Ericsson reports positive cash flow and extends market share in mobile systems

Ericsson reports positive cash flow and extends market share in mobile systems · Earlier than expected savings through rapid implementation of Efficiency Program · Leadership in 2G and 3G mobile systems extended, GSM sales up 17% year to date · Adjusted income before taxes declined to SEK -5.8 b.; Latin America sales dropped sharply, as indicated in early September · Momentum for sustainable profitability: target over 5% operating margin full year 2002 Third quarter Nine months SEK b. 2001 2000 Change 2001 2000 Change Orders 44.9 68.7 -35% 181.5 212.9 -15% - Systems 35.3 49.7 -29% 148.6 153.2 -3% - Phones 7.4 14.1 -47% 22.2 42.1 -47% - Other operations 4.1 7.7 -46% 17.9 27.7 -35% Sales 54.6 67.3 -19% 173.3 191.5 -9% - Systems 43.0 48.1 -11% 137.8 133.4 3% - Phones 8.3 14.3 -42% 23.6 42.5 -45% - Other operations 5.5 8.1 -32% 19.7 25.9 -24% Adjusted Operating -5.2 4.7 -13.8 18.3 Income 1) - Systems 0.2 8.1 2.6 23.4 - Phones -4.2 -4.0 -14.6 -5.5 - Other operations -0.8 0.5 -0.8 1.6 - Unallocated -0.4 0.1 -1.0 -1.2 Adjusted Operating -10% 7% -8% 10% Margin 1) - Systems 1% 17% 2% 18% - Phones -51% -28% -62% -13% - Other operations -15% 6% -4% 6% Adjusted Income Before -5.8 4.1 -16.0 16.8 Taxes 1) Net Income -4.0 4.4 -17.8 18.8 Earnings per share, -0.50 0.55 -2.25 2.37 diluted (SEK) Earnings per share, diluted per U.S. GAAP (SEK) -0.71 0.49 -2.45 2.29 Cash flow before 1.2 -6.2 -12.3 -5.2 financing activities Number of employees 92,949 103,394 1) Adjusted for: - Capital gain, - - 5.5 - Juniper - Non-operational 0.2 1.4 0.2 6.2 capital gains - Pension refund - - - 1.1 - Restructuring - - -15.0 - charges OPERATIONAL RESULTS In the third quarter, orders and sales were affected primarily by the drop in Latin America and by lower systems sales and reduced phone volumes. Even with these reductions, our sales performance in Mobile Systems is still the strongest in the industry. Adjusted income before taxes, excluding non-operational items, was SEK - 5.8 b. This decrease reflects lower income in Systems, largely related to Multi-Service Networks, and reduced income in Other Operations related to lower sales of Microelectronics. CEO COMMENTS "With 17% sales growth so far this year we have once again outpaced all competitors in GSM systems and at the same time demonstrated fast progress in adapting our organization and costs to the difficult market conditions," says Kurt Hellström, President and CEO of Ericsson. "Cash flow was positive for the second consecutive quarter with improvements in inventories. We have a strong cash position and expect continued cash flow improvement." "The Efficiency Program is ahead of schedule with SEK 2.5 b. in savings this quarter and estimated savings of SEK 7 b. for the full year. With this momentum, our objective is to achieve over 5% operating margin for the full year 2002, as we continuously adjust our capacity and discontinue lower priority products and activities." "We are regaining strength in mobile phones and have launched several new phones including five GPRS models. The T39 is a bestseller and we have received strong interest in the T68 with color screen, which we have just started shipping. The restructuring of our mobile phone business is nearly completed. The Sony Ericsson Mobile Communications joint venture was launched as scheduled on October 1." "We are also very positive about the technology licensing business retained by Ericsson. We will continue to invest in this area to become a leading supplier of core technology to mobile phone manufacturers." "Despite the effects of the current slowdown on our recent financial results, the underlying demand drivers of our business remain strong. With the top position in GSM and 3G we have clearly extended our lead in mobile systems even further." "The substantial cost savings of our Efficiency Program were overshadowed by excess capacity costs and pricing pressure. The rapidly dropping sales volumes in Latin America during the third quarter emphasize the difficulty in forecasting under such changing conditions." "In these challenging times, our customers rely more than ever on our ability to deliver better solutions faster. With our dedicated people, strong cash position, premier customer base and technological lead, I am confident that we will deliver on our customers' expectations better than any competitor." OPERATIONAL REVIEW Systems With the benefits of the Efficiency Program we maintained a 1% operating margin in Systems. Although this margin is not satisfactory, it has held up well compared to our peers. Orders and sales declined sharply in Latin America. Sales in China, Middle East and Africa remained strong. Mobile Systems We continued our leadership in Mobile Systems, with GSM sales up 17% year to date, despite a 6% decline in the third quarter. Total Mobile Systems sales decreased 8%, but are still up 3% year-to-date in a market that is expected to be flat this year. In the third quarter, orders were down 23%. The main decrease was in TDMA and PDC, but GSM orders also declined. The impact from 3G orders was lower than in the previous two quarters, as most agreements for the first phase of network deployments have already been booked. Our leadership in 3G remains unquestioned with an estimated 40% market share in terms of projected UMTS sales. Multi-Service Networks During the first six months of the year, Multi-Service Networks sales increased 23% due to very strong demand in Latin America. In the third quarter, however, sales decreased 21%, abruptly reversing the trend in this region. As a consequence of the lower sales and margins, the product portfolio is under review, with home communication products already discontinued and the ADSL and broadband access strategies being revisited. Sales of our ENGINE solution in general continued to develop favorably with seven new agreements in the quarter. ENGINE is our solution for operators to convert existing circuit-switched networks into packet- switched multi-service networks or build entirely new networks. Mobile Phones Sales were sequentially flat with unit volumes decreasing from 7.7 to 7.2 million which was partially offset by higher average selling prices. This resulted in somewhat improved financial performance compared to last quarter. With the formation of the Sony Ericsson Mobile Communications joint venture the restructuring of our mobile phone business is nearly complete. The new company began operations as planned on October 1 with the transfer of 2,700 employees from Ericsson and the launch of a new mobile phone brand. Fifty percent of the results from the joint company will be reported as part of "Share in earnings of associated companies" starting in the fourth quarter. The mobile phones activities retained by Ericsson, which include the licensing businesses for mobile technology platforms and Bluetooth as well as our manufacturing in China, will be further optimized. These activities will be reported as part of Other Operations starting in the fourth quarter. Other Operations Adjusted operating income for Other Operations declined primarily due to lower sales and volumes for Microelectronics, but also lower results from Cables and Defense. Microelectronics has high fixed costs. Income is therefore very volume sensitive to the general downturn in demand from Ericsson as well as third parties for components for mobile phones and systems. Efficiency Program Our Efficiency Program has gained full momentum and implementation is ahead of schedule for the SEK 20 b. in yearly savings from 2002. This year, the program will provide around SEK 7 b. in savings, compared with the SEK 5.5 b. previously planned. During the third quarter, we reached the following milestones in the Efficiency Program: · The number of employees was reduced by 5,500, bringing the total reduction so far this year to 6,800 of the 10,000 planned for the Efficiency Program. · A new streamlined organization was created with fewer market units, concentrated R&D and supply units, fewer management layers and a Chief Operating Officer function. In addition to the Efficiency Program, other measures such as outsourcing and divestitures have reduced the workforce further. In total, the number of employees has been reduced from 107,200 in March to 92,900 by the end of September 2001. With the transfer of 2,700 employees to Sony Ericsson Mobile Communications and other reductions during October, our total headcount is today below 90,000. The total number of consultants and temporary workers has been reduced by 7,700 during the last six months. FINANCIAL REVIEW INCOME Gross margin declined in the quarter due to excess capacity costs, price pressure and the sharp sales and volume decline in Multi-Service Networks and Microelectronics. Operating margin declined from -7% in the second quarter to -10% in the third quarter, as reductions in operating expenses only partially offset the lower gross margin. Effects of foreign currency exchange rates, compared to the rates one year ago, were SEK 0.5 b., with SEK -0.7 b. in Phones. Restructuring reserves of SEK 3.2 b. were utilized, of which approximately SEK 2.5 b. had a negative cash flow impact. With the SEK 2.5 b. savings benefit from the Efficiency Program, the cash flow impact of restructuring actions was neutral. Financial net and minority interests improved somewhat in the quarter, mainly related to favorable foreign currency effects. Taxes are calculated at the expected annual average rate of 30%. Earnings per share (EPS) diluted were SEK -0.50 in the quarter and SEK - 2.25 (2.37) year to date. EPS diluted according to US GAAP year-to-date was SEK -2.45 (2.29). Positive effects of capitalization of software development costs were lower than last year, due to reduced R&D costs, more conservative capitalization, additional write downs from product portfolio reviews and continued depreciation on previously capitalized items. A negative effect of around SEK -0.25 related to timing differences of restructuring charges impacted the third quarter, as the recognition of some charges in the second quarter under Swedish GAAP were postponed to the third quarter according to US GAAP. CASH FLOW Cash flow before financing activities was positive in the third quarter by SEK 1.2 b. Receivables were reduced by SEK 5 b. mainly due to lower sales. Inventory was reduced by SEK 2.4 b. through better turnover. Payments from Flextronics for components were SEK 4 b. as planned. As previously mentioned the Efficiency Program was cash flow neutral. Cash flow contribution from divestitures of real estate was SEK 0.6 b., with further divestitures planned for the fourth quarter. BALANCE SHEET AND FINANCING The equity ratio was stable at 32%, even with the net loss in the quarter, due to lower levels of assets (i.e. reduced receivables and inventory). The Payment Readiness (cash plus temporary investments and long-term committed credit facilities less short-term interest-bearing liabilities) was improved, without changing the equity ratio. This was accomplished through a positive operating cash flow and by establishing an additional USD 600 m. in long-term committed credit facilities which now amount to USD 1.6 b.. To further strengthen payment readiness, borrowing under our Euro Medium Term Note Program (EMTN) and long-term bank loans were increased by SEK 3.7 b. during the quarter. As a result, our payment readiness is now 20% of sales, compared to our normal target level of 7-10%. We believe that this is favorable in the prevailing uncertain environment. To enlarge access to long-term liquidity, a EUR 400 m. loan agreement was signed with the European Investment Bank on October 8. With the positive cash flow, net debt (including pensions and similar commitments) decreased from SEK 33.3 b. to SEK 31.0 b. The refinancing of short-term debt continued during the third quarter and the maturity profile of the interest-bearing liabilities has now been substantially extended. Under the current financial market conditions, we strive to decrease the refinancing risk and free up capacity in our short-term borrowing programs. CUSTOMER FINANCING Our customer financing exposure decreased by approximately SEK 1 b. in the quarter to SEK 21.9 b., with repayments and credits sold outpacing additional lending. Brazil and the U.S. are still the markets with the largest exposures. MARKET VIEW Our global forecast of 25-35% mobile subscriber growth this year remains, with 920- 950 million subscribers by year-end. We expect about as many new subscribers will be added in 2002 as in 2001. Our long-term forecast remains unchanged with 1.6 b. mobile subscribers anticipated by year-end 2005. The number of mobile phones sold-through (units purchased by end users) this year will be around 400 million, which is the low end of our previous estimates. In 2002, we expect some growth in unit volume with a larger proportion of replacement phones, driven by new phones with GPRS, Bluetooth, color screens and multimedia messaging capabilities. As we indicated in early September when we updated our outlook for this year, the slowdown for telecommunications systems accelerated during the third quarter. We now anticipate that the difficult market conditions will persist well into next year, particularly in Latin America. Operators are prioritizing profitability and cash flow over subscriber growth by lowering mobile phone subsidies and postponing network expansion. We believe that growth in the mobile systems market this year will be more or less flat. In September we estimated flat to modest market growth for 2002. We now estimate the range to be flat to down 10%. Our market view is based on discussions with our customers. Our assumptions are a market downturn lasting well into next year, significant net subscriber additions with continued increasing usage per subscriber, gradual build up of GPRS traffic over the next 12 to 18 months, and increased deployment of 3G systems during 2002. OUTLOOK In our second quarter report we refrained from giving specific guidance for the third quarter and the full year. For the fourth quarter, we expect net sales of approximately SEK 55b. excluding the parts of the mobile phones operations that were transferred to Sony Ericsson Mobile Communications. Mobile systems sales are expected to decrease 10% compared with the fourth quarter last year. We will benefit from the Efficiency Program savings, but with continued price pressure, under-utilization of capacity and increased provisions for customer financing risks in Latin America, we anticipate a pre-tax loss somewhat smaller than in the third quarter 2001. This estimate includes fifty percent of the results from Sony Ericsson Mobile Communications but excludes non-operational items. For 2002, we expect sales at least in line with the market development of flat to down 10%. However, we plan to achieve an operating margin greater than 5% for the full year, even with sales declining as much as 10%. This target includes fifty percent of the results from Sony Ericsson Mobile Communications but excludes non-operational items. Our operational planning is cautious and based on the lower end of our sales estimate. We will identify and implement any necessary cost reductions on an ongoing basis in pace with our sales development. Parent company information The parent company business mainly consists of corporate management and holding company functions as well as activities performed on a commission basis by Ericsson Treasury Services AB and Ericsson Credit AB regarding internal banking and customer credit management. Net sales for the quarter were SEK 4.1 b. and income before taxes was SEK 10.2 b. Major changes in the company's financial position were: · Increased investments in subsidiaries, SEK 26 b. · Increased short- and long-term loans to subsidiaries, SEK 18 b. These investments and loans were financed primarily through increased internal borrowing of SEK 18 b. and increased long-term external borrowing of SEK 27 b. At September 30, cash and short-term cash investments amounted to SEK 27 b. (26 b.). Accounting principles This interim report has been prepared in accordance with the Swedish Financial Accounting Standards Council's recommendation RR 20, Interim reports. The same accounting principles have been used as in our latest annual report. The following optional recommendations are not yet implemented: RR 1:00, RR 15, RR 16, RR 17 and RR 19. For US GAAP purposes, FAS 133 "Accounting for derivative instruments and hedging activities" is adopted from January 1, 2001. Stockholm, October 26, 2001 Kurt Hellström President and CEO (Unaudited) Uncertainties in the Future "Safe Harbor" Statement under the U.S. Private Securities Litigation Reform Act of 1995: Some statements in this interim report are forward looking and actual results may differ materially from those stated. In addition to the factors discussed, among other factors that may affect results are product demand, the effect of economic conditions, exchange-rate and interest-rate movements, capital- and credit market developments, the ability to successfully restructure existing business, the timing of customer orders and manufacturing lead times, the changes in customer order and payment patterns, insufficient, excess or obsolete inventory, and the impact of competing products and their pricing, product development, commercialization and technological difficulties, political risks in the countries in which the Company has operations or sales, supply constraints, and the result of customer financing efforts. Results for interim periods are not necessarily indicative of results for the full fiscal year or any future periods Date for next report: January 25, 2002 A glossary of all technical terms is available at: http://www.ericsson.com/about and in the annual report. FOR FURTHER INFORMATION PLEASE CONTACT Corporate Communications: Roland Klein, Senior Vice President, Corporate Communications Phone: +44 20 7451 5660, +44 7776 162 997 E-mail: roland.klein@clo.ericsson.se Investors: Gary Pinkham, Vice President, Investor Relations Phone: +1 212 685 4030 E-mail: investorrelations@ericsson.com Lars Jacobsson, Vice President, Financial Reporting and Analysis Phone: +46 8 719 9489, +46 70 519 9489 E-mail: lars.jacobsson@lme.ericsson.se Maria Bernström, Director, Investor Relations Phone: +46 8 719 5340, +46 70 533 4750 E-mail: maria.bernstrom@lme.ericsson.se Lotta Lundin, Manager, Investor Relations Phone: +44 0 20 745 15664, +44 7887 628 707 E-mail: lotta.lundin@clo.ericsson.se Glenn Sapadin, Manager, Investor Relations Phone: +1 212 685 4030 E-mail: investorrelations@ericsson.com Media: Pia Gideon, Vice President, External Relations Phone: +46 8 719 2864, +46 70 519 2864 E-mail: pia.gideon@lme.ericsson.se Mads Madsen, Director, Media Relations Phone: +46 8 719 0626, +46 70 666 2903 E-mail: mads.madsen@lme.ericsson.se Åse Lindskog, Director, Media Relations Phone: +46 719 9725, +46 730 244 872 E-mail: ase.lindskog@lme.ericsson.se