Ericsson Interim report six months ended september 30, 1998

Interim Report 22 Oct 1998 Ericsson Interim Report six months ended September 30, 1998 Ericsson reports increased net sales and a continuing good development of income during the first nine months of 1998. The financial crisis in certain markets and the related general economic uncertainty made itself increasingly manifest, which emphasizes the need for reinforced rationalization efforts. Market successes for Mobile Systems continue. Net sales SEK 125,396 m + 11 percent Income before taxes SEK 12,097 m + 17 percent Income per share SEK 4.25 + 18 percent During the nine-month period under review, consolidated net sales rose 11 percent compared to the corresponding period last year, and amounted to SEK 125,396 m. Income before taxes, amounting to SEK 12,097 m, was up 17 percent compared to the same period in 1997. Ericsson profitability was strengthened through improved margins as a result of continued success with mobile systems. Foreign exchange earnings of SEK 400 m contributed to income. Income per share amounted to SEK 4.25 (3.60). China, as the biggest single Ericsson market, grew even more dominant, followed by the United States, the United Kingdom, Brazil and Italy. Sales in Asia rose 9 percent. Excepting China, sales in Asia declined 29 percent, however. Latin America saw sales increase by 29 percent, and Europe (excluding Sweden) grew 15 percent, while sales in North America declined 7 percent. Selling expenses rose during the year, mainly due to business process reengineering and marketing programs in the Mobile Phones and Terminals business area. As a percentage of sales, however, selling expenses dropped from 13.8 percent during the first quarter to 13.2 percent for the first nine months of the year. The trend is expected to continue during the fourth quarter. Disregarding the acquisition of the bulk of Ericsson minority holdings in its Brazilian subsidiary, the third-quarter cash flow was positive. Positive cash flow for the whole year is expected, with the exception of investments in American and Brazilian subsidiaries' minority holdings, as well as the acquisition of the U.S.-based computer firm, Advanced Computer Communications Inc. (ACC). The equity ratio was 38.6 percent (38.4 percent). The number of employees at the end of the period was 104,001, an increase of 3,227 since December, 1997 (1,419 of which due to the consolidation of MET in France). Consolidated investments in property, plant and equipment were SEK 5,048 m (4,559). During the period, Ericsson made a bid for the out-standing shares in its listed Brazilian subsidiary, Ericsson S.A., bringing Ericsson participation to 97.5 percent. The agreed acquisition of ACC will be implemented during the fourth quarter. Business areas Mobile Systems continued to show strong growth, with sales increasing by 19 percent. Important contracts were signed in Argentina, Brazil, Italy, Mexico and Spain, and several new solutions to wireless Internet and data communications were introduced during the period. The number of mobile subscriptions to digital networks is growing rapidly. Several network operators introduced advantageous rates to encourage usage, resulting in a rise in minutes usage on mobile networks. Strong global support for a third generation standard for mobile telephony, based on WCDMA technology, marks a major success for Ericsson. The business area is reporting a very strong operating income. Net sales of Infocom Systems increased by 2 percent. However, weak development in certain Asian and Latin American markets, as well as for the Italian network construction company, Cosir, contributed to hampering the rate of sales increase. The divestment of Cosir has not been made due to weakening market conditions. Previously reported delivery problems for the new AXE switching systems were essentially remedied, but nonetheless affected sales for the business area during the third quarter. Earnings of the business area are still unsatisfactory. The lower growth rate in sales, combined with adjustments for reduced demand at Cosir and delays in the restructuring program in the Public Networks business unit, mean that the objective of achieving acceptable earnings will not be reached until during next year. Mobile Telephones and Terminals showed an increase of 11 percent in sales and a strong operating income. The business area shows continued strong volume growth, with an increase of more than 50 percent. Total Ericsson market share was well defended. Nevertheless, price pressure has continued and is expected to result in a 25-30 percent price reduction in Ericsson's product portfolio on an annual basis. Customer interest in prepaid services caused a rise in demand for entry-level mobile phones. Price competition in this segment is particularly severe, which influenced sales during the period. This trend was particularly evident in Europe. The U.S. market has seen a positive development. Ericsson has during the period launched a number of new models. Other operations (including energy systems, components, cable and defense electronics) reported an overall sales increase of 12 percent for the period under review. Stockholm, October 22, 1998 Sven-Christer Nilsson (This report is unaudited) CHIEF EXECUTIVE OFFICER'S COMMENTS Income before taxes at Ericsson rose 17 percent to SEK 12,097 m during the first nine months of this year. Gross margins also showed further improvement during the period. The growth in income and improved margins were primarily due to favorable developments in the Mobile Systems business area. In the shorter perspective, concern about the global economy and stock market turbulence continued during the period. On the whole, we have benefited from the broad geographical spread of our operations, which reduces exposure to the problems afflicting individual national economies. Notwithstanding, economic developments have caused reduced sales compared to historic growth rates. Lower global demand is expected in the near term. For our part, this highlights the importance of continuing ongoing rationalization efforts. Our new organization creates important synergies that will be fully leveraged. Lower global demand is cause for additional cost reductions. Economic uncertainty in Asia has continued. The situation in the Russian economy has worsened, and increasing uncertainty regarding certain Latin American economies also became apparent during the period. At Ericsson, we have concluded that overall development in Asia continued to yield growth for our operations. We are still experiencing strong growth in China. Other economies in Asia that demonstrate good growth with positive impact on our sales include Singapore, Taiwan and India. The serious state of the Russian economy has had very marginal influence on Ericsson's results. Sales in Russia represent only about 1 percent of total sales. During the period, Ericsson purchased the majority of outstanding shares in our listed Brazilian subsidiary. The purchase reflects our positive assessment of the Brazilian telecommunications market. With more than 100 years of presence in Brazil, Ericsson enjoys a strong position in fixed and mobile telephony. Continued success in the Brazilian market, particularly in the third quarter, means that Ericsson's market share of mobile systems now exceeds 50 percent. In early October, Ericsson announced a new strategic direction and a new organization that will secure growth as well as a leading role in the new telecoms world taking shape in coming years. This new direction is the result of a comprehensive review of Ericsson technology, strategy and organization that was launched last spring. Implementation is now underway across the world. In terms of strategy, Ericsson aims at occupying a leading position in the growing market for wireless communications and Internet-based technologies. The strategy will fundamentally affect Ericsson as well as the entire industry. The new strategy also means that Ericsson capitalizes on its strengths @ telecommunications know-how including highly accessible and reliable networks, coupled with world-leading skills in wireless communications. Third-generation mobile systems based on WCDMA technology, in which Ericsson enjoys a leading position, will play a key role in the development of the new telecoms world. Earlier this year, Ericsson became the first company to launch the new packet- linked GPRS (General Packet Radio Service) technology, which improves GSM network capacity to handle data services. Another new development is EDGE, which further speeds up data transmissions, giving network operators today the opportunity to offer services with third-generation characteristics. GPRS, EDGE and WCDMA all represent potential avenues for further joint development of existing D-AMPS and GSM networks toward third-generation mobile services. The coming years will be dominated by convergence between data and telecommunications, and where demands for mobility will characterize development. At a press conference on October 12, we announced that our goal is to long term exceed market growth. Ericsson will achieve this objective by capturing strong positions in the new growth markets within our customer segments. Such new-growth markets include wireless data and voice communications within all three customer segments: network operators and service providers, enterprises, and consumers. The strategy allows us to defend our world-leading position in mobile telephony, while simultaneously establishing the same position in the emerging market for mobile data communications. Our position in data communications will be secured by our own development efforts and by acquisition of small and medium-sized companies with complementary cutting-edge technologies. In the third quarter, one such strategic acquisition was negotiated regarding California-based ACC, one of the leading suppliers of remote-access products. This acquisition gives Ericsson additional strategic competence in the Internet protocol sphere. Our strategic intent is supported by continued forceful investments in research and development. Our R&D resources will focus on the growth segments emphasized in the strategy. The Mobile Systems business area has experienced strong growth in sales as well as income. During the third quarter, considerable sales successes were achieved, especially in Argentina, Brazil, Italy, Mexico and Spain. China remains the largest market for Mobile Systems, followed by the United States and the United Kingdom. During the period, Telecom Italia Mobile, Europe's biggest mobile operator, ordered a WCDMA test system. In addition, Ericsson recently announced a three-year agreement with Wind, the third largest Italian mobile operator. Ericsson will be the main supplier of both fixed-line and mobile networks to Wind. The agreement comprises turnkey solutions for dual-band GSM 900/1800 networks, as well as fixed networks @ both based on AXE architecture. Ericsson will also provide an IN (Intelligent Network) solution, enabling Wind to offer customers with coordinated fixed and mobile services, such as the use of a common mailbox for voice mail. Ericsson has also signed contracts with Retevisión Móvil, Spain's third- ranking mobile operator, involving the major part of the nationwide GSM 1800 network. As a result of this contract, Ericsson is now a provider to all three GSM operators in the Spanish market, and has strengthened its position as leading supplier. Ericsson has received word that the United States Patent and Trademark Office has validated a total of 36 new and amended claims in one of Ericsson's key patents on 'soft handoff', an Ericsson invention that is essential to the practice of U.S. wireless telecommunications standard IS-95. Over the past three months the U.S. Patent Office has allowed three such Ericsson patents. The successful reissue of these three patents confirms that Ericsson is the true inventor of the 'soft handoff' and 'macrodiversity' concepts that are fundamental to IS-95. The Infocom Systems business area vigorously continues its restructuring. This work will be pursued and reinforced in the new organization, creating conditions for increased and sustainable efficiency. In the third quarter, Ericsson won a strategic contract in China against tough competition from other datacom suppliers. The contract covers delivery of the ATM system AXD 301, which will provide the basis for one of the largest ATM- based networks in China to date. The market for the Mobile Phones and Terminals business area is characterized by shorter product cycles, to which we are adapting. Toward the end of the period, several new models of mobile phones were launched. In September, Ericsson introduced a mobile phone that offers international travelers the opportunity to communicate using one and the same phone in more than 120 countries @ in Europe, Africa, Asia Pacific and America. This new mobile phone, I 888 World, featuring a dual-band GSM 900/1900 frequency function, is indeed truly global. Thanks to an infrared modem built into the I 888 World, travelers can communicate effortlessly with their stationary or portable PCs or hand-held devices. The function facilitates checking e-mail, surfing the Internet, or logging into a company network without having to carry cables, or to search for a suitable telephone outlet. In September, Ericsson also introduced model S 868, a new mobile phone with advanced dual-band functions. Because the S 868 is compatible with both GSM 900 and GSM 1800 networks, it facilitates international usage while reducing the incidence of lost connections. The business area also reports rising selling expenses, due to increased market activities as well as the implementation of a global business support system, which will increase efficiency, and should be viewed as an investment for the future. The new organization, based on customer segments, will be fully implemented by year end, and will replace the present division into business areas. A proforma account of the new segments will be presented in conjunction with the 1998 Report. FOR FURTHER INFORMATION, PLEASE CONTACT Lars A. Stålberg, Senior Vice President, Corporate Relations Phone: +46 8 719 3162 or +46 70 555 6066 E-mail: lars.stalberg@lme.ericsson.se Johan Fant, Senior Vice President Corporate Financial Control Phone: +46 8 719 3707 or +46 70 540 4011 E-mail: johan.fant@lme.ericsson.se Pia Gideon, Manager, External Relations Phone: +46 8 719 2864 or +46 70 519 2864 E-mail: pia.gideon@lme.ericsson.se Karin Almqvist Liwendahl, Director, Investor Relations Phone: +46 8 719 5340 or +46 70 590 5340 E-mail: karin.almqvist.liwendahl@lme.ericsson.se CONSOLIDATED (unaudited INCOME STATEMENT ) July-Sep July-Sep Changes Jan-Sep Jan-Sep Changes SEK millions 1998 1997 in % 1998 1997 in % Net sales 43,146 40,407 7 125,396 112,617 11 Cost of sales -24,301 -23,832 2 -71,173 -65,789 8 Gross margin 18,845 16,575 14 54,223 46,828 16 Research and development and other technical -6,803 -5,798 17 -19,645 -17,196 14 expenses Selling -5,422 -4,720 15 -16,508 -13,867 19 expenses Administrative -2,114 -1,645 29 -5,882 -5,193 13 expenses Other operating 129 186 -31 507 671 -24 *) revenues Share in earnings 45 71 -37 108 339 -68 of associated companies Operating 4,680 4,669 0 12,803 11,582 11 income Financial 688 394 75 1,794 1,210 48 income Financial -676 -331 104 -1,670 -1,263 32 expenses Income after 4,692 4,732 -1 12,927 11,529 12 financial items Minority interest -166 -502 -67 -830 -1,204 -31 in income before taxes Income before 4,526 4,230 7 12,097 10,325 17 taxes Taxes -1,416 -1,317 8 -3,801 -3,264 16 Net 3,110 2,913 7 8,296 7,061 17 income *) Including 6 - 15 92 - 36 capital gains/losses net CONSOLIDATED BALANCE SHEET Sep 30 Dec 31 Sep 30 SEK millions 1998 1997 1997 Intangible 4,039 748 780 assets Tangible assets 20,033 19,225 18,126 Equity in associated companies and 3,757 4,077 4,234 other investments Long-term customer 4,038 2,000 2,161 financing Other fixed 3,333 3,365 4,003 assets Total fixed 35,200 29,415 29,304 assets Invento 27,475 23,614 25,054 ries Accounts 49,033 46,151 41,173 receivable - trade Other 21,412 19,133 15,584 receivables Cash, bank and short-term cash 21,494 29,127 20,431 investments Total current 119,414 118,025 102,242 assets Total 154,614 147,440 131,546 assets Stockholders' 57,593 52,624 46,471 equity Minority 2,075 4,395 4,067 interest in equity Convertible 6,180 6,034 855 debentures Interest bearing provisions 20,364 17,112 19,092 and liabilities Non-interest bearing provisions 68,402 67,275 61,061 and liabilities Total stockholders' equity, 154,614 147,440 131,546 provisions and liabilities TREND OF OPERATIONS IN BRIEF Jan-Sep Jan-Sep Changes SEK millions 1998 1997 in % Net 125,396 112,617 11 sales Income before 12,097 10,325 17 taxes Net 8,296 7,061 17 income Average number of shares 1,997 1,971 1 outstanding, million Income per 4.25 3.60 18 share, SEK Equity ratio 38.6 38.4 (percent) Additions to tangible fixed 5,048 4,559 11 assets Depreci 4,067 3,872 5 ation Number of employees, end of 104,001 99,113 5 period SALES BY BUSINESS AREA July-Sep July-Sep Changes Jan-Sep Jan-Sep Changes SEK 1998 1997 in % 1998 1997 in % millions Mobile Systems 19,958 17,200 16 56,084 47,300 19 Infocom Systems 10,951 11,218 -2 33,291 32,688 2 Mobile Phones and 10,822 11,000 -2 32,701 29,387 11 Terminals Other 4,557 3,862 18 13,149 11,741 12 operations Less: -3,142 -2,873 9 -9,829 -8,499 16 Intersegment sales Total 43,146 40,407 7 125,396 112,617 11 SALES BY GEOGRAPHIC AREA July-Sep July-Sep Changes Jan-Sep Jan-Sep Changes SEK 1998 1997 in % 1998 1997 in % millions Sweden 2,100 2,002 5 6,539 6,246 5 Europe (excl. 18,062 16,402 10 51,326 44,666 15 Sweden) USA and Canada 4,308 4,619 -7 12,382 13,329 -7 Latin 5,039 5,488 -8 17,387 13,478 29 America Africa 795 540 47 2,387 1,724 38 The Middle East 2,366 1,256 88 4,890 3,314 48 Asia 9,600 8,422 14 27,151 24,965 9 Oceania 876 1,678 -48 3,334 4,895 -32 Total* 43,146 40,407 7 125,396 112,617 11 * Of 17,152 15,409 11 48,552 43,490 12 which EU Closing exchange rate SEK/USD = 7.8605