Ericsson reports solid start of the year
CEO COMMENTS
"Our focus on profitable growth through intensified customer partnerships and operational excellence is successful and is giving us a distinct competitive advantage," says Carl-Henric Svanberg, President and CEO of Ericsson. "The increase in mobile infrastructure market share of two to three percentage points last year proves the strength of our strategy.
We are seeing several exciting developments in the industry. Operator interest in services continues to grow. Our strategic managed services contract win with H3G in Italy during the quarter extends our leading position further in this area. We also see encouraging signs of accelerated infrastructure investments in both China and the U.S.
Our long and strong market presence throughout the world is unique. This provides growth opportunities from the increased number of subscribers and usage as well as the introduction of new exciting services. Launches of richer, more convenient and efficient services are repeatedly rewarded by consumers. With our consumer understanding and technology leadership we are well positioned to support our customers in meeting consumer needs," concludes Carl-Henric Svanberg.
FINANCIAL HIGHLIGHTS
2004 numbers restated in accordance to 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
| | First quarter | Fourth quarter | |||
| SEK b. | 2005 | 2004 | Change | 2004 | Change |
| Net sales | 31.5 | 28.1 | 12% | 39.4 | -20% |
| Gross margin | 48.5% | 44.7% | - | 45.6% | - |
| Operating income | 6.6 | 3.9 | - | 8.9 | - |
| Operating margin | 21.0% | 14.0% | - | 22.7% | - |
| Income after financial items | 6.7 | 3.7 | - | 8.7 | - |
| Net income 1) | 4.6 | 2.6 | - | 5.6 | - |
| Earnings per share 1) | 0.29 | 0.16 | - | 0.35 | - |
| Cash flow before financial investing activities | -6.5 | 2.9 | - | 5.3 | - |
| Cash flow before financial investing activities excl. pension trust funding | 1.8 | 2.9 | - | 5.3 | - |
1) Attributable to stockholders of the parent company, excluding minority interest.
Sales were up 12% year-over-year and showed a sequential decline of 20% due to seasonality. The year-over-year development is encouraging but the comparison is also somewhat favorable due to a somewhat slower start last year.
Currency exchange effects negatively impacted sales in the quarter by 5%, compared to currency exchange rates one year ago. In constant currencies sales for the quarter grew by 17%.
Gross margin was 48.5%, a reflection of a favorable product mix as well as continuous focus on cost of sales reductions. The operating margin was 21.0% and includes increased R&D investments in selected areas.
Net effects of currency exchange differences on operating income compared to the rates one year ago were SEK -0.9 b. in the quarter.
Financial net amounted to SEK 0.1 b.
Cash flow from operations was SEK 1.8 b. excluding pension trust transfers. Work in progress increased as a result of a higher business activity level. With the transfer of cash or cash equivalents of SEK 8.3 b. into a Swedish pension trust cash flow was negatively affected during the quarter and amounted to SEK -6.5 b.
Balance sheet and other performance indicators
| | Three months | Full year |
| SEK b. | 2005 | 2004 |
| Net cash | 43.1 | 42.9 |
| Interest-bearing provisions and liabilities | 28.4 | 33.6 |
| Days sales outstanding | 97 | 75 |
| Inventory turnover | 4.0 | 5.7 |
| Net customer financing | 4.2 | 3.6 |
| Equity ratio | 46.5% | 43.8% |
The financial position remained strong in the quarter. Net cash increased by SEK 0.2 b. to SEK 43.1 (42.9) b.
Days sales outstanding has improved from 102 to 97 days compared to the same period last year. Inventories were up in the quarter by SEK 4.0 b. to SEK 18.0 (14.0) b., mainly due to work in progress reflecting the increased activity level.
Deferred tax assets of SEK 1.5 b. were utilized in the quarter that decreased the balance from SEK 20.8 b. at year-end to SEK 19.3 b.
Cash outlays with regards to restructuring amounted to SEK 0.7 b. for the quarter. Approximately SEK 2.7 b. of restructuring charges remains to be paid out during 2005 and beyond.
During the quarter the rating institute Standard & Poor's raised Ericsson's credit rating to investment grade with a positive outlook. Standard & Poor's said that the move also reflected its view on the medium term outlook for the industry. After the end of the quarter rating institute Moody's also raised Ericsson's rating to investment grade.
MARKET AND BUSINESS HIGHLIGHTS
The steady increase in subscribers and usage stimulates the solid long-term industry growth. This drives both infrastructure investments and the development of more advanced consumer services. Ease of use and quality of service in parallel with reducing operating expenses continues to be main priorities for most operators.
Triple play, that is bringing together telephony, Internet and broadcast media, is in focus, especially among fixed network operators. Our evolved version of WCDMA with HSDPA is a key enabler within the mobile triple play market, offering mobile broadband with data rates similar to fixed broadband. HSDPA will be commercially available 2005 with volume shipments in 2006, and is the natural evolution of WCDMA. In parallel, our strong GSM development continues, especially in high growth markets where we expand our GSM footprint and pave the way for WCDMA.
The development of IP to telecom grade quality levels enables a convergence of fixed and mobile solutions for voice, data and video and thereby offers consumers even richer experiences. IMS (IP Multimedia Sub-system) is a crucial step toward a world of all-IP. The open IMS standard will enable operators to deliver the new services in a secure and efficient way. Based on our technology leadership we have a leading position in IMS and have to date signed 27 contracts throughout the world.
Operators seek long-term partners to further develop their business, manage the increased complexity and reduce operating expenses. Our services' offering is an important competitive advantage in being able to meet this demand. We particularly see strong demand for systems integration and managed services, which includes hosting.
Regional overview
Western Europe sales grew 26% year-over-year. Italy and Spain continued to show strong development and the region as a whole is benefiting from ongoing 3G deployments and GSM capacity enhancements.
Central Europe, Middle East and Africa sales grew 20% year-over-year with particularly good development in Africa and Eastern European markets such as Turkey and Ukraine. The growing demand for EDGE and WCDMA continues to stimulate the positive development in the region.
Asia Pacific sales were up by 4% year-over-year. Strong development in important markets such as India, Indonesia, Bangladesh and Pakistan contributed to the sales growth. The development in China has been somewhat slower in the first quarter but should pick up going forward. Operators are evaluating different 3G technologies and performing large-scale trials with WCDMA as the natural choice for the dominating GSM technology. A Chinese telecom reform is expected mid year 2005 and should trigger the issuing of 3G licenses. Irrespective of license decisions we expect increased infrastructure spending going forward.
North America sales continue to be affected by the temporary slow down in capital expenditure due to operator consolidation and sales declined by 24% year-over-year. Sales should start to pick up as the 3G roll out starts later this year. During the quarter Ericsson also announced a contract to provide WCDMA equipment and telecom services to the U.S. Navy MUOS program.
Latin America continues to show a positive development and sales grew by 24% year-over-year through strong GSM sales. Brazil and Mexico in particular contributed to the year over year growth.
Subscriber growth
During the quarter, five new WCDMA networks were commercially launched, bringing the total to 61. We are a supplier to 36 of these networks. WCDMA subscriptions grew from approximately 16 million to more than 21 million during the quarter. The number of CDMA2000 1xEV-DO subscriptions has now reached 12 million.
Net subscriber additions were close to 100 million in the quarter. At the end of the quarter worldwide subscription penetration is 28% with a total of more than 1.8 billion subscriptions, of which almost 1.4 billion are in GSM. The strong subscriber growth continues and the global number of subscriptions could pass 2 billion already by year-end.
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 new services as well as new subscribers. 2004 was a strong growth year in terms of mobile infrastructure investments following a pent up demand. For 2005 we maintain our view that the global mobile systems market will 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 to IFRS, please see www.ericsson.com/investors/doc/ifrs_statement.pdf. IAS 39 implemented as of January 1, 2005, related to financial instruments.
Systems
| | First quarter | Fourth quarter | |||
| SEK b. | 2005 | 2004 | Change | 2004 | Change |
| Net sales | 29.0 | 26.1 | 11% | 36.8 | -21% |
| Mobile Networks | 23.5 | 21.1 | 11% | 29.1 | -19% |
| Fixed Networks | 1.0 | 0.9 | 17% | 1.5 | -31% |
| Professional Services | 4.5 | 4.1 | 9% | 6.2 | -27% |
| Operating income | 6.2 | 3.5 | - | 7.9 | - |
| Operating margin | 21% | 13% | - | 21% | - |
Sales in Mobile Networks grew by 11% year-over-year. In constant currencies sales grew by 16%year-over-year.
In the evolution from GSM to WCDMA most customers are deploying hybrid networks that combine GSM and WCDMA. The growth in the GSM/WCDMA track was approximately 11% in the quarter. Of radio access sales 42% were WCDMA/EDGE related. The strong subscriber growth continues and supports the growth in Mobile Networks sales.
Sales within Professional Services have developed well during the quarter and grew approximately 9% year-over-year. In constant currencies the growth was 14% year-over-year. The size of the managed services contract with H3G in Italy which was announced during the quarter represents a milestone in the industry and is Ericsson's largest contract to date, extending our lead even further.
Other Operations
| | First quarter | Fourth quarter | |||
| SEK b. | 2005 | 2004 | Change | 2004 | Change |
| Net sales | 2.7 | 2.4 | 11% | 3.3 | -18% |
| Operating income | 0.0 | 0.0 | - | 0.5 | - |
| Operating margin | 2% | 1% | - | 14% | - |
Other Operations grew year over year. Ericsson Mobile Platforms in particular showed good development. Seasonality impacted operating income in Other Operations.
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 7% and sales decreased by 4% year-over-year. Ericsson's share in Sony Ericsson's income before tax was SEK 0.3 b. for the quarter, compared to SEK 0.5 b. in the same period previous year.
PARENT COMPANY INFORMATION
Net sales for the quarter amounted to SEK 0.4 (0.5) b. and income after financial items was SEK 0.5 (0.9) b.
Major changes in the company's financial position for the first quarter include decreased other current receivables of SEK 3.4 b. Current and long-term commercial and financial liabilities to subsidiaries decreased by SEK 10.0 b. At the end of the quarter, cash and short-term cash investments amounted to SEK 66.8 (71.7) b.
The commission agreement with Ericsson Treasury Services AB has been cancelled as per January 1, 2005, and the internal banking activities have been transferred to the parent company.
In accordance with the conditions of the stock purchase plans and option plans for Ericsson employees, 1,427,802 shares from treasury stock were sold or distributed to employees during the first quarter. The holding of treasury stock at March 31, 2005, was 298,287,315 Class B shares.
OTHER INFORMATION
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 0.25 per share for 2004. The total dividend payment amounts to SEK 4.0 b.
The Annual General Meeting decided, as previously announced and in accordance with the proposal from the Board of Directors, to implement a Long Term Incentive Plan 2005 (LTI 2005). The LTI 2005 is based upon the same principles as the Stock Purchase Plan 2003, which covered all employees and was supplemented by the LTI 2004 for key contributors and senior management. The Annual General Meeting resolved to transfer own shares in relation to the LTI 2005.
The Annual General Meeting also resolved to transfer own shares in relation to the company's global Stock Incentive Plan program 2001, the Stock Purchase Plan 2003 and the LTI 2004.
Following the completion of the public cash offer for the shares in Ericsson's Italian subsidiary, Ericsson S.p.A, not already owned by Ericsson, Ericsson S.p.A has been delisted.
Stockholm, April 22, 2005
Carl-Henric Svanberg
President and CEO
Date for next report: July 21, 2005
AUDITORS' REPORT
We have reviewed the report for the first quarter ended March 31, 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, April 22, 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/2005/3month05-en.pdf
Ericsson invites the media, investors and analysts to a press conference at the Ericsson headquarters, Torshamnsgatan 23, Stockholm, at 09.00 (CET), April 22.
A analyst and media conference call will begin at 14.00 (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
Lotta Lundin, Investor Relations,
Phone: +46 8 719 6553;
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
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.