Ericsson reports continued solid financial performance
CEO COMMENTS
"The market continues to show good development with growth in mobile voice and data, broadband and in emerging markets in general," says Carl-Henric Svanberg, President and CEO of Ericsson. "The two billion reported subscriber mark was passed in the quarter and three billion should be passed within five years. In parallel, usage is fueled by increased tariff competition and new service offerings.
We continue to outpace the market. Our ability to continuously drive operational excellence is confirmed by another quarter of strong performance. Through our leading product portfolio, including HSDPA, mobile and fixed softswitch and IMS, we continue to make strategic wins. The strong growth in services, especially managed services, confirms strong customer interest and our leading position in this area.
IP technology that opens up for converged services and new applications is quickly becoming a key focus area for operators. We are determined to secure a leading position also in this field and are directing our R&D investments accordingly. The development within IP technology has also renewed the interest for fixed network development and investments," 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
| | Third quarter | Second quarter | Nine-month period | |||||
| SEK b. | 2005 | 2004 | Change | 2005 | Change | 2005 | 2004 | Change |
| Net sales | 36.2 | 31.8 | 14% | 38.4 | -6% | 106.2 | 92.5 | 15% |
| Gross margin % | 45.2% | 47.1% | - | 45.9% | - | 46.4% | 46.6% | - |
| Operating income | 7.8 | 6.6 | 19% | 8.3 | -6% | 22.7 | 17.8 | 28% |
| Operating margin % | 21.6% | 20.7% | - | 21.6% | - | 21.4% | 19.2% | - |
| Income after financial items | 8.0 | 6.4 | - | 8.5 | - | 23.3 | 17.5 | - |
| Net income 1) | 5.3 | 4.3 | - | 5.8 | - | 15.8 | 11.9 | - |
| Earnings per share, SEK 1) | 0.34 | 0.27 | - | 0.37 | - | 1.00 | 0.75 | - |
| Cash flow before financial investing activities | -1.1 | 5.2 | - | 5.4 | - | -2.2 | 12.4 | - |
| Cash flow before financial investing activities excl. pension trust funding | -1.1 | 5.2 | - | 5.4 | - | 6.1 | 12.4 | - |
1) Attributable to stockholders of the parent company, excluding minority interest.
Sales were up 14% year-over-year and showed a sequential decrease of 6%. The invoicing in the second quarter included equipment worth close to two billion Swedish crowns originally planned for the third quarter.
Currency exchange effects were basically flat in the quarter compared to rates one year ago. For the nine-month period, currency exchange effects impacted sales negatively by 2%.
Gross margin was 45.2% in the quarter. The slight decline in gross margin compared to the previous quarter is an effect of the quickly growing services business and a high proportion of network rollout. The operating margin was 21.6%, unchanged compared to the previous quarter.
Net effects of currency exchange differences on operating income compared to the rates one year ago were SEK -0.6 b. in the quarter.
Financial net amounted to SEK 0.2 b. for the quarter.
Cash flow before financial investing activities was SEK -1.1 b. in the third quarter. Currency exchange effects have negatively impacted reported cash flow and working capital by approximately SEK 2.0 b. Furthermore, accounts receivable and work in progress have increased as a result of a higher business activity, increased proportion of larger projects, and a normal seasonal build up for the fourth quarter sales.
Balance sheet and other performance indicators
| | Nine months | Six months | Three months | Full year |
| SEK b. | 2005 | 2005 | 2005 | 2004 |
| Net cash | 41.3 | 42.4 | 43.1 | 42.9 |
| Interest-bearing provisions and liabilities | 29.3 | 29.8 | 28.4 | 33.6 |
| Days sales outstanding | 102 | 90 | 97 | 75 |
| Inventory turnover | 4.5 | 4.4 | 4.0 | 5.7 |
| Net customer financing | 4.5 | 4.4 | 4.2 | 3.6 |
| Equity ratio | 49.2% | 46.5% | 46.5% | 43.8% |
The equity ratio is 49.2%, an increase by 5.4 percentage points during the nine-month period. Net cash decreased by SEK 1.1 b. in the quarter to SEK 41.3 (42.4) b., mainly as a consequence of higher business activity.
Days sales outstanding were 102 days, an increase by 12 days compared to the second quarter due to a higher proportion of sales from markets with longer payment conditions. Inventories, including work in progress, were up in the quarter by SEK 0.5 b. to SEK 19.8 (19.3) b.
Net reduction of deferred tax assets amounted to SEK 2.0 b. in the third quarter. The balance decreased from SEK 20.8 b. at year-end 2004 to SEK 16.9 b.
Cash outlays related to restructuring amounted to SEK 0.2 b. for the quarter. Approximately SEK 2.1 b. of restructuring charges remains to be used during 2005 and beyond.
MARKET AND BUSINESS HIGHLIGHTS
There is a steady increase in both subscribers and usage, which further contributes to the solid long-term industry growth. Emerging markets are the primary driver for this subscriber growth. As an example of the high growth, Africa has passed 100 million GSM users.
In mature markets, growth is primarily driven by new and richer services. Mobile and fixed broadband access is quickly growing. The upgrade to broadband access will lead to an increase in voice and data traffic generating an accelerating demand for transmission capacity.
Intensified tariff competition is resulting in increasing usage. This has already occurred in the US and is now obvious also in Western Europe. As a consequence of falling tariffs and increasing traffic, the focus on operational efficiency and business models is increasing.
The WCDMA rollout continues across all markets with strong momentum for HSDPA. With HSDPA, operators will be able to offer their customers a new level of services with music and video downloads, TV, and enterprise services.
Triple play, which brings together telephony, Internet and broadcast media, continues to be in focus for both mobile and fixed operators. Convergence creates opportunities to offer such services across fixed and mobile networks. Our recent announcement of a converged IMS and triple play trial together with Rogers Communications Inc. in Canada underlines the accelerated interest for convergence.
As operators meet changing consumer demands and increased competition, their focus on the services area increases. In this environment, our services offering is a key ingredient in assisting operators to lower costs and offer richer content services.
Regional overview
Western Europe sales were basically flat year-over-year. Italy and Spain showed strong development in the quarter. Eastern Europe, Middle East and Africa sales grew 8% year-over-year. African markets also showed good development with strong sales in South Africa.
Asia Pacific sales were up by 20% year-over-year. Australia, India, Indonesia and Japan showed particularly strong development. Sales in China were down in the quarter. Subscriber and usage growth continues on high levels while operators are preparing themselves for 3G.
North American sales rebounded strongly and showed a 35% increase year-over-year. The intense competition on service quality and service offering continues in all areas of the market. This involves traditional fixed and mobile operators as well as cable-TV companies and stimulates further investments.
Latin America showed a positive development, and sales grew by 40% year-over-year through continued strong GSM sales. Brazil and Mexico in particular contributed to the strong sales increase.
Subscriber growth
During the quarter, 12 new WCDMA networks were commercially launched, bringing the total to approximately 80. Ericsson is a supplier to 44 of these networks. WCDMA subscriptions grew approximately six million to more than 34 million during the quarter and have increased by 18 million during the first nine months of 2005.
Net subscriber additions exceeded 100 million in the quarter. At the end of the quarter, worldwide subscription penetration was 32% with, more than two billion subscriptions in total, of which almost 1.6 billion GSM. The strong subscriber additions continue and the global number of subscriptions is expected to pass three billion within five years.
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 continue to believe that the global mobile systems market, measured in USD, will show moderate growth compared to 2004.
We maintain our view that the addressable market for professional services will show good growth.
For 2006 we believe that the global mobile systems market, measured in USD, will show moderate growth compared to 2005
We also believe that the addressable market for professional services will continue to show good growth in 2006.
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
| | Third quarter | Second quarter | Nine-month period | ||||||
| SEK b. | 2005 | 2004 | Change | 2005 | Change | 2005 | 2004 | Change | |
| Net sales | 33.9 | 29.6 | 15% | 36.1 | -6% | 99.1 | 86.1 | 15% | |
| Mobile networks | 26.8 | 23.8 | 13% | 28.8 | -7% | 79.0 | 69.1 | 14% | |
| Fixed networks | 1.1 | 1.0 | 11% | 1.1 | 1% | 3.3 | 3.0 | 9% | |
| Professional services | 6.0 | 4.8 | 25% | 6.2 | -3% | 16.8 | 14.0 | 20% | |
| Operating income | 7.1 | 5.9 | - | 8.2 | - | 21.5 | 15.3 | - | |
| Operating margin | 21% | 20% | - | 23% | - | 22% | 18% | - | |
Sales in mobile networks grew by 13% year-over-year, and in constant currencies, 16% for the nine-month period. The lower operating margin compared to the previous quarter is an effect of lower sales and a high level of network rollouts.
In the evolution from GSM to WCDMA, most customers are deploying networks that combine GSM and WCDMA. Of radio access sales, 53% was WCDMA/EDGE related. The strong subscriber growth continues and supports the growth in mobile networks sales.
Global Services sales (ie network rollout plus professional services) increased close to 30% year-over-year. Sales of professional services developed strongly during the quarter and grew 25% year-over-year Supporting this growth, the number of employees within the services area grew by 800 in the quarter.
Other Operations
| | Third quarter | Second quarter | Nine-month period | |||||
| SEK b. | 2005 | 2004 | Change | 2005 | Change | 2005 | 2004 | Change |
| Net sales | 2.5 | 2.8 | -12% | 2.7 | -6% | 7.9 | 8.1 | -2% |
| Operating income | 0.1 | 0.2 | - | -0.1 | - | 0.1 | 0.8 | - |
| Operating margin | 5% | 9% | - | -4% | - | 1% | 10% | - |
Other Operations sales decreased by 12% year-over-year, mainly due to a softer demand for defense systems and Ericsson Power Modules. Ericsson Mobile Platforms continues to show particularly strong development. Cables also showed good development as a result of an increased optical fiber broadband rollout.
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 29% year-over-year and 17% sequentially, reflecting a solid growth and market share gain. The increased investment in product development and marketing is starting to yield benefits. Sales increased by 22% year-over-year. Ericsson's share in Sony Ericsson's income before tax was SEK 0.7 b. for the quarter. The joint venture has now reached positive accumulated earnings, a significant milestone.
PARENT COMPANY INFORMATION
Net sales for the nine-month period amounted to SEK 0.9 (1.2) b. and income after financial items was SEK 6.6 (7.6) b.
Major changes in the Parent Company's financial position for the nine-month period include increased short- and long-term receivables from subsidiaries of SEK 4.0 b. and decreased other current receivables of SEK 4.7 b. Current and long-term liabilities to subsidiaries decreased by SEK 10.2 b. At the end of the quarter, cash and short-term cash investments amounted to SEK 65.7 (71.9) b.
In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 17,724,805 shares from treasury stock were sold or distributed to employees during the third quarter. The holding of treasury stock at September 30, 2005, was 275,267,862 class B shares.
Stockholm, October 21, 2005
Carl-Henric Svanberg
President and CEO
Date for next report: January 31, 2006
AUDITORS' REPORT
We have reviewed the report for the third quarter ended September 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, October 21, 2005
| Bo Hjalmarsson | Peter Clemedtson | Thomas Thiel |
| Authorized Public Accountant | Authorized Public Accountant | Authorized Public Accountant |
| PricewaterhouseCoopers AB | PricewaterhouseCoopers AB |
EDITOR'S NOTE
To read the complete report with tables please go to: www.ericsson.com/investors/financial_reports/2005/9month05-en.pdf
Ericsson invites the media, investors and analysts to a press conference at the Ericsson headquarters, Torshamnsgatan 23, Stockholm, at 09.00 (CET), October 21.
An analyst and media conference call will begin at 15.00 (CET).
Live audio web casts 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
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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
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Glenn Sapadin, Investor Relations,
North America
North America
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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
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Media Relations
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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 following link.