Ericsson reports significantly reduced operating expenses
PRO FORMA (excl EPS)
- Other operations
- Other operations
Adjusted Operating Income 1)
- Other operations
Adjusted Operating Margin 1)
- Other operations
Adjusted Income Before Taxes 1)
Earnings per share, diluted (SEK)
Cash flow before financing activities
Number of employees
1) Adjusted for:
- Capital gain, Juniper
- Non-operational capital gains
- Restructuring charges net
* Reported orders net include deductions of cancellations of SEK 5.4 b., mostly related to 3G contracts in Germany.
"Mobile communications is a long-term growth business. Over half a million new subscribers sign up each day and people are using their phones more and more. With only 17% worldwide penetration and mobile data just beginning, significant need for network expansion lies ahead," says Kurt Hellström, President and CEO of Ericsson.
In the near-term, the industry outlook continues to be uncertain. Many operators pursue more gradual 3G rollouts or target fewer markets. However, we are also seeing consolidations, restructurings and a more favorable regulatory environment, which we view as positive signs toward market stabilization.
The benefit of our restructuring is evident. We are driving efficiency throughout the organization to return to profit at some point next year. The rights offering proceeds have given us the financial security to make these changes.
We are one of the strongest in our industry and are uniquely positioned to expand our business with the world's leading operators. We are increasing our market share in GSM/WCDMA systems and capturing new business with professional services and technology licensing.
The number of mobile subscribers continues to grow. We estimate that more than 45 million new subscribers were added worldwide during the third quarter. At this rate, we expect net subscriber additions this year to be toward the lower end of our 175 - 215 million forecast.
In line with industry consensus estimates, we believe that the size of the mobile systems market in 2001 was about USD 53 b. We expect the mobile systems market in 2002 to decline about 20%, in line with our previous estimate of more than 15%.
We anticipate that the market in 2003 will not decline as much as this year, and will begin to stabilize at a lower level. A moderate increase in 3G sales should partly compensate for the lower demand for mature technologies such as TDMA and PDC.
Within the wireline systems market, we now believe the traditional circuit-switching business will shrink by more than 60% in 2002, compared with our previous estimate of more than 40%. Consequently, the overall wireline systems market, which also includes broadband access, optical transmission and multi-service networks, will decline significantly more than the 20% we estimated earlier.
We believe that approximately 92 million mobile phones were shipped in the second quarter and approximately 100 million in the third quarter. We had previously estimated 85 million units for the second quarter. Our full-year market estimate is about 390 million units.
Cost reductions and operational realignment
In the second quarter report we announced that we are targeting an annualized operating expense run rate of SEK 38 b. as well as a 2 - 4 percentage point improvement in gross margins. Implementation should be completed by end of third quarter 2003.
In the third quarter our operating expense annual run rate excluding restructuring costs was reduced by SEK 5 b. to SEK 52 b. At the end of the quarter we were 71,700 employees, a workforce reduction of 4,500 employees during the quarter. We expect to be less than 60,000 by the end of 2003.
The total cost for this restructuring plan is estimated to be SEK 17.5 b. During the quarter, restructuring charges were SEK 4.2 b. of which SEK 3.5 b. is related to redundancies. SEK 0.7 b. were related to the write-down of inventory and fixed assets as well as other costs for establishing more flexible operations.
The rights offering was oversubscribed by 37%. Proceeds net of fees and other costs were SEK 29.0 b. The rights offering increased the number of B shares outstanding by 7,908,754,111.
OPERATIONAL and financial REVIEW
In addition to the primary format, financial statements are also reported in a pro forma format. The primary format is based on Swedish GAAP (please see section Accounting Principles), and the previous year is restated for consolidation of finance companies previously accounted for according to the equity method. The pro forma format portrays results of operations as if capitalization of development costs was made on a continuous basis, and with results of operations transferred to Sony Ericsson October 1, 2001, reported in "Share in earnings of Associated companies and JVs." Comments below refer to pro forma statements unless otherwise indicated.
Order intake, excluding cancellations of SEK 5.4 b., declined by SEK 12 b. compared to the third quarter last year. The order cancellations are largely related to 3G and include contracts with Mobilcom and Quam in Germany. Adjusted for cancellations, quarterly order bookings 2002 have developed as follows, compared to 2001:
Table: Systems order development
While total Systems sales in the quarter declined year-over-year, sales in our Professional Services business grew almost 10%. Professional Services is the largest part of our Global Services business and now accounts for 14% of total Systems sales. With year-to-date sales of SEK 25 b., our Global Services operation is the largest service business among telecom equipment suppliers.
The lower order bookings were primarily due to weak demand for TDMA and PDC systems, combined with the order cancellations for 3G.
Sales in the quarter of our GSM/WCDMA track increased 2% sequentially, strengthening our leading market position. Year-to-date, sales of WCDMA equipment and associated network rollout services represent 8% of Mobile Systems sales.
Orders and sales in the quarter both declined by approximately 60% compared to last year, primarily driven by continued weak traditional circuit-switching equipment markets in both Latin America and Western Europe. Our ENGINE solution continues to improve its competitive position with more than 40% of the market.
Our 50% share of income from Sony Ericsson Mobile Communications is included in "Earnings from Joint Ventures and Associated Companies." The retained activities, including technology licensing and phone manufacturing in China, are reported as part of "Other Operations."
Sony Ericsson Mobile Communications
High-end phones continued to be the joint venture's best selling models, particularly the T68i. The demand for our phones with camera accessories shows that Sony Ericsson is at the forefront of mobile multi-media devices. Several new models targeting the mid and entry-level segments were launched and sales started to gain momentum late in the quarter. However, sales of SEK 8.2 b. on unit volumes of 5.0 million were not sufficient to generate a positive result. Our 50% share of income before taxes was SEK -0.5 b.
Orders increased by 14% over third quarter last year as orders for our Mobile Platforms developed favorably.
Total sales in the quarter for Other Operations declined by 4%. Strong sales growth in Mobile Platforms partially compensated for lower sales in Network Technology, Enterprise and Defense operations.
Adjusted operating income in Other Operations was SEK -1.2 b. with most of the losses attributable to Microelectronics and Network Technology. Although development in our Mobile Platforms and Bluetooth operations is promising they are still in an investment phase and not yet profitable.
The divesture of the bulk of our Microelectronics operation was completed during the quarter, with a net capital gain of SEK 0.1 b. Ericsson has agreed to staff a factory in Sweden for Infineon for one to two years. Provisions have been made to cover the estimated closure costs at the end of this period.
Net sales in the third quarter were down 29% year-over-year and 13% sequentially. The gross margin remained stable at the same level as in the second quarter. The positive effects of our cost savings offset lower sales volume.
The current operating expense run rate is SEK 52 b. per year. This excludes increased customer financing risk provisions of SEK 1.3 b. and is adjusted for normal seasonality for the third quarter.
Restructuring costs in the quarter were SEK 4.2 b., compared to SEK 1.5 b. in the second quarter.
Share in earnings of associated companies was SEK -0.6 b. mainly due to the negative result in Sony Ericsson in the quarter.
The effect of changes in foreign currency exchange rates in the quarter compared to rates one year ago was SEK 0.6 b. In the first quarter the effect was SEK 0.4 b. and in the second quarter 0.8 b.
Financial net improved marginally compared to the previous quarter as a result of the net proceeds from the rights offering concluded in September.
Adjusted income before taxes was SEK -3.9 b. (-5.8) in the quarter. Excluding provisions for customer financing of SEK 1.3 b. and SEK 0.5 b. respectively, this is an improvement of SEK 0.4 b. from the previous quarter. Tax is calculated at an average estimated rate of 30%.
Diluted earnings per share were SEK -0.93 (-1.63). Prior periods have been adjusted for the stock dividend element of the stock issue. After the stock issue, the number of shares outstanding is now 15,974,258,678.
Balance sheet and financing
We increased our cash position during the quarter from SEK 47.6 b. to SEK 74.4 b. primarily with the proceeds from the rights offering in early September. Net debt was reduced from SEK 21.2 b. to SEK -5.2 b. and the equity ratio increased from 31.6 % to 38.3 %.
On September 12, the rating agency Moody's downgraded Ericsson's long-term credit rating to Ba2.
Inventory and receivables declined in line with the lower sales volume. Inventory turnover improved slightly to 4.3 turns, while days sales outstanding (DSO) increased from 101 to 103 days. Accounts payable declined with lower purchases due to lower volumes.
Total customer financing risk exposure was reduced by SEK 2.9 b. On-balance sheet credits increased by SEK 2.3 b. largely due to the put-back of a credit that was formerly off-balance sheet. Off-balance sheet risk exposure as well as outstanding financing commitments was reduced considerably, as we cancelled certain commitments.
During October, we repurchased the off-balance sheet Mobilcom credits, which we expect to be able to convert into France Telecom bonds as previously announced.
The financial arrangements with a syndicate of banks for the refinancing of the portfolio of customer credits will be withdrawn on October 30. This is not expected to significantly affect cash flow or risk exposure.
On completion of these transactions, no put options will remain outstanding.
Table: Customer financing risk exposure
Less third party risk coverage
Ericsson risk exposure
net book value
recorded as contingent liabilities
Other long-term receivables include deferred tax assets of SEK 26.3 b., related to countries with long or indefinite utilization periods. Deferred tax assets have increased by SEK 5.4 b. during 2002.
Cash flow before financing activities was SEK -2.7 b. in the quarter. This includes SEK 2.3 b. from the sale of our Microelectronics operations, which was offset by the take back of off-balance sheet customer financing of SEK 2.3 b. Swedish pension insurance company FPG was paid a cash collateral of SEK 1.5 b. and given a bank guarantee of SEK 1.2b. Excluding the cash effect of these items, cash flow before financing was approximately SEK -1.2 b.
Short-term borrowings were reduced by SEK 1.0 b. in the quarter and long-term debt was unchanged. Payment readiness at the end of September, after completion of the rights offering, was 47 %, compared to 27 % at the end of June.
In our second quarter report we indicated that our sales would develop in line with an estimated market decline of more than 15% during 2002.
We believe that we will continue to maintain our share in each technology segment of the mobile systems market. However, due to product mix, our Mobile Systems sales this year could decline more than our revised estimate of an overall market decline of 20%. A comparatively strong performance in GSM/WCDMA is mainly being offset by our exposure to the sharply declining TDMA and PDC markets.
The market remains unpredictable. We continue to adjust to the prevailing market conditions and expect a return to profit at some point in 2003.
Parent Company information
The Parent Company business consists mainly of corporate management and holding company functions. It also includes activities performed on a commission basis by Ericsson Treasury Services AB and Ericsson Credit AB regarding internal banking and customer credit management. The Parent Company has branch- and representative offices in 16 (15) countries.
Net sales for nine months were SEK 1.2 b. (4.1) and income after financial items was SEK 0.6 b. (11.1).
Major changes in the company's financial position were:
Increased current and long-term commercial and financial receivables from subsidiaries of SEK 24.0 b.
Increased short-term and long-term customer financing of SEK 3.2 b.
Increased cash and short-term cash investments of SEK 16.7 b.
The investments were financed primarily through increased internal borrowing of SEK 17 b. and increased stockholders' equity, due to the new rights issue in September 2002, of SEK 29 b. At end of quarter, cash and short-term cash investments amounted to SEK 66 (49) b.
In accordance with the conditions of the Stock Purchase Plan for Ericsson employees, 205,072 shares from treasury stock were distributed during the third quarter to employees who left Ericsson. An additional 25,800 shares were sold in order to cover social security costs related to the Stock Purchase Plan. The holding of treasury stock at September 30, 2002, was 156,545,108 Class B shares.
This interim report has been prepared in accordance with the Swedish Financial Accounting Standards Council's recommendation RR 20, Interim reports.
We have changed accounting principles since our latest annual report.
The following Swedish GAAP recommendations are now implemented:
RR 1:00, Consolidated financial statements
RR 15, Intangible assets
RR 16, Provisions, contingent liabilities and contingent assets
RR 17, Impairment of assets
RR 19, Discontinuing operations
RR 21, Borrowing costs
RR 23, Related party disclosures
The only material effects of these new standards relate to RR1:00, regarding consolidation of controlled companies, and RR 15, regarding capitalization of development costs.
According to RR1:00 we have consolidated as subsidiaries certain finance companies previously accounted for under the equity method. We have restated previous year in our primary statements.
According to RR 15, starting from January 1, 2002 we have capitalized certain development costs. In accordance with this rule, we have not restated our primary accounts.
We also present pro forma statements, where we have assumed that the principle of capitalization of such development costs had been applied in all periods. For this purpose, we have used the amounts for capitalized development costs we already calculated and used in previous periods' reconciliation to US GAAP.
Our pro forma statement is also adjusted to portray our operations as if the mobile phones operations transferred to the Sony Ericsson joint venture on October 1, 2001, were accounted for under the equity method for the whole year 2001.
Stockholm, October 18, 2002
President and CEO
Date for next report: February 3, 2003
This report is the fourth consecutive quarterly report that has included pro forma statements to facilitate comparison with previous periods. From the fourth quarter, the primary accounts will be comparable and pro forma reporting will be discontinued.
We have reviewed the Interim Report as of September 30, 2002, for Telefonaktiebolaget LM Ericsson (publ). We conducted our review in accordance with the recommendation issued by FAR. A review is limited primarily to enquires 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 in the Annual Account Act.
Stockholm, October 18, 2002
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 fact, 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.
Ericsson is a world leader in communications technology and services with headquarters in Stockholm, Sweden. Our organization consists of more than 100,000 experts who provide customers in 180 countries with innovative Solutions and services. Together we are building a more connected future where anyone and any industry is empowered to reach their full potential. Net sales in 2017 were SEK 201.3 billion (USD 23.5 billion). The Ericsson stock is listed on Nasdaq Stockholm and on NASDAQ in New York. Read more on www.ericsson.com.