Teleca AB (publ) Interim Report January - June, 2002

Report this content

Teleca AB (publ) Interim Report, January - June, 2002 Strong result - Q2 margin EBITA 10.0% * Teleca´s Mobile Suite has taken a strong position in the emerging global market for 3rd party software for handsets * Broad base of development intensive customers essential for margins. The 3 main industries are Telecom 31%, Consumer Electronics 28% and Industrial and Automotive 21% * Sales during the period amounted to SEK 957 M (608 M) * Operating profit before goodwill amortization (EBITA) amounted to SEK 96.2 M (93.8 M). Profit after financial items amounted to SEK 45.8 M (67.0 M) * Strong platform for European consolidation exemplified with outsourcing deal with Ericsson in France and public offer on Pronyx in Sweden * Forecast 2002 remains firm: Significantly increased profit (EBITA) compared with the pro forma profit for Teleca and AU-System Teleca consolidates AU-System as from February 1, 2002. This report includes comparative Teleca pro forma figures for previous year, which excludes Epsilon and Sigma. The Teleca Group Teleca is a European consulting company focusing on R&D and new technology with a strong position in the Nordic countries, the UK and France. The Group has more than 2,200 employees in 13 countries, of which approximately 31% are based outside Sweden. Revenue outside Sweden is approximately 42%. The Group's customers are leading technology companies, service operators and world-class IT users that need to develop new technologies or enhance existing solutions in the following markets: * Telecom: switches, base-stations, PABXs, OSS, services, call handling, etc. * Consumer Electronics: mobile terminals, PC peripherals, cameras, set-top-boxes, hi-fi equipment, etc. * Industrial and Automotive: SCADA, robotics, materials handling, device control, simulation, validation, driver info, security and safety, engine management, telematics, etc. * Life Science: pharmaceutical production control, laboratory instrumentation, medical devices, bioinformatics, tele medicine, etc. * Finance: online banking, financial message processing, mobile banking solutions, etc. * Government: business critical Content Management Systems, etc. Customers rely on the engineering skills of the Group across the range from small devices such as mobile phones and smart-card readers to large- scale operations like financial networks, telecom networks and production plant control. Examples of customers of the Group are; ABB, AMS, Ericsson, Hutchison 3G, Motorola, Nokia, One2One, Orange, Panasonic, Saab, Sagem, Samsung, Siemens, Sony Ericsson, Telia, Thales, Vattenfall and Volvo. One reason why Teleca is maintaining a good margin is its broad customer base with a good spread in industry and geography. The 3 main industries are Telecom, Consumer Electronics, Industrial and Automotive. [REMOVED GRAPHICS] *) whereof Life Science 7%, Government 6%, Bank/Finance 1% and others 6% Market outlook The focus remains on sales and efficiency as we work in weak and competitive markets. Our broad and strengthening geography and customer base provides a stable platform and our strong financial performance provides excellent possibilities in the downturn. Valuations of target Teleca companies are attractive which creates consolidation opportunities as confirmed with the Ericsson outsourcing deal in France and Teleca's public offer on Pronyx. In addition to this customers increasingly look for stable partners to work with and this gives Teleca an edge. This is particularly true with regard to the outsourcing of R&D and major projects. The merger between Teleca and AU-System is complete and work within the organisation continues in a normal way with focus on efficiency and sales synergies. The industrial logic and the potential to increase profit, is constantly reconfirmed according to the estimates made in the prospectus. Teleca's Mobile Suite continues to play a key role in the successful development of the Teleca Group (see "Teleca Mobile Suite"). All of Teleca's traditional markets remain stable but tough. Some price pressure continues in difficult markets where there is over capacity (e.g. Stockholm). The markets show no sign of a rapid upturn in the near future but with hard work there are still plenty of opportunities to be seized. Teleca's strongest market remains terminal manufacturers, in particular demand for Mobile Suite is strong. Mobile operators still show good demand in the area of 3G Operational Support Systems and Services, and the Life Science and Industrial and Automotive markets are stable. The picture across Teleca's European market is similar but our global position in mobile terminals reduces geographic limitations. Teleca's order book has continued to strengthen during Q2 providing a stable outlook. With a good start to Q3 and ongoing focus on sales and efficiency combined with a stable, broad market order book, we believe in continued gradual improvements during the rest of the year. Teleca Mobile Suite The Teleca Mobile Suite is a portfolio of software products that is the application layer needed to build a complete mobile phone including Internet browsing, messaging and content management. Mobile Suite works with all network bearer systems including GSM, CDMA and 3G, which means it is not so affected by delays in 3G. Mobile Suite supports MMS, SyncML and Java and provides high-level security. The market for the Teleca Mobile Suite is expected to grow significantly over the next five years. Contracts for Mobile Suite have doubled in each of the last two years giving a total of 50 customers as at end June 2002 representing 40% of the estimated 120 potential customers. Example customers include: Arima, Condat AG, Hyundai, Infineon, LG Electronics Inc, Motorola Electronics and Communications Inc, Philips Semiconductors, Samsung Electronics Co. Ltd, Siemens VDO Automotive AG and SK Telecom. Our estimates indicate that Mobile Suite will be integrated into 120 million mobile devices by 2003 representing approximately 35 percent of the total handset market (350 million handsets 2003: Frost&Sullivan). This gives Teleca a dominant market position and a huge potential for increased product and related services revenues in the years ahead. Teleca has made a substantial investment during the last two years, which has lowered the profit. Focus has been on buildning a state of the art product and to reach a substantial market share. This has been accomplished. License revenues are now forecast to rise and generate profits starting with H2 2002. Teleca estimate that within two years the EBIT profit will exceed SEK 50 M. Mobile Suite is also a driver for highmargin consulting services with revenues related to Mobile Suite forecasted to rise approximately 15% per year from SEK105 M in 2002. The broad Mobile Suite customer base provides an excellent platform for Teleca to develop other consulting revenues. From August 2002 the Mobile Suite operation will run as a separate subsidiary called Teleca Mobile Technologies AB. This is done to have focused management with specific skills in selling software and running product development, but also to have a clear follow-up and to facilitate structural deals. See Appendix for further information regarding the Teleca Mobile Suite. Sales and earnings Sales during the first six months 2002 increased 57% to SEK 957 M (608 M). Sales outside Sweden accounted for 42%. Sales per employee amounted to SEK 484 thousands (499). Operating profit before goodwill amortization (EBITA) amounted to SEK 96.2 M (93.8 M). The margin (EBITA) was 10.0% (15.4%). The combined margin for Teleca and AU System during full year 2001 was 7.9%. It increased to 10.1% during Q1 and 10.0% during Q2. Q2 has 2 less working days than Q1 this year, which corresponds to approximately 3% in sales and margin, given the same conditions. Profit after financial items amounted to SEK 45.8 M (67.0 M). Personnel The average number of employees increased 63% to 1,978 (1,217) (AU- System is consolidated from February 1). The number of employees at the end of the period was 2,234 (1,246, December 2001). Liquid funds and financial position The Group's liquid funds amounted to SEK 226 M (245 M December 2001). During Q2 the Group's liquid funds was effected by payment of dividend of SEK 41.2 M and repayment of loan notes and interest costs of SEK 162.8 M to former owners of Teleca Ltd. The Group's interest bearing net debt amounted to SEK 153 M (SEK 162 M December 31, 2001 and SEK 110 M March 31, 2002). Included in the net debt is a long term debt instrument to the sellers of Teleca Ltd in the amount of SEK 156 M. The net debt/equity ratio was 8% (19% December 31, 2001). Group shareholders' equity amounted to SEK 1,942 M (870 M, December 2001). The equity/assets ratio was 69% (58% December 2001). Investments The Group's investments during the period totalled SEK 1,080 M, of which SEK 1,022 M was invested in goodwill, which is almost entirely connected to the acquisition of AU-System AB. The remaining SEK 58 M was invested in machinery and equipment, whereof SEK 43 M belongs to consolidation of machinery and equipment from AU-System. According to a new recommendation from the Swedish Financial Accounting Standards council (Redovisningsrådet; RR 15, effective from January 1, 2002) the group has recorded SEK 6.2 M as fixed assets due to investments in software development arisen during the second quarter. Of this SEK 5.1 M is investments in Mobile Suite. Depreciation for the period amounts to SEK 0.5 M. Compared to accounting principles complied until 2001 this has an effect of SEK 5.7 M on the result. The deprecation period used for software development is 3 years. Based on transitional regulation according to RR 15 when the recommendation is implemented, historical expenses for software development not capitalized, should not be adjusted to RR 15. Hence, the implementation of the new recommendation has not had any effect on comparative periods. Acquisitions and divestments during the period Teleca and Ericsson finalised an outsourcing agreement where Ericsson's French research and development activities were transferred to Teleca. As part of the agreement 185 employees were transferred from Ericsson to a new Teleca subsidiary in France. The R&D outsourcing contract runs for an initial three-year period. The new subsidiary will focus on projects and outsourced R&D. Leveraging from the centre's long experience in full lifecycle projects. Teleca will work on a variety of telecom services including core network and mobile technologies. Teleca will also work as an integration partner to Ericsson within mobile services and service platforms. The agreement increases Teleca's staff in France to around 300 employees and is part of Teleca's strategy to focus growth in major European markets and to expand the outsourcing business. The outsourcing agreement has had an immediate positive effect on Teleca's earnings and normal Teleca margins are expected within two years. The results from the new subsidiary are consolidated with Teleca from 1 June 2002. In order to strengthen Teleca's focus on R&D Teleca acquired the IT consulting company Erda Technology AB with 30 employees from Bure Equity. Erda strengthens Teleca's position in Life Science. Erda will be incorporated with the operation of Teleca's subsidiaries in Uppsala and Linköping and is consolidated from 1 April 2002. Teleca sold the Business-to-Business agency SandbergTrygg with 80 employees to Bure Equity. This is not core business for Teleca and SandbergTrygg will have a better platform for development within Bure's business area Media & Communication. SandbergTrygg is not consolidated with Teleca in Q2. Projects and new agreements The following are examples of assignments secured during the second quarter of the year, which may be mentioned without breaching the non- disclosure agreements with Teleca's customers: Arbejdsmarkedsstyrelsen (AMS) Teleca has signed a four year agreement with the Danish Labour Market Board for the development and maintenance of applications for digital labour exchange via the Internet. AstraZeneca Implementation of a new automation and surveillance system for new production line. Axis-Shield Teleca and Axis-Shield PoC AS have commenced collaboration for development of the next generations Point-of-Care instrument for the growing area of the In vitro Diagnostics market. Ericsson Renewal of the general agreement with Ericsson within the areas Research and Development and IS/IT. Hi3G Access Teleca has delivered a complete solution for number management to Hi3G. This enables Hi3G to manage number planning, number portability and USIM-cards in an efficient manner. Hi3G, Orange Sverige, Vodafone Teleca has concluded an and Svenska UMTS Nät (Telia agreement with the leading and Tele2) Swedish mobile operators for a technical solution and a financial calculation designed to form a basis for decisions regarding the rollout of a third-generation (3G) mobile telecommunication network within the Stockholm subway system. Gijon Development of SMS platform for the commune of Gijon, Spain. Mitsubishi Electric Teleca has secured a contract from Mitsubishi Electric to implement Bluetooth in the client company's latest micro controllers. The assignment includes software development, licensing and support. National Semiconductor Software development partner Corporation for their next generation of embedded Bluetooth chip-set. Oniway Delivery of customised web based tool for Quality assurance and certification of value added services and content for the Portuguese operator Oniway. Saab Training Systems Frame agreement regarding consultancy services within electronics-, software- and test system development. Siemens ICM Development of a mobile accessory for hearing disabled. Starfish Software Selected by Starfish Software as first Systems Integrator Program Partner. As a SIP partner, Teleca will deploy mobile data synchronization, connectivity and device management solutions in Europe. Volvo Car Corporation Teleca has been contracted to introduce the Anoto concept for digital paper at the Volvo assembly plant in Olofström, Sweden. Important events after the period In July 2002, Teleca made a public offer for Pronyx AB, which has 125 employees. If the offer is implemented, Teleca will integrate Pronyx's operations with Teleca's subsidiary Benima, which will have operations in Sweden, Norway, Denmark and Finland. Information about the offer has been published in a prospectus, copies of which can be ordered through the Company, or downloaded from Forecast Teleca is working hard to seize the opportunities that are created in a downturn. The ongoing strengthening of the company provides an excellent platform for continued success in the years ahead. Teleca has successfully implemented a significant merger that almost doubled Teleca's size in 2002. This has been achieved while increasing profits and margins during extremely tough market conditions. Q3 has started well and the order book is good. There is strong demand for Teleca's Mobile Suite and we see a very interesting future potential. Mobile Suite will generate increasing services and license revenues as we strengthen our global position in mobile terminals. The Board of Directors' forecast for 2002 remains firm, which means significantly increased profit (EBITA) compared with the pro forma profit for Teleca and AU-System during 2001 (SEK 173 M). For further information, please contact: Nick Stammers, CEO, Christer Björk, CEO, Teleca Teleca AB Software Solutions AB Mobile phone: +44-7768-32 35 35 Mobile phone: +46-706-38 16 01 e-mail: e-mail: ------------------------------------------------------------ This information was brought to you by Waymaker The following files are available for download: The full report The full report