Ericsson three months interim report ended March 31, 2000

Interim Report Three months ended March 31, 2000 April 28, 2000 Ericsson raises forecast after strong sales growth and record order intake in first quarter 2000 * Income before tax more than quadrupled to SEK 6.1 billion * Record order intake, up 67 percent - driven by its largest segment Network Operators and Service Providers * Leadership in mobile Internet with strong order intake for GPRS and 3G - mobile systems now represent 53 percent of total sales * Consumer Products: Sales up 53 percent with operating margin at 3 percent * Outlook 2000: Forecast for revenue growth raised to more than 25 percent, reflecting substantial growth by mobile systems SEK b. Jan-March Jan-March Change in 2000 1999 percent Orders 79.5 47.5 67 Sales 59.1 41.6 42 Income before taxes 6.1 1.3 366 Earnings per share 2.15 0.49 339 (SEK) EPS US GAAP (SEK) 2.53 0.80 216 Cash flow -6.2 -10.7 SUMMARY Ericsson today reported income before tax of SEK 6.1 b. for the first quarter of 2000, an improvement of 366 percent over the first quarter 1999, mainly a result of 42 percent higher sales and slower growth in operating expenses. Income also benefited from a gain of SEK 1 045 m. from divestiture of part of Ericsson's stake in Saraïde. Orders increased by 67 percent and reached a new record level. Main drivers were a continued strong demand for mobile telecommunications infrastructure combined with the growing market for mobile Internet systems, applications and devices. "This quarter shows Ericsson's clear lead in mobile Internet including 3G, which is beginning to take off. I am particularly pleased that profits in our largest segment, Network Operators, again improved sharply," said Kurt Hellström, president of Ericsson. "We have captured more than 50 percent of the strategically important GPRS orders both in terms of number of contracts and subscribers." Kurt Hellström continued: "The overall very good results for the period have been achieved by another outstanding effort from our entire personnel." All segments show improved operating margins. Network Operators, representing two thirds of total sales, increased sales by 36 percent. This reflects the acceleration of the market for infrastructure. Ericsson grew faster than the market, taking advantage of its leadership. Operating margin improved substantially from 7 to 15 percent of sales. Consumer Products increased sales by 53 percent. While production was on track, financial performance is still inadequate. A strong shift toward entry level phones affected the gross margin. The operating margin improved to 3 (0) percent. Enterprise solutions developed favorably and reached break-even compared to -6 percent operating margin for last year's first quarter. The improvement was mainly due to successful consulting business. Sales and orders grew very strongly in all market areas except the sales in China, due to low order intake last year. During the quarter, Ericsson won the largest GSM order ever placed in China, which confirms a strong recovery in the Chinese market. Ericsson is now raising the sales forecast for the full year 2000 from at least 20 percent to more than 25 percent, due to the strong growth of mobile systems. Ericsson continues to expect substantial growth in earnings, driven by mobile systems. Second quarter sales is expected to be up more than 25 percent, and income before taxes in the second quarter to double, compared to the second quarter last year. ORDERS AND SALES Orders increased by 67 percent to SEK 79.5 b.. This is a record level for Ericsson. This growth was mainly driven by a strong development for mobile systems, where orders increased by 86 percent, and by a favorable development also for wireline systems with orders up 47 percent. Ericsson's sales increased by 42 percent to SEK 59.1 b. Main contributors to the strong growth are mobile systems with increased sales of 49 percent and mobile phones with sales up 53 percent, compared to first quarter of the previous year. Microelectronics and Defense systems also showed strong sales growth. OPERATING INCOME AND MARGINS The operating income improved to SEK 6.4 b., up 257 percent from 1.8 b. in the first quarter 1999. This is a result of higher sales and a slower growth in operating expenses. In the first three months of 2000, an operating margin at 10.8 (4.3) percent was achieved, which is in line with Ericsson's long- term financial objectives. The gross margin declined to 41.3 (43.0) percent, primarily caused by lower gross margins on mobile phones. Other operating revenues include capital gains of SEK 361 m., mainly from outsourcing of real estate management activities and the sale of Private Radio Systems. Operating expenses improved to 32 (39) percent of sales. Operating expenses were positively affected by an operational gain from the divestiture of part of Ericsson's stake in Saraïde by SEK 1,045 m. and from results relating to the restructuring program. Total R&D expenses (including SEK 0.2 b. of costs related to customer orders) in-creased by 15 percent to SEK 7.2 b., which corresponds to 12 (15) percent of sales. Other technical expenses were up 28 percent to SEK 1.0 (0.8) b. Total R&D and other technical expenses amounted to SEK 8.3 (7.1) b. or 14 (17) percent of sales. A refund of pension premiums to Ericsson companies in Sweden totaling SEK 1.3 b. has not yet been included in income, but is expected to be included in the second quarter. FINANCIAL NET AND EARNINGS PER SHARE Financial net at SEK -180 (-294) m. improved due to the relatively favorable cash position at the beginning of the year. Net income increased to SEK 4,246 (905) m. Earnings per share on a fully diluted basis was SEK 2.15 (0.49). Income per share in accordance with US GAAP for the first quarter was SEK 2.53 (0.80). The major difference between Swedish GAAP and US GAAP is the capitalization of development costs for software products. Changes of currency rates had a positive net effect on income of approximately SEK 0.3 b. compared to the first quarter of 1999, due to stronger Japanese yen and US dollar. The equity ratio improved to 36.5 percent from 35.2 percent at year-end 1999. Cash flow before financing activities was SEK -6.2 (-10.7) b. Positive income effects were offset by increased working capital in inventory (SEK -9.3 b.) and customer financing (SEK -1.8 b.). The increased inventory is mainly related to GSM systems (-3.5 b.) and mobile phones (- 2.8 b.). The company prepared for higher sales volumes with increased inventories and pre-stocking of certain critical components. A negative impact from component shortages due to increased lead-times and lower than anticipated sales of high-end phones was also experienced. Inventory turnover improved, however, to 4.6 times from 3.4. EMPLOYEES The number of employees decreased during the quarter by 967 to 102 323, mainly a result of the outsourcing of production in Sweden and France and divesting of Private Radio Systems. BUSINESS SEGMENTS The growing demand for mobile communications, driven by increased subscriber growth, increasing usage per subscriber and investments to develop and prepare the infrastructure for mobile Internet is reflected in Ericsson's orders and sales. Segment results first 3 months ended March 31, 2000 Segment Net Growt Operat Operati Employe Sales h % ing ng es SEK m. Income Margin SEK m. % Network 38,718 36 5,760 15 (7) 63,616 Operators Consumer 14,794 53 457 3 (0) 17,290 Products Enterprise 3,858 12 29 1 (-6) 9,130 Solutions Other Operations 5,343 61 543 10 (4) 11,257 Unallocated -414 1,030 costs Inter-segment -3,628 sales TOTAL 59,085 42 6,375 11 (4) 102,323 As shown in the table above, operating margins improved from last year's figures in all segments in combination with substantially increased sales. Network Operators and Service Providers segment again experienced a very successful quarter, with an increase in sales of 36 percent compared to first quarter last year. Orders were up 76 percent reflecting continued very strong demand for network capacity. Operating margin improved to 15 from 7 percent showing the segment's role as the prime generator of income. The improvements in operating income were the result of the continuous improvement process and economies of scale from increased volumes. Orders increased by 86 percent for mobile systems and 47 percent for wireline systems. Corresponding figures for sales were 49 and -3 percent. Mobile systems now account for 53 percent of Ericsson's sales. During the quarter, Ericsson expanded its leadership in the new mobile Internet market. Important orders in GPRS (packet data) were awarded from operators Orange and Telia. Ericsson has won more than 50 percent of the GPRS market to date, both in number of contracts and subscribers. Several of the field trials announced last year have now been converted into commercial contracts. In the 3G market, Ericsson has been chosen as supplier in all four 3G agreements secured so far - and as the main supplier in three of the four agreements. Consumer Products showed a sales increase of 53 percent and an operating margin of 3 percent. While production was on track, financial performance is still inadequate. There was a strong shift toward entry level phones, which affected margins in this segment. The new management is reviewing the mobile phone strategy to better achieve the financial objectives. The financial target of a double-digit operating margin will however not be reached this year. Unit volume at 10.5 million was up 57 percent from first quarter last year. The unit volume for entry level phones grew even faster, reflecting the overall market's development. This resulted in an unfavorable product mix for Ericsson that offset operating margin gains from volume leverage. The introduction of new generation models with emphasis on high-end devices and more cost competitive low/mid-range phones should improve the product mix during the second half of 2000. Ericsson is committed to continue R&D investments in Consumer Products. Today, much of the R&D efforts in this segment are focused on mobile Internet products supporting our mobile systems business. Enterprise Solutions showed a good growth in both orders and sales during first quarter, increasing 29 percent and 12 percent respectively. The segment has seen a particularly favorable development in demand for business consulting services focusing on mobile Internet, where Ericsson assists enterprises in developing applications and services. Continued efforts are made regarding reorganization of the distribution channels for the PABX and wireless office business. In the US, the sales and service activities regarding cordless office were sold to Ericsson's main distributor. Other operations. Defense systems, cables and microelectronics showed good per-formance with orders up 54 percent and sales 61 percent. MARKET AREAS The sales growth was driven by a very strong demand for mobile communications in all market areas. North America is still showing the fastest growth worldwide with 105 percent increase in sales. Latin America increased by 58 percent in sales, Western Europe by 36 percent, Market Area Central and Eastern Europe, Middle East and Africa increased by 53 percent and Asia Pacific by 15 percent. External sales by market area/by segment in first quarter 2000 SEK b. Network Consume Enterpr Other TOTAL % of Operato r ise Tota rs Product Solutio l s ns Western 12.1 7.1 1.8 2.6 23.6 40 Europe CEEMA 5.4 1.5 0.2 0.2 7.3 12 North America 5.7 2.4 0.1 0.3 8.5 15 Latin America 6.2 1.0 0.3 0.3 7.8 13 Asia Pacific 8.9 2.5 0.3 0.2 11.9 20 TOTAL 38.3 14.5 2.7 3.6 59.1 100 *) Internal sales between segments are excluded Western Europe The market area is characterized by a continued strong subscriber growth and early preparation for 3G and mobile Internet. Ericsson's sales grew by 36 percent during the period and several strategic orders in GPRS, the first step toward 3G with packet switched data, were taken. Examples are agreements with Orange and Telia Mobile. Western Europe has also taken a lead in early allocation of 3G licenses. The auction of five licenses in the UK is finalized and licenses have already been issued in Spain and Finland. Central and Eastern Europe, Middle East and Africa Sales grew by 53 percent in the region, and Ericsson won orders for several new GSM markets. The strong growth of the largest market in the area, Turkey, continued, and Ericsson won the largest order ever of SEK 7.2 b. North America Sales in North America increased by 105 percent compared to the first quarter of the previous year, reflecting the continued strong growth of the wireless market driven by subscriber growth and tariff changes. Latin America The positive development continued in the market area with sales up 58 percent. The highest increase in sales was shown in Mexico and Argentina with 280 and 394 percent respectively. Brazil continued to show a strong development. Asia Pacific At the end of the quarter, Guangdong Mobile Communications placed the largest GSM order ever awarded in China. The SEK 5.4 b. order is an indication that the Chinese market is turning around. In the region, sales increased by 15 percent. Excluding China, sales grew by 73 percent. Japan continued to report a very strong growth. Sales increased by 159 percent, reflecting the strong demand for mobile communications, in particular for mobile Internet services. Top 10 Markets in Orders and Sales Market % of % of Total Total Orders Sales United 11 14 States China 10 5 Turkey 10 4 Italy 7 6 Japan 5 7 United 5 8 Kingdom Brazil 5 5 Spain 5 6 Mexico 4 4 Sweden 4 4 TO THE SHAREHOLDERS The overall strong market trends continue. The growth of mobile subscribers and the demand for mobile Internet develop even faster than we originally expected in our forecasts 1999. We are now expecting 1 billion mobile subscribers in 2002. In 2004, the number of mobile Internet users will exceed 600 million, according to our forecast. The mobile Internet has indeed started. More than 80 licenses for 3G are expected to be issued within the coming 12 months. In Finland and Spain, 3G licenses were issued already, while in the UK the auction is going on. The development during the first quarter, with income before taxes up 366 percent, record levels for orders and Ericsson's leadership in GPRS and 3G orders, shows Ericsson's unique position in the marketplace for mobile Internet. Our position has strengthened. Almost 80 percent of our business is directed toward the fastest growing segment of the entire industry, mobile communications. Due to the rapid growth in our orders and sales and the overall industry we will however have to handle increasing challenges in manufacturing, sub-supply and components. With the ramp-up of our business, there will be strong demand on cash-flow, but our objective remains to have a positive cash-flow for the year. Overall, we are pleased with the results for the first quarter, record order intake, improved operating margins in all segments and a strengthened position in the marketplace, and we look forward to a continued success for infrastructure systems, services and applications. OUTLOOK We believe in continued strong market growth where Ericsson gains benefits from its leading position in mobile telephony. Our long-term financial targets remain unchanged: We intend to grow faster than our market, which means growing by more than 20 percent, and with a return on capital employed of 20-25 percent with positive cash flow before strategic acquisitions, and an operating margin of at least 10 percent. For the full year 2000, we now expect sales to increase by more than 25 percent and we continue to expect substantial growth in earnings, mainly driven by mobile systems. We intend to achieve this with a positive cash flow. For the second quarter isolated, we expect sales to increase by more than 25 percent compared to the second quarter 1999. Income before taxes is expected to be in the range of double that of the second quarter 1999. Operating income is expected to include gains from divestitures in the same magnitude as those in the first quarter. The pension premium refund of SEK 1.3 b. and gains from non-recurring structural divestitures, such as Energy Systems and real estate activities, are not included in this outlook. Stockholm, April 28, 2000 Lars Ramqvist Kurt Hellström Chairman and CEO President (Unaudited) Uncertainties in the Future. "Safe Harbour" 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, 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. FOR FURTHER INFORMATION PLEASE CONTACT Roland Klein, Senior Vice President, Corporate Communications Phone: +46 8 719 2128, +44 7776 162997 E-mail: roland.klein@clo.ericsson.se Pia Gideon, Vice President, External Relations Phone: +46 8 719 2864, +46 70 519 2864 E-mail: pia.gideon@lme.ericsson.se Karin Almqvist Liwendahl, Director, Investor Relations Phone: +46 8 719 5340, +46 70 590 5340 E-mail: karin.almqvist.liwendahl@lme.ericsson.se Gary Pinkham, Vice President, Investor Relations - New York Phone: +1 212 685 4030 E-mail: gary.pinkham@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 CONSOLIDATED INCOME STATEMENT (unaudited) Jan- Jan-Chang Jan- March March es Dec SEK 2000 1999 in % 1999 millions Net 59,085 41,571 42%215,4 sales 03 Cost of - - 46% - sales 34,674 23,708 125,8 81 Gross 24,411 17,863 37%89,52 margin 2 Gross margin as percentage 41.3% 43.0% 41.6% of net sales Research and development and other -7,986 -6,926 15% - technical expenses 33,12 3 Selling expenses -7,769 -6,624 17% - 31,20 5 Administrative -2,874 -2,827 2% - expenses 10,07 8 Operating - - 14% - expenses 18,629 16,377 74,40 6 Operating expenses as 31.5% 39.4% 34.5% percentage of net sales Other operating 610 220 177% 2,224 revenues Share in earnings of - 17 80-121% 250 associated companies Operating income 6,375 1,786 257%17,59 0 Operating margin as 10.8% 4.3% 8.2% percentage of net sales Financial income 777 623 25% 2,273 Financial - 957 - 917 4% - expenses 2,971 Income after 6,195 1,492 315%16,89 financial items 2 Minority interest in - 129 - 190 -32% - 506 income before taxes Income before 6,066 1,302 366%16,38 *) taxes 6 Tax -1,820 - 397 358% - es 4,256 Net 4,246 905 369%12,13 income 0 *) *) Including capital 361 78 1,843 gains/losses, net CONSOLIDATED BALANCE SHEET March Dec March 31 31 31 SEK 2000 1999 1999 million s Fixed assets Intangible assets 10,545 10,54 6,336 8 Tangible assets 25,056 24,71 21,994 9 Financial assets Equity in associated 2,706 2,712 2,759 companies Other 1,675 1,751 1,507 investments Long-term customer 7,541 6,657 5,228 financing Other long-term 3,520 4,972 3,200 receivables Total fixed 51,043 51,35 41,024 assets 9 Current assets Invento 34,764 25,70 28,909 ries 1 Receiva bles Accounts receivable - trade and short- 66,422 65,33 53,477 term customer financing 3 Other 32,778 31,22 24,951 receivables 7 Short-term cash 23,787 29,00 16,457 investments, cash and bank 8 Total current 157,75 151,2 123,79 assets 1 69 4 Total 208,79 202,6 164,81 assets 4 28 8 Stockholders' 74,037 69,17 62,560 equity 6 Minority interest in equity of 2,234 2,182 1,996 consolidated subsidiaries Convertible 5,209 5,453 6,072 debentures Interest bearing provisions 40,514 39,56 27,570 and liabilities 7 Non-interest bearing 86,800 86,25 66,620 provisions and liabilities 0 Total stockholders' equity, 208,79 202,6 164,81 provisions and liabilities 4 28 8 CONSOLIDATED STATEMENT OF CASH FLOW Jan- Jan- March March SEK 2000 1999 million s Cash flow from -5,829 -8,787 operating activities Investm -332 -1,943 ents Cash flow before -6,161 - financing activities 10,730 Financi 1,002 8,018 ng Effect of exchange rate -62 936 changes on cash Net change in -5,221 -1,776 cash TREND OF OPERATIONS IN BRIEF Jan- Jan-Change March March s SEK 2000 1999 in % million s Net 59,085 41,571 42% sales Operating margin as 10.8% 4.3% percentage of net sales Income before 6,066 1,302 366% taxes Net 4,246 905 369% income Average number of shares after full 2,004 1,997 conversion and options, million Earnings per 2.15 0.49 339% share, SEK Earnings per share in accordance 2.53 0.80 216% with U.S. GAAP, SEK Equity 36.5% 39.2% ratio Cash flow before -6,161 -10,730 financing activities Additions to tangible 2,458 1,576 56% fixed assets Total depreciation on tangible 2,011 1,592 26% and intangible assets - Of which 155 124 25% goodwill Number of employees, 102,323 101,217 1% end of period Orders booked 79,474 47,461 67% Capital turnover 2.0 1.7 18% NET SALES BY SEGMENT BY QUARTER (SEK m.) Year-to-date Change 1999 2000 % 9903A 9906A 9909A 9912A 0003A 03A Network Operators & 28,50564,31499,208149,94 36% Service Providers 3 38,718 Consumer Products 9,69620,06429,79746,444 53% 14,794 Enterprise Solutions 3,446 7,84111,94917,345 3,858 12% Other operations 3,312 7,30111,32616,750 5,344 61% Less: Intersegment sales -3,388-7,137 - - - 7% 10,63215,079 3,629 141,64215,40 Total 41,57192,383 8 3 59,085 42% Isolated quarters Change 1999 2000 % Q1 Q2 Q3 Q4 Q1 Q1 Network Operators & 28,50535,80934,89450,735 36% Service Providers 38,718 Consumer Products 9,69610,368 9,73316,647 53% 14,794 Enterprise Solutions 3,446 4,395 4,108 5,396 3,858 12% Other operations 3,312 3,989 4,025 5,424 5,344 61% Less: Intersegment sales -3,388-3,749-3,495-4,447 - 7% 3,629 Total 41,57150,81249,26573,755 59,085 42% NET SALES BY MARKET AREA BY QUARTER (SEK m.) Year-to- date Change 1999 2000 % 9903A 9906A 9909A 9912A 0003A 03A Western Europe* 17,35036,37455,89085,329 23,578 36% Central- and Eastern Europe, 4,77912,62119,52829,736 7,323 53% Middle East & Africa North 4,17911,38717,61025,175 8,549 105% America Latin 4,92012,18618,91630,263 7,781 58% America Asia 10,34319,81529,70444,900 11,854 15% Pacific 141,64215,40 Total 41,57192,383 59,085 42% 8 3 * Of which Sweden 1,685 3,868 5,461 7,551 2,380 41% * Of 16,26134,29952,41180,345 22,052 36% which EU Isolated quarters Change 1999 2000 % Q1 Q2 Q3 Q4 Q1 Q1 Western Europe* 17,35019,02419,51629,436 23,578 36% Central- and Eastern Europe, 4,779 7,842 6,90710,208 7,323 53% Middle East & Africa North 4,179 7,208 6,223 7,565 8,549 105% America Latin 4,920 7,266 6,73011,347 7,781 58% America Asia 10,343 9,472 9,88915,196 11,854 15% Pacific Total 41,57150,81249,26573,755 59,085 42% * Of which Sweden 1,685 2,183 1,593 2,090 2,380 41% * Of 16,26118,03818,11227,934 22,052 36% which EU OPERATING INCOME AND OPERATING MARGIN PER SEGMENT PER QUARTER (SEK m.) Year-to-date As % of Net Sales 1999 2000 1999 2000 9903 9906 9909 9912 0003 9903 9906 9909 991 0003 A A A A A A A A 2A A Network Operators & Service 2,10 5,75 10,9 19,6 5,76 8 8 19 37 0 Providers 7% 9% 11% 13% 15% Consumer Products -23 -56 -675 253 457 0% 0% -2% 1% 3% Enterprise -222 -216 -382 64 29 -6% -3% -3% 0% 1% Solutions Other operations 128 342 139 75 543 4% 5% 1% 0% 10% Unallocated costs -205 -666 - - -414 1,09 2,43 8 9 TOTAL 1,78 5,16 8,90 17,5 6,37 4% 6% 6% 8% 11% 6 2 3 90 5 Isolated quarters As % of Net Sales 1999 2000 1999 2000 Q1 Q2 Q3 Q4 Q1 Q1 Q2 Q3 Q4 Q1 Network Operators 2,10 3,65 5,16 8,71 5,76 & Service Providers 8 0 1 8 0 7% 10% 15% 17% 15% Consumer Products -23 -33 -619 928 457 0% 0% -6% 6% 3% Enterprise -222 6 -166 446 29 -6% 0% -4% 8% 1% Solutions Other operations 128 214 -203 -64 543 4% 5% -5% -1% 10% Unallocated costs -205 -461 -432 - -414 1,34 1 TOTAL 1,78 3,37 3,74 8,68 6,37 4% 7% 8% 12% 11% 6 6 1 7 5 Unallocated costs consist mainly of costs for corporate staffs, certain goodwill amortizations and non-operational capital gains and losses. NUMBER OF EMPLOYEES PER SEGMENT PER QUARTER 1999 2000 Change % 9903A 9906A 9909A 9912A 0003A Q1 Network Operators & 65,53065,90965,35964,695 63,616 -3% Service Providers Consumer Products 14,11614,05314,97016,446 17,290 22% Enterprise Solutions 9,85610,32910,262 9,615 9,130 -7% Other operations 11,04611,27811,47411,525 11,256 2% Non allocated 669 809 712 1,009 1,031 54% Total 101,21102,37102,77103,29 102,32 1% 7 8 7 0 3 ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/2000/04/28/20000428BIT00020/bit0001.doc http://www.bit.se/bitonline/2000/04/28/20000428BIT00020/bit0002.pdf