In the Network Operator segment, Ericsson doubled operating margins from 9 to 18 percent. Income benefited from capital gains of SEK 8.2b. Excluding non-operational capital gains and a pension refund, income before taxes was SEK 12.8 (4.3)b. and adjusted earnings per share (EPS) were SEK 1.13, up 157 percent from last year. Ericsson achieved a sales increase of 34 percent to SEK 124b. for the first six months. Orders increased by 45 percent, driven by rapid growth in demand for mobile infrastructure and mobile phones. In the second quarter, sales increased by 28 percent and income before taxes increased by 325 percent to SEK 12.6b. Income before taxes adjusted for non-operational gains and pension refund was SEK 6.7b., more than twice the income of the second quarter last year. Cash flow for the second quarter was positive, also excluding non- operational divestitures. The pension refund did not affect cash flow during the quarter. "These results confirm Ericsson's leading position in mobile infrastructure. Now we are building the mobile Internet. We have invested more in R&D than anyone else in the industry to expand our lead," said Kurt Hellström, president of Ericsson. "So far, we have captured over 50 percent of both the GPRS and the 3G market - solid proof of our unmatched position as market leader." The Network Operators segment represents almost 70 percent of Ericsson's business. Sales in this segment increased by 32 percent for the six months, while orders increased by 47 percent. Benefiting from its broad base of system technologies and a global presence, Ericsson grew faster than the market. Consumer Products increased sales by 40 percent. The segment reports a loss due to component shortage from a key supplier and an unfavorable product mix. To restore profitability, a strategic review is ongoing and a number of firm actions have been initiated. Ericsson will address the entry-level segment with a special purpose organization and externally sourced products, concentrate the product portfolio, streamline manufacturing, and increase R&D for mobile Internet to expand leadership in GPRS and 3G. Several new leading-edge products were announced during the period, including the first combined GPRS and Bluetooth phone. Enterprise Solutions showed a moderate business development with sales at the same level as last year. Order bookings for business consulting increased substantially. Solutions for mobile Internet represented 50 percent of the business consulting projects. Ericsson achieved strong growth in all market areas. North America was again the fastest growing area with a 69 percent rise in sales, followed by Latin America with 42 percent sales increase. The company reaffirms its positive outlook for 2000. For the full year, Ericsson expects sales growth to exceed 25 percent. Operating margin is expected to be around 10 percent, with a positive cash flow before acquisitions. ORDERS AND SALES For the six month period, orders increased by 45 percent to SEK 144.2b. and sales increased by 34 percent to SEK 124.1b. For comparable units, orders increased by 47 percent and sales increased by 36 percent. In the second quarter, orders booked increased by 24 percent to SEK 64.7b. and sales by 28 percent to SEK 65.0b. Order bookings normalized in the second quarter from the extraordinary level in the first quarter. During the second quarter, bookings for Network Operators were up 22 percent over the same period last year, and for Consumer Products 33 percent, while the Enterprise Solutions segment orders declined by 14 percent, mainly in the PBX area, whereas the consulting business developed favorably. Strong sales performance was realized in North America (+49 percent) and Latin America (+31 percent) in particular. The other market areas all increased by more than 20 percent. OPERATING INCOME AND MARGINS In the first half of 2000, operating income was SEK 19.4b., up 275 percent from 1999. For the second quarter, operating income was SEK 13.0b. Included in the income are non-operational capital gains of SEK 4.7b. resulting mainly from the divestiture of the Energy System business, and some real estate properties in Stockholm. Both are part of the ongoing process of focusing on core businesses. Also included is a SEK 1.1b. refund of pension premiums in Sweden. Adjusted for these items, operating income was SEK 7.2 (3.4)b. or 11 (7) percent of sales in the quarter. Included in the operating income for the second quarter are operational capital gains from sales of shares in AU-system, iD2 and Across Wireless for a total of SEK 2.0b. Of the operational capital gains reported during the quarter, SEK 1.5b. are allocated to Network Operators and SEK 0.5b. to Consumer Products. (See exhibit on capital gains.) Other operating revenues now include all gains and losses, operational as well as non-operational. No deductions are made from operating expenses. The gains and losses reported in the first quarter have been restated to reflect this change and to better facilitate analysis of their effect. Gains and losses are classified as operational when they have a direct relation to ongoing continued operations. The item "Other operating revenues" also includes the SEK 1.1b. pension premium refund. Operating expenses were 32 percent of sales in the second quarter, down from 33 percent in the first quarter, which is mainly attributable to lower selling expenses and partly offset by increased R&D expenses. The gross margin declined from 41 percent to 40 percent in the second quarter, which is mainly attributable to increased price pressure in Consumer Products. Adjusted operating margin for the six months remains at 11 percent. However, more intense R&D activity relative to 3G including IP/Datacom for both systems and mobile phones is required, and may affect the R&D expenses later this year. Total R&D expenses (including SEK 0.4b. of costs related to customer orders) increased by 28 percent to SEK 17.2b., which corresponds to 14 (14) percent of sales. Other technical expenses decreased by 29 percent to SEK 2.0 (2.8)b. Total R&D and other technical expenses amounted to SEK 19.1 (16.2)b. or 15 (17) percent of sales. NET INCOME, EARNINGS PER SHARE AND CASH FLOW Income before taxes (IBT) was SEK 18.6 (4.3)b. for the six month period. Excluding non-operational items, IBT was SEK 12.8b., and in the second quarter IBT more than doubled to SEK 6.7 (3.0)b. Operational capital gains of SEK 2.0b. are included. Income taxes are comparatively low, with a tax rate of 23 percent, since a considerable share of the capital gains reported are non-taxable. Earnings per share (EPS) fully diluted were SEK 1.28 in the second quarter. Excluding the non-operational items, EPS was SEK 0.59 (0.31). For the first six months, Ericsson reports EPS of SEK 1.82 (0.44). EPS according to US GAAP were SEK 1.80. The difference to Swedish EPS is insignificant in this reporting period, due to the US GAAP requirement not to recognize the pension refund until received, which offsets the normal addition to US GAAP income resulting from capitalization of R&D related to software. In the second quarter, Ericsson repurchased 1.8 million shares, which are to be kept as treasury stock in order to hedge obligations under employee stock option plans. This is reported as a SEK 0.3b. reduction of equity. Convertible debentures intended for employee purchases, but which had not been utilized, were also sold. The resulting capital gain is reported, net of tax, as an increase in equity of SEK 1.7b. A portion of stock options related to the year 2000 program for employees was set aside as a hedge to cover payroll taxes related to the program. These options were disposed of and the proceeds net of tax are reported directly in equity with SEK 0.3b. Changes in foreign currency exchange rates had a net positive effect on income of approximately SEK 0.3b. driven mainly by the stronger US dollar. Cash flow before financing activities was favorable in the second quarter, mainly attributable to the sale of Energy Systems. Excluding non- operational items, cash flow was still positive by SEK 1.0b. This is a result of improved income as well as favorable development of accounts receivable, which offset negative effects from increased inventory. Inventory increased another SEK 7.2b. in the second quarter, largely driven by component shortage issues plus general volume increases. Inventories for systems are expected to decline during the second half of the year as the order backlog is reduced. The inventory situation will be closely monitored to ensure we are able to fulfil our customer obligations and to minimize the amount of capital tied up in inventory. The equity ratio improved during the first six months to 38.0 percent compared to 35.2 percent at year-end 1999. EMPLOYEES The number of employees was reduced by around 2,000 to 101,317, compared to 103,290 at year-end 1999, mainly due to the divestiture of Energy Systems in the second quarter and Private Radio Systems in the first quarter. BUSINESS SEGMENTS The development of orders and sales reflects the continued growth and rapid expansion of mobile infrastructure. Ericsson expects the number of mobile subscribers to double over the next two years to 1 billion in 2002. We also estimate that in 2004 mobile Internet will have over 600 million users - more than the number of fixed Internet users.