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Ericsson reports robust start of the year

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  • Net sales SEK 42.2 (39.1) b., up 8% year-over-year, excluding divested operations
  • Operating income SEK 8.2 (6.6) b., up 23% year-over-year
  • Operating margin 19.3% (16.7%)
  • Net income SEK 5.8 (4.6) b., up 27% year-over-year
  • Earnings per share SEK 0.37 (0.29), up 28% year-over-year
    •  
    CEO COMMENTS


    "We have concluded another quarter with solid performance and market share gains in a stable growth environment," said Carl-Henric Svanberg, President and CEO of Ericsson (NASDAQ:ERIC). "Sales growth in the quarter was primarily driven by Western Europe, and large turnkey projects in Central and Eastern Europe, Middle East, Africa and Asia Pacific. Our capability in managing such projects around the world is a competitive advantage. Margins remain stable, due to the benefits of scale and technology leadership. Our commitment to operational excellence continues and operating expenses grew less than 3 percent versus a sales growth of 8 percent.


    Fixed and mobile data traffic accelerates and we have seen a doubling of traffic in mobile broadband networks over the last six months. User generated content is becoming a main traffic driver, with YouTube as a current example of a popular, capacity demanding, service. As a consequence, transmission is quickly becoming a bottleneck in many networks. Mobile broadband deployments accelerate with new 3G licenses in many regions, including India, Eastern Europe, Middle East and Latin America. In parallel, demand for GSM remains solid, driven by expansions in China, India, and many other high-growth markets.


    During the quarter, we completed the acquisitions of Redback and Entrisphere and announced, and got acceptance for, a public offer to acquire Tandberg Television. Through these moves we strengthen our position in fiber-to-the-home and IPTV. In combination with Marconi and our in-house capabilities, the prerequisites for leadership in next-generation IP networks are now in place.


    We are uniquely positioned to benefit from current market conditions. The year has started well, including encouraging growth in multimedia and professional services. Vodafone has awarded us the industry's first European-wide contract for spare parts management. With this move, Vodafone has taken a new, exciting, trend-setting approach with considerable cost savings," concluded Carl-Henric Svanberg.


    FINANCIAL HIGHLIGHTS
    Income statement and cash flow




     
             First quarter
    Fourth quarter
    SEK b.
    2007
    2006
    Change
    2006
    Change
    Net sales, excl.
    divested operations
    42.2
    39.1
    8%
    54.2
    -22%
    Net sales
    42.2
    39.6
    7%
    54.2
    -22%
    Gross margin (%)
    43.0
    43.5
    -
    42.2
    -
    EBITDA (%)
    23.8
    21.8
    -
    26.3
    -
    Operating income
    8.2
    6.6
    23%
    12.2
    -33%
    Operating margin (%)
    19.3
    16.7
    -
    22.5
    -
    Operating margin
    ex Sony Ericsson (%)
    15.5
    14.9
    -
    18.4
    -
    Income after
    financial items
    8.3
    6.7
    24%
    12.2
    -32%
    Net income
    5.8
    4.6
    27%
    9.7
    -40%
    Cash flow
    from operations
    4.6
    2.4
    -
    11.0
    -
    EPS, SEK
    0.37
    0.29
    28%
    0.61
    -35%
    Cash EPS, SEK1)
    0.40
    0.32
    -
    0.65
    -
                               
    1) EPS excluding amortization of intangible assets.
     


    The year-over-year sales increase reflects good performance across all business segments despite the comparison with a strong first quarter 2006 and a considerably weaker USD.


    Gross margin was stable sequentially. Operating expenses increased by less than half the rate of the sales growth. The increased operating margin year-over-year, excluding Sony Ericsson, is due to continuous operational excellence activities, including positive effects from the Marconi integration.. Operating margin decreased sequentially due to seasonally lower sales. The growing earnings in Sony Ericsson contributed significantly to the improved result.


    The majority of our sales growth over the last four years has increasingly been driven by large turnkey projects. This leads to growing working capital with obvious cash flow effects but builds a platform for future growth. In this field, our capabilities represent a clear competitive advantage and therefore support our margins.


    Cash flow from operating activities was SEK 4.6 (2.4) b. in the quarter. Cash flow was positively impacted by an advance payment equivalent to the dividend from Sony Ericsson of SEK 3.5 b. In 2006 the dividend was paid in the first quarter and amounted SEK 1.2 b. Cash flow from investing activities was SEK -9.2 b., largely driven by the acquisition of Redback, Entrisphere and certain shares in Tandberg Television.


    Balance sheet and other performance indicators




     
           Three months
    Full year
    SEK b.
      2007
      2006
       2006
    Net cash
    29.1
    33.7
         40.7
    Interest-bearing
    provisions and liabilities
    22.6
    32.7
    21.6
    Days sales
    outstanding
    107
    100
    85
    Inventory
    24.1
    23.5
          21.5
    Of which work
    in progress
    14.9
    14.4
          14.2
    Inventory turnover
    4.2
    4.2
    5.2
    Customer
    financing, net
    3.8
    3.2
             3.7
    Return on capital
    employed (%)
    23.8
    20.9
    27.4
    Equity ratio (%)
    56.6
    50.2
    56.2
                      

    Deferred tax assets increased in the quarter by SEK 0.6 b. to SEK 14.1 (13.6) b. due to acquired deferred tax assets, mainly in Redback.


    Working capital increased by SEK 4.7 b. in the quarter. This increase reflects the continued growth of large turnkey projects in Asia Pacific and Central and Eastern Europe, Middle East and Africa. Days sales outstanding amounted to 107 days.


    During the quarter, approximately SEK 2.5 b. of provisions was utilized to cover costs incurred of which the majority was related to previously announced restructuring programs and ongoing product warranties. New net provisions of SEK 0.8 b. have been made in the quarter for planned future costs.


    SEGMENT RESULTS


    From January 1, 2007, Ericsson has implemented a more customer-oriented organization. As a result, the financial reporting has been adapted and the first quarter 2007 interim report will include the business segments Networks, Professional Services and Multimedia. Sony Ericsson will be reported as before, but with a higher level of disclosure.


    Previously, Ericsson has reported sales of fixed networks, mobile networks and professional services. Sales of mobile systems include the mobile parts of Networks, network rollout, with its related parts of systems integration, and the mobile part of Multimedia. Although the reporting structure is changed to partly new dimensions, mobile systems will at least during 2007, be continued to be reported for comparability and it will remain the basis for our market outlook. Growth for mobile systems in the first quarter amounted to 6% year-over-year.
    Further details of the changes are included in the section "Financial statements and additional information".




            First quarter
     
    Sales, SEK b.
    2007 1)
    2006 2)
    Change
    Networks
    29.3
    28.0
    5%
    Of which
    network rollout
    3.8
    3.9
    -4%
    Operating margin (%)
    17%
    17%
    -
    Professional Services
    9.5
    8.3
    15%
    Of which
    managed services
    2.6
    2.3
    11%
    Operating margin (%)
    15%
    15%
    -
    Multimedia
    3.4
    2.8
    19%
    Operating margin (%)
    8%
    3%
    -
    Total sales
    42.2
    39.1
    8%
    Of which
     mobile systems
    28.4
    26.7
    6%
                               
                               
    1)Acquired companies are included from date of acquisition.
    2)Excludes sales from the in 2006 divested defense business, Ericsson Microwave Systems.


    Networks


    The 5% year-over-year sales increase in Networks was driven by growth in both fixed and mobile networks. The sales decline in North America due to the Cingular rollout peak in first quarter of 2006 is overshadowing the underlying growth in other parts of the world. Outside North America, growth amounted to 14% year-over-year. Operating margin was stable year-over-year.


    The good demand for GSM continues. Growth is primarily driven by new network deployments and capacity expansions in high-growth markets. New features are still being added, for example super EDGE with 1 Mbps downlink. 3G/HSPA rollouts continue and new licenses have been or will be issued in several regions, also in developing countries. Sales of fixed networks grew slightly, excluding acquired sales, with increased sales of transmission products more than offsetting a decline of traditional circuit-switching equipment.


    Operator focus on next-generation IP networks is reflected in the strong demand for Redback's intelligent router program. Demand for transmission is growing, and in parallel, the quickly growing data traffic is starting to create bottlenecks in many networks.


    Redback is included as of February 1, and added, together with the acquired Entrisphere, sales of approximately SEK 0.4 b. in the quarter.




    The Professional Services business continued to make advancements throughout all areas and sales grew by 15% year-over-year. Growth in local currencies, which better reflects the actual activity level as services business is local, amounted to 20%. Recurring services revenues amount to more than 60%.


    Our leading position in managed services is solid. Sales growth amounted to 11%, or 15% in local currencies. The growth rate will vary over time as a result of larger contract awards. Agreements with Orange, Mobistar and Vodafone are examples of recent key business wins. In all current managed services contracts, excluding hosting, Ericsson is managing networks that together serve more than 120 million subscribers worldwide.


    Multimedia


    The organization is now established and business development is well under way. The segment includes service layer products, revenue management systems, enterprise solutions and mobile platforms as well as the two companies Tandberg Television and Mobeon, presently being acquired.


    Growth was strong during the quarter with especially encouraging development in revenue management, primarily prepaid and mediation solutions, and mobile platforms. Operating margin increased year-over-year as a result of the good growth and the effects of restructuring of enterprise solutions operations. As a fairly new business activity, growth and margins may fluctuate over the coming quarters.


    Sony Ericsson Mobile Communications
    For information on transactions with Sony Ericsson Mobile Communications, please see Financial statements and Additional information.




     
    First quarter
    Fourth quarter
    EUR m.
    2007
    2006
    Change
    2006
    Change
    Number of units
    shipped (m.)
    21.8
    13.3
    63%
    26.0
    -16%
    Average selling
    price (EUR)
    134
    149
    -
    146
    -
    Net sales
    2,925
    1,992
    47%
    3,782
    -23%
    Gross margin (%)
    30.3
    26.3
    -
    29.0
    -
    Operating income
    346
    143
    142%
    484
    -29%
    Operating margin (%)
    11.8
    7.2
    -
    12.8
    -
    Net income
    254
    109
    133%
    447
    -43%


    Sony Ericsson continued to build on the success of 2006 with strong growth in Asia Pacific, Latin America and Europe. The company captured market share in these markets through low- and mid-tier products. Gross margin improved both sequentially and year-over-year whereas operating margin declined sequentially due to lower sales. As a result of the expanded portfolio, ASP decreased to EUR 134.


    A number of new products were announced during the quarter, of which many already are shipping and have been well received. During the quarter, two new Cybershot phones, four new Walkman models and the first HSPA handset, aimed primarily at the North American market, were announced.


    Ericsson's share in Sony Ericsson's income before tax was SEK 1.6 (0.7) b. in the quarter.

    REGIONAL OVERVIEW




     
    First quarter
    Fourth quarter
    Sales, SEK b.
    2007
    2006
    Change
    2006
    Change
    Western Europe
    12.5
    11.5
    9%
    17.2
    -27%
    Central and Eastern Europe,
     Middle East and Africa
    11.4
    10.5
    9%
    15.2
    -25%
    Asia Pacific
    11.8
    8.7
    36%
    13.1
    -9%
    Latin America
    3.3
    3.7
    -9%
    4.8
    -31%
    North America
    3.1
    5.3
    -41%
    4.0
    -22%


    Western Europe showed better than expected growth, driven by increased voice traffic and accelerating data traffic in the mobile broadband networks. This has resulted in growing transmission sales as well as growing mobile infrastructure investments by operators, especially in Southern Europe. The strong focus on services remains. On the multimedia side, TV contracts were signed with Telefónica and Vodafone Iceland.


    In Central and Eastern Europe, Middle East and Africa, sales were driven by continued good demand for GSM as well as increased deployments of mobile broadband. The business activity was high in Africa, particularly in Sub Sahara. Sales in the Middle East were slower during the quarter but business activity remains high, including a third mobile license awarded to MTC in Saudi Arabia. Russia was also somewhat slower, however, preparations for 3G licenses are being made.


    Asia Pacific's strong sales growth year-over-year was primarily driven by the expected increase in GSM demand in China. After the end of the quarter, the BSNL court case in India has been withdrawn and contracts should be awarded shortly. In parallel, the other large operators in India are planning major expansion projects. The activity level is high also in countries such as Bangladesh, Indonesia and Thailand, and in Japan sales almost doubled as a result of mobile broadband rollouts and increased operator competition.


    Latin America is showing signs of recovery after last year's slowdown in operator investments, primarily in Mexico and Brazil. The strong subscriber growth continues and builds up the need for further expansions. GSM is being deployed in several new markets like El Salvador, Guyana and Peru, and in parallel many operators are preparing for commercial 3G deployments.


    In North America, there is a strong operator focus on triple play and fixed and mobile broadband. This will lead to accelerating investments over time and Ericsson has strengthened its presence in the US market through the recent acquisitions. Sales were down compared to the strong first quarter in 2006 when the Cingular rollout peaked.


    Growth rates based on Ericsson and market estimates.
     
    Fixed and mobile traffic is expected to continue to accelerate over the coming years due to increased coverage and usage as well as new multimedia services. As a consequence, operator investments in infrastructure equipment over the long-term should continue to grow along historical trends of mid-to high-single digits.


    Infrastructure investments have always varied over time and between regions depending on technology and regulatory developments, as well as license awards and new technology deployments. There is also a growing replacement market driven by the benefits from improved operating expenses, such as lowered power consumption with newer equipment.
     
    Data traffic in the world's mobile networks is accelerating and expected to exceed voice traffic in the next three to four years. We estimate that mobile data traffic tripled in 2006. In addition, the introduction of HSPA has generated a step up in network traffic volumes and the packet data traffic has doubled in the last six months in the 3G/HSPA markets we monitor.


    Net additions of mobile subscriptions amounted to 136 million in the quarter. The total number of subscriptions now amount to 2.88 billion, of which 2.43 billion are GSM/WCDMA. The number of WCDMA subscriptions grew some 13 million to 113 million.


    The fixed broadband market also showed strong development during the quarter. During 2006, fixed broadband connections grew 69 million to a total of 280 million.


    Growth within the mobile systems market for 2006 is estimated to have been mid-single digits. Growth was driven by a combination of initial network rollouts and expansions in high-growth markets as well as 3G deployments in more mature markets.


    Growth within the fixed infrastructure market for 2006 is estimated to have been mid-single digits. Growth accelerated but varied between different parts of the network, where IP broadband related products showed particularly strong development.


    The telecom services market for 2006 is estimated to have continued to show good growth. Increasingly complex networks with new multimedia services drove demand for professional services. An increasing interest in managed services could enhance market growth.


    It is estimated that growth within the emerging multimedia market for 2006 accelerated but with large variations between different market segments.


    MARKET OUTLOOK FOR MOBILE INFRASTRUCTURE AND SERVICES
    All estimates are measured in USD and refer to market growth compared to previous year.
     
    For 2007 we believe that the GSM/WCDMA track within the global mobile systems market, measured in USD, will continue to show mid-single digit growth.


    The addressable market for professional services is expected to show good growth in 2007.


    With our technology leadership and global presence we are well positioned to take advantage of these market opportunities.
     
    PARENT COMPANY INFORMATION


    Net sales for the first quarter amounted to SEK 0.7 (0.6) b. and income after financial items was SEK 4.0 (2.6) b.  Patent license revenues have been included in net sales from 2007, and 2006 results have been restated accordingly.


    Major changes in the Parent Company's financial position for the first quarter include increased investments in subsidiaries of SEK 14.6 b. and decreased cash and bank and short-term investments of SEK 10.8 b. These changes are mostly attributable to the Redback and Entrisphere acquisitions. Current and non-current liabilities to subsidiaries decreased by SEK 5.7 b. At the end of the quarter, cash and bank and short-term investments amounted to SEK 43.2 (54.0) b.


    In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 4,375,087 shares from treasury stock were sold or distributed to employees during the first quarter. The holding of treasury stock at March 31, 2007 was 246,638,805 Class B shares.


    OTHER INFORMATION
    Acquisition of Redback Networks


    On January 25, 2007, Ericsson announced the finalization of the acquisition of Redback Networks. The acquisition has had a SEK 13.3 b. effect on cash flow during the quarter.


    Acquisition of Entrisphere


    On February 12, 2007, Ericsson announced its acquisition of Entrisphere, a company providing fiber access technology. The acquisition strengthens Ericsson's fixed broadband access portfolio and its position in converged networks. Fiber technology is essential for next generation access networks and for High Definition IPTV and other IP-based services with high demand for bandwidth and cost efficiency.


    Entrisphere, based in the US, employs about 140 persons.


    Acquisition of Mobeon


    As announced on March 15, 2007, Ericsson will acquire the business and assets of Mobeon AB, the world's leader in IP messaging components for mobile and fixed networks. 21% of Mobeon are already owned by Ericsson, which is also the primary partner and regional developer of Mobeon's CompEdge series of carrier-class messaging products.


    Mobeon employs approximately 130 persons in Sweden and the UK. Mobeon will be included in the reporting as of the second quarter, 2007.


    Public offer to acquire Tandberg Television


    On April 23, 2007 Ericsson announced it has received favorable rulings from the relevant competitive authorities to acquire all outstanding shares in Tandberg Television. All conditions in the terms and conditions set out in the offer document have been met and Ericsson will complete the offer in accordance with the offer document.


    Ericsson announced its voluntary public cash offer to acquire Tandberg Television for NOK 106 in cash per share as of February 26, 2007. The aggregate price was approximately SEK 9.8 b. Tandberg Television is a world-leader in video head-end, encoding and compression technology critical to maximize picture quality while minimizing bandwidth in video applications.


    Tandberg Television employs approximately 870 people with headquarters in Southampton, UK and Atlanta, US.


    Annual General Meeting


    The Annual General Meeting decided, as previously announced and in accordance with the proposal from the Board of Directors, on a dividend payment of SEK 0.50 per share for 2006 and with April 16, 2007, as the date of record for dividend. The total dividend payment amounts to SEK 7.9 b.


    The Annual General Meeting decided, as previously announced and in accordance with the proposal from the Board of Directors and with previous decisions, that Ericsson should have the right to transfer its own shares on the Stockholm Stock Exchange in order to cover certain payments that occur in relation to the company's Global Stock Incentive Plan program 2001, the Stock Purchase Plan 2003, the Long Term Incentive plans 2004, 2005 and 2006. The Annual General Meeting voted against the proposed long-term variable compensation plan 2007 and transfer of own stock in connection therewith. The Board of Directors is now working, in close contact with shareholders, on different alternatives for implementing the long-term variable compensation plan 2007.


    Stockholm, April 26, 2007


    Carl-Henric Svanberg


    President and CEO

    Date for next report: July 20, 2007


    REVIEW REPORT


    We have reviewed this report for the period January 1 to March 31, 2007, for Telefonaktiebolaget LM Ericsson (publ). Management is responsible for the preparation and presentation of this interim financial information in accordance with IAS 34 and the Annual Accounts Act. Our responsibility is to express a conclusion on this interim financial information based on our review.


    We conducted our review in accordance with the Standard on Review Engagements SÖG 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, issued by FAR. A review consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Standards on Auditing in Sweden, RS, and other generally accepted auditing practices. The procedures performed in a review do not enable us to obtain a level of assurance that would make us aware of all significant matters that might be identified in an audit. Therefore, the conclusion expressed based on a review does not give the same level of assurance as a conclusion expressed based on an audit.


    Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information is not, in all material respects, in accordance with IAS 34 and the Annual Accounts Act.


    Stockholm, April 26, 2007




    PricewaterhouseCoopers AB
    PricewaterhouseCoopers AB
    Bo Hjalmarsson
    Peter Clemedtson
    Authorized Public Accountant
    Authorized Public Accountant


    EDITOR'S NOTE


    To read the complete report with tables, please go to: www.ericsson.com/investors/financial_reports/2007/3month07-en.pdf


    Ericsson invites media, investors and analysts to a press conference at the Ericsson headquarters, Torshamnsgatan 23, Stockholm, at 09.00 (CET), April 26.


    An analyst and media conference call will begin at 14.00 (CET).


    Live audio webcasts 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
    Phone: +46 8 719 0000
    E-mail: investor.relations@ericsson.com


    Susanne Andersson,
    Investor Relations
    Phone: +46 8 719 4631
    E-mail: investor.relations@ericsson.com


    Glenn Sapadin,
    Investor Relations,
    North America
    Phone: +1 212 843 8435
    E-mail: investor.relations@ericsson.com

    Media
    Åse Lindskog, Director,
    Head of Media Relations
    Phone: +46 8 719 9725, +46 730 244 872


    Ola Rembe, Director,
    Media Relations
    Phone: +46 8 719 9727, +46 730 244 873

     
     
    Telefonaktiebolaget LM Ericsson (publ)
    Org. number: 556016-0680
    Torshamnsgatan 23
    SE-164 83 Stockholm
    Phone: +46 8 719 00 00


    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 attached link.

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