Ericsson reports continued good development
CEO COMMENTS
"We report yet another quarter of robust performance," says Carl-Henric Svanberg, President and CEO of Ericsson. "Our employees' impressive drive for operational excellence and responsiveness to customer needs continues to yield positive results. Technology leadership, long customer relationships and deep consumer understanding are key factors behind our leading position.
The activity level in emerging markets is accelerating, which means more people have access to communication services. In parallel, operators seek new ways of working to meet the global trends of increased tariff competition and convergence of technologies and services. We continue to focus on supporting our customers in reducing the total cost of network ownership and developing new business models. Our competitive technology and services offering is a distinct advantage in this environment.
The services area develops strongly and operators show growing interest in our offering, particularly in outsourcing of network operations, and the synergies we are able to leverage throughout the value chain. Hosting and content services are also in high demand as operators continue to develop their business to meet consumer needs," concludes Carl-Henric Svanberg.
FINANCIAL HIGHLIGHTS
2004 numbers restated in accordance with IFRS, please see www.ericsson.com/investors/doc/ifrs_statement.pdf. IAS 39 implemented as of January 1, 2005, related to financial instruments.
Income and cash flow
| | Second quarter | First quarter | Six-month period | |||||
| SEK b. | 2005 | 2004 | Change | 2005 | Change | 2005 | 2004 | Change |
| Net sales | 38.4 | 32.6 | 18% | 31.5 | 22% | 69.9 | 60.7 | 15% |
| Gross margin | 45.9% | 47.8% | - | 48.5% | - | 47.1% | 46.4% | - |
| Operating income | 8.3 | 7.3 | 14.5% | 6.6 | 26% | 14.9 | 11.2 | 33% |
| Operating margin | 21.6% | 22.2% | - | 21.0% | - | 21.3% | 18.4% | - |
| Income after financial items | 8.5 | 7.3 | - | 6.7 | - | 15.2 | 11.1 | - |
| Net income 1) | 5.8 | 5.0 | - | 4.6 | - | 10.5 | 7.6 | - |
| Earnings per share 1) | 0.37 | 0.31 | - | 0.29 | - | 0.66 | 0.48 | - |
| Cash flow before financial investing activities | 5.4 | 4.3 | - | -6.5 | - | -1.1 | 7.2 | - |
| Cash flow before financial investing activities excl. pension trust funding | 5.4 | 4.3 | - | 1.8 | - | 7.2 | 7.2 | - |
1) Attributable to stockholders of the parent company, excluding minority interest.
Sales were up 18% year-over-year and showed a sequential increase of 22%. The ongoing network rollout in the North American market is well under way and invoicing included equipment worth close to two billion Swedish crowns originally planned for the third quarter.
Currency exchange effects negatively affected sales in the quarter by 2%, compared to currency exchange rates one year ago. In constant currencies, sales for the quarter grew by 20%. For the six-month period, currency exchange effects impacted sales negatively by 3%.
Gross margin was 45.9% in the quarter. The software content was somewhat lower in the quarter, and the services proportion grew compared to the previous quarter. The operating margin was 21.6%, a slight increase compared to the previous quarter.
Net effects of currency exchange differences on operating income compared to the rates one year ago were SEK -1.2 b. in the quarter.
Financial net amounted to SEK 0.2 b. for the quarter.
Cash flow before financial investing activities was SEK 5.4 b. in the second quarter. As previously reported, cash flow in the first quarter of 2005 was negatively affected by SEK 8.3 b. by the transfer of cash and cash equivalents into a Swedish pension trust.
Balance sheet and other performance indicators
| | Six months | Three months | Full year |
| SEK b. | 2005 | 2005 | 2004 |
| Net cash | 42.4 | 43.1 | 42.9 |
| Interest-bearing provisions and liabilities | 29.8 | 28.4 | 33.6 |
| Days sales outstanding | 90 | 97 | 75 |
| Inventory turnover | 4.4 | 4.0 | 5.7 |
| Net customer financing | 4.4 | 4.2 | 3.6 |
| Equity ratio | 46.5% | 46.5% | 43.8% |
The financial position is strong. Net cash decreased by SEK 0.7 b. in the quarter to SEK 42.4 (43.1) b., mainly as a consequence of the dividend payment of SEK 4.0 b.
Days sales outstanding were 90 days, an improvement by seven days compared to the first quarter. Inventories, including work in progress, were slightly up in the quarter by SEK 1.3 b. to SEK 19.3 (18.0) b., due to currency exchange effects. Excluding currency exchange effects, inventories, including work in progress, were flat in the quarter.
Net change of deferred tax assets amounted to SEK 0.3 b. in the second quarter. The balance decreased from SEK 20.8 b. at year-end to SEK 18.9 b.
Cash outlays with regards to restructuring amounted to SEK 0.4 b. for the quarter. Approximately SEK 2.3 b. of restructuring charges remains to be paid out during 2005 and beyond.
MARKET AND BUSINESS HIGHLIGHTS
There is continued growth in the GSM market where emerging markets show particularly good development in both network coverage and capacity.
Tariff competition is intensifying in Western Europe. This stimulates both traffic growth and the evolution of new business models and services. In parallel, richer services and more complex technology has made total cost of network ownership, including operating expenses, an obvious priority for operators.
As a consequence, operator focus on the services area is increasing. In this environment, our services offering is a key ingredient in assisting operators to lower costs and offer rich content services. An important step in helping our customers meet consumer demands is the recently announced Napster agreement, which will enable operators to offer branded music download services efficiently.
The WCDMA rollout continues, and Cingular Wireless' rapid buildout plan in the US is driving the industry forward. When complete, Cingular's buildout will have contributed to doubling the installed WCDMA base outside of Japan. More attractive handsets with more competitive prices also contribute to the fast WCDMA network expansions.
Our successful HSDPA offering is proving to be a crucial part of operator considerations in timing WCDMA deployments. With HSDPA, operators will be able to offer their customers even richer services including music and film downloads, TV, and enterprise applications. Triple play, which brings together telephony, Internet and broadcast media, continues to be a focus for both mobile and fixed operators.
In parallel, operators are considering fixed/mobile convergence also as a way of reducing operating expenses. A key element in this development is the deployment of all-IP softswitch-based networks. Ericsson announced several strategic wins during the quarter in this area, of which BT's 21st Century all-IP network was the most noteworthy.
Regional overview
Western Europe sales grew 7% year-over-year. Also this quarter, Italy and Spain showed strong development, and the region as a whole continues to benefit from ongoing 3G deployments and GSM capacity enhancements.
Central Europe, Middle East and Africa sales grew 27% year-over-year and was the largest region. The development was solid across the markets with particularly good development in Nigeria and Turkey. There is a continued strong GSM development as well as an increased focus on 3G.
Asia Pacific sales were up by 8% year-over-year. China and India showed particularly strong development. While operators are evaluating different 3G technologies and performing large-scale trials with WCDMA, they continue to invest in GSM capacity enhancements to accommodate the strong subscriber growth.
North American sales are recovering. Growth year-over-year of 31% indicates a market rebound following operator consolidation. The ongoing network rollout in the North American market is well under way and invoicing included equipment worth close to two billion Swedish crowns originally planned for the third quarter.
Latin America shows continued positive development, and sales grew by 28% year-over-year through strong GSM sales. Argentina and Brazil, in particular, contributed to the year-over-year growth.
Subscriber growth
During the quarter, four new WCDMA networks were commercially launched, bringing the total to 65. We are a supplier to 38 of these networks. The number of subscriptions grew from 21 million to more than 28 million during the quarter and WCDMA is now by far the fastest growing 3G technology. The number of CDMA2000 1xEV-DO subscriptions grew by two million and has reached 14 million.
We continue to see a steady increase in both subscribers and usage, which further contributes to the solid long-term industry growth. Net subscriber additions were more than 100 million in the quarter. At the end of the quarter, worldwide subscription penetration is 30%, with more than 1.9 billion total subscriptions, of which almost 1.5 billion are GSM.
OUTLOOK
All estimates are measured in USD and refer to market growth compared to previous year.
The traffic growth in the world's mobile networks is expected to continue as a result of both new services and new subscribers. For 2005 we now believe that the global mobile systems market, measured in USD, will show moderate growth compared to 2004.
We previously estimated the global mobile systems market, measured in USD, to show slight growth compared to 2004.
We maintain our view that the addressable market for professional services is expected to continue to show good growth.
With our technology leadership and global presence we are well positioned to take advantage of these market opportunities.
SEGMENT RESULTS
2004 numbers restated in accordance with IFRS, please see www.ericsson.com/investors/doc/ifrs_statement.pdf. IAS 39 implemented as of January 1, 2005, related to financial instruments.
Systems
| | Second quarter | First quarter | Six-month period | |||||
| SEK b. | 2005 | 2004 | Change | 2005 | Change | 2005 | 2004 | Change |
| Net sales | 36.1 | 30.4 | 19% | 29.0 | 25% | 65.1 | 56.5 | 15% |
| Mobile Networks | 28.8 | 24.3 | 19% | 23.5 | 23% | 52.2 | 45.4 | 15% |
| Fixed Networks | 1.1 | 1.1 | 0% | 1.0 | 8% | 2.2 | 2.0 | 8% |
| Professional Services | 6.2 | 5.0 | 25% | 4.5 | 38% | 10.7 | 9.1 | 18% |
| Operating income | 8.2 | 5.9 | 6.2 | 14.4 | 9.4 | |||
| Operating margin | 23% | 20% | - | 21% | - | 22% | 17% | - |
Sales in Mobile Networks grew by 19% year-over-year. In constant currencies, sales grew 21% year-over-year and 18% for the six-month period.
In the evolution from GSM to WCDMA most customers are deploying networks that combine GSM and WCDMA. The growth in the GSM/WCDMA track was approximately 22% in the quarter. Of radio access sales, 54% was WCDMA/EDGE related. The strong subscriber growth continues and supports the growth in Mobile Networks sales.
Sales within Professional Services have developed favorably during the quarter and grew approximately 25% year-over-year. In constant currencies the growth was 27% year-over-year. Supporting the strong growth the number of employees in services grew by 1,500 in the quarter.
Other Operations
| | Second quarter | First quarter | Six-month period | |||||
| SEK b. | 2005 | 2004 | Change | 2005 | Change | 2005 | 2004 | Change |
| Net sales | 2.7 | 2.8 | -5% | 2.7 | -2% | 5.4 | 5.3 | 2% |
| Operating income | -0.1 | 0.6 | - | 0.0 | - | 0.0 | 0.6 | - |
| Operating margin | -4% | 20% | - | 2% | - | -1% | 11% | - |
Other Operations show a sequential sales decline of 2%. This includes 17% growth in Ericsson Mobile Platforms. Operating income of SEK -0.1 b. is affected by ongoing restructuring in Ericsson Power Modules and increased R&D investments in Enterprise and public safety.
SONY ERICSSON MOBILE COMMUNICATIONS
For information on transactions with Sony Ericsson Mobile Communications please see Financial statements and additional information.
Sony Ericsson Mobile Communications (Sony Ericsson) reported units shipped up 14% year-over-year and 26% sequentially. Sales increased by 7% year-over-year. Ericsson's share in Sony Ericsson's income before tax was SEK 0.4 b. for the quarter, compared to SEK 0.5 b. in the same period previous year.
PARENT COMPANY INFORMATION
Net sales for the six months period amounted to SEK 0.7 (0.9) b. and income after financial items was SEK 5.3 (4.5) b.
Major changes in the Parent Company's financial position for the six months period include increased short- and long-term receivables from subsidiaries of SEK 6.6 b. and decreased other current receivables of SEK 4.8 b. Current and long-term liabilities to subsidiaries decreased by SEK 7.3 b. and other current liabilities increased by SEK 2.4 b. At the end of the quarter, cash and short-term cash investments amounted to SEK 67.2 (71.7) b.
In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 5,294,648 shares from treasury stock were sold or distributed to employees during the second quarter. The holding of treasury stock at June 30, 2005 was 292,992,667 Class B shares.
Stockholm, July 21, 2005
Carl-Henric Svanberg
President and CEO
Date for next report: October 21, 2005
AUDITOR'S REPORT
We have reviewed the report for the second quarter ended June 30, 2005, for Telefonaktiebolaget LM Ericsson (publ.). We conducted our review in accordance with the recommendation issued by FAR. A review is limited primarily to enquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.
Based on our review, nothing has come to our attention that causes us to believe that the interim report does not comply with the requirements for interim reports in the Annual Accounts Act and IAS 34.
Stockholm, July 21, 2005
| Bo Hjalmarsson | Peter Clemedtson | Thomas Thiel |
| Authorized Public Accountant | Authorized Public Accountant | Authorized Public Accountant |
| PricewaterhouseCoopers AB | PricewaterhouseCoopers AB |
EDITOR'S NOTE
Ericsson invites the media, investors and analysts to a press conference at the Ericsson headquarters, Torshamnsgatan 23, Stockholm, at 09.00 (CET), July 21.
An analyst and media conference call will begin at 15.00 (CET).
Live audio webcast 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
Investors
Gary Pinkham, Vice President,
Investor Relations
Investor Relations
Phone: +46 8 719 0000;
E-mail: investor.relations@ericsson.com
E-mail: investor.relations@ericsson.com
Susanne Andersson, Investor Relations,
Phone: +46 8 719 4631
Phone: +46 8 719 4631
E-mail: investor.relations@ericsson.com
Glenn Sapadin, Investor Relations,
North America
North America
Phone: +1 212 843 8435;
E-mail: investor.relations@ericsson.com
E-mail: investor.relations@ericsson.com
Media
Pia Gideon, Vice President,
Market and External Communications
Pia Gideon, Vice President,
Market and External Communications
Phone: +46 8 719 2864, +46 70 519 8903; E-mail: press.relations@ericsson.com
Åse Lindskog, Director,
Head of Media Relations
Head of Media Relations
Phone: +46 8 719 9725, +46 730 244 872; E-mail: press.relations@ericsson.com
Ola Rembe, Director,
Media Relations
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
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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.
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The full report including tables can also be downloaded from the following link.