Ericsson reports profit in the third quarter, restructuring excluded
Third quarter summary
* Net sales SEK 28.0 b. - book-to-bill above 1 for third consecutive
quarter
* Net income SEK -3.9 b. - adjusted income after financial items SEK
1.0 b.
* Earnings per share SEK -0.25
* Adjusted gross margin 35.9% - up 0.8%-points sequentially despite
weakening USD
* Operating expense run rate SEK 38 b. - down SEK 4 b. sequentially
* Cash flow before financing SEK 9.1 b. - net of financial assets and
liabilities SEK 20.5 b.
Third quarter Second quarter
SEK b. 2003 2002 Change 2003 Change
Orders booked, net 28.1 20.5 37% 28.3 -1%
Net sales 28.0 33.5 -16% 27.6 2%
Adjusted gross margin (%) 35.9% 32.6% - 35.1% -
Adjusted operating
income 1.3 -3.2 - -0.2 -
Adjusted income after
financial items 1.0 -3.6 - -0.2 -
Net income -3.9 -5.0 - -2.7 -
Earnings per share -0.25 -0.41 - -0.17 -
Cash flow before
financing activities 9.1 -2.7 - 5.1 -
Opex run rate, annualized 38 52 -27% 42 -9%
Number of employees 53,401 71,723 -26% 57,644 -7%
Book-to-bill was above one for the third consecutive quarter. Order
bookings decreased sequentially by 1% to SEK 28.1 (20.5) b. Net sales
in the third quarter grew 2% sequentially to SEK 28.0 (33.5) b.
Currency exchange effects have had a negative impact on sales of 9%
year-over-year.
Adjusted gross margin improved sequentially by 0.8 percentage points
to 35.9% (32.6%) as a result of ongoing restructuring. Operating
expense reductions are well on track, reaching an annualized run rate
of SEK 38 (52) b. Adjusted income after financial items was SEK 1.0
(-3.6) b. compared to SEK -0.2 b. in the second quarter. Net currency
exchange effects have had a negative impact of SEK 0.9 b. on
operating income in the quarter.
Cash flow before financing was SEK 9.1 (-2.7) b. with major
contributions from reductions in working capital and customer
financing. The financial position was significantly strengthened with
a net of financial assets and liabilities of SEK 20.5 b. Payment
readiness remains high at SEK 71.4 (66.6) b.
CEO COMMENTS
"Ericsson is back to profit, which is an important milestone, but a
lot still remains to be done before we reach good profitability,"
says Carl-Henric Svanberg, President and CEO of Ericsson. "The cost
savings, as well as cash flow and gross margin improvements are the
result of dedicated employees with a clear understanding of the need
to be in control of our own destiny.
Our direction is clear. We are targeting an operating expenses run
rate of SEK 33 b. by Q3 2004 and will continue to focus on cost and
operational excellence. We must respond even quicker to customers'
changing needs and leverage our technology and market leadership.
This is the way to secure the profitability and cost advantages
attainable by the market leader.
We are well positioned to capture new opportunities and are
encouraged by our continued leading position in the market. We have
gained a number of key contracts within the rapidly expanding markets
for 3G/EDGE and MMS. Our solid 2G GSM position remains an important
platform for further business expansion. We also see an increasing
interest in our strong service offering where professional services
have become a natural extension of our network contracts.
Leadership in this changing industry requires a clear understanding
of operator and consumer needs in different markets. The ability to
support operators in their launch of new services, changing business
models and high quality standards in end-to-end solutions is crucial.
A prerequisite is operational excellence in all aspects of our
business," concludes Carl-Henric Svanberg.
Market View
Applications with rich consumer experience like sending and receiving
pictures, downloading music, accessing e-mail and checking news over
the mobile phone are gaining momentum. This drives the need for
higher capacity and speeds, improved interoperability and higher
quality of service in the mobile networks.
New service applications are of interest to the operator not only to
drive new business but also to attract and retain high volume voice
users, as such users are early adopters of new services. Today there
are more than 160 commercially launched MMS installations of which we
have 50% market share.
Broadband in fixed networks, with its dramatically improved speed, is
growing strongly. Mobility has built its tremendous success on the
advantages of convenience and reachability. 3G now combines mobility
and broadband capabilities opening obvious new opportunities.
The number of WCDMA subscriptions is accelerating and by the end of
the quarter there were 1.7 million subscriptions. The introduction
pace mirrors the rollout of GSM, ten years ago. Major operators are
now working toward confirmed launch dates. Within the CDMA standard,
the number of CDMA2000 users is growing rapidly.
The global number of mobile subscriptions continues to grow on pace
to reach close to 2 billion subscriptions during 2008. The growth is
particularly strong in China, India and Russia partly driven by
tariff reductions. Today, world penetration is only 20% with a total
of 1.28 billion subscriptions. Asia-Pacific still only has 12%
penetration in mobile subscriptions while Western Europe and North
America has 80% and 51% respectively. We expect between 165 and 180
million net additions this year.
The industry is recovering. Operators are successfully reducing debt
and strengthening their financial position. The gradual shift in
focus from financial restructuring to business development leads us
to believe that the market is stabilizing and that the dramatic
market decline is behind us.
OUTLOOK
We maintain our view that the global mobile systems market, measured
in USD, could decline by more than 10% this year compared with 2002.
The addressable market for professional services is expected to
continue to show good growth.
We expect to maintain our shares of the mobile systems and
professional services markets this year. Due to currency exchange
effects, our reported sales in SEK will decline more than the overall
market, which is estimated in USD. Due to seasonality, sales for the
fourth quarter are expected to show significant sequential growth.
We expect the mobile systems market in 2004 to be in line with 2003.
OPERATIONAL REALIGNMENT
The cost of sales projects contributed to an improvement of the
adjusted gross margin to 35.9% (32.6%), a sequential increase of 0.8
percentage points from 35.1%. The targeted annualized run rate of
operating expenses of SEK 38 b. was achieved one quarter ahead of
schedule and was reduced by SEK 4 b. sequentially. The earlier
announced reduction targets in cost of sales and operating expenses
by the third quarter 2004 remains.
Total restructuring charges were SEK 5.4 b. during the quarter and
SEK 12.4 b. year-to- date. Estimated total restructuring costs for
2003 remain at SEK 16.3 b., which concludes the announced
restructuring programs. Cash outlays in the quarter were SEK 2.7 b.
During the quarter, headcount was reduced by 4,200, bringing the
number of employees to 53,400 (71,700). The previous headcount target
remains with total number of employees reaching 47,000 during 2004.
CONSOLIDATED ACCOUNTS
FINANCIAL REVIEW
Income
Both orders and sales were essentially flat compared to the second
quarter. The book-to-bill ratio remained above 1.0 for the third
consecutive quarter.
Orders booked were SEK 28.1 (20.5) b. Year-over-year orders increased
by 37%, largely due to substantial improvement in demand in China and
India. Adjusted for currency exchange effects and cancellations in
the third quarter 2002 the increase was 16%.
Increased order development in Western Europe compensated for weaker
order intake in Central and Eastern Europe. Orders in Asia Pacific
were slightly down from the second quarter. The Americas was slightly
up mainly due to increased orders booked in Latin America and stable
demand in the US.
Sales grew 2% sequentially to SEK 28.0 (33.5) b. but declined 16%
year-over-year. Currency adjusted sales were down 7% year-over-year.
Sales in Asia Pacific and Latin America increased sequentially with
major contributions from China, Japan and Mexico. The increase was
offset by lower sales in Europe, while Middle East and Africa sales
continued to develop favorably.
Gross margin adjusted for restructuring costs improved for the third
consecutive quarter to 35.9% (32.6%), a sequential increase from
35.1%. Continued cost reductions and improved capacity utilization
were the main contributors.
Adjusted operating expenses were reduced SEK 0.5 b. sequentially to
SEK 9.6 (13.7) b. Operating expenses include a SEK 0.5 b. customer
financing risk provision. The annualized run rate was SEK 38 (52) b.,
down from SEK 42 b. in the second quarter.
Adjusted operating income was SEK 1.3 (-3.2) b. compared to SEK -0.2
b. the previous quarter. Adjusted income after financial items was
SEK 1.0 (-3.6) b. compared to SEK -0.2 b. in the second quarter. Net
effects of currency exchange differences on operating income compared
to rates one year ago were SEK -0.9 b. in the quarter and SEK -1.5 b.
year-to-date. Excluding effects from currency hedging contracts this
effect would have been SEK -2.2 b. year-to-date.
Net income was SEK -3.9 (-5.0) b. for the quarter. Financial expenses
increased somewhat during the quarter due to increased interest rates
tied to our credit rating.
Earnings per share were SEK -0.25 (-0.41).
Balance sheet and financing
The financial position improved significantly as the net of financial
assets and debt increased sequentially from SEK 11.0 b. to SEK 20.5
(3.8) b. Cash improved by SEK 7.2 b. sequentially.
Days sales outstanding (DSO) for trade receivables were 93 (109), a
decrease by eight days sequentially. Inventory turnover was more than
5.7 (4.3) turns.
Customer financing risk exposure remained unchanged at SEK 11.8
(24.9) b. in the quarter. Customer financing credits on balance sheet
were reduced sequentially from SEK 10.0 b. to SEK 4.3 (12.7) b.,
largely due to payments received from credits sold in the second
quarter, including the France Telecom bonds. Certain credit
commitments expired unutilized, reducing the balance of outstanding
commitments from SEK 11.0 in the second quarter to SEK 6.7 (14.0) b.
A credit facility of USD 1 b. scheduled to expire in 2004 was
extended to 2007.
The equity ratio was 34.5% (36.0%) compared to 36.0% at the end of
the previous quarter.
Cash flow
Cash flow before financing activities improved significantly
sequentially and amounted to SEK 9.1 (-2.7) b. of which net payments
received for customer financing credits contributed with SEK 5.3 b.
Cash flow from investing activities was SEK -0.8 b. net.
Payment readiness increased sequentially by SEK 2.6 b. to SEK 71.4
(66.6) b. Payment readiness is expected to remain at approximately
SEK 70 b. at year-end, including repayments of approximately SEK 2.2
b. of debt scheduled for the fourth quarter.
SEGMENT RESULTS
SYSTEMS
Third quarter Second quarter
SEK b. 2003 2002 Change 2003 Change
Orders booked 26.5 17.9 48% 26.3 1%
Mobile Networks 21.5 12.4 73% 20.0 7%
Fixed Networks 1.5 1.8 -14% 1.7 -12%
Professional Services 3.5 3.7 -7% 4.6 -24%
Net sales 25.9 30.6 -15% 25.2 3%
Mobile Networks 19.8 23.9 -17% 18.9 5%
Fixed Networks 1.7 2.4 -30% 2.2 -23%
Professional Services 4.4 4.3 2% 4.1 8%
Adjusted operating
income 1.2 -1.1 - 0.6 -
Adjusted operating
margin (%) 5% -4% - 2% -
Systems orders grew sequentially to SEK 26.5 (17.9) b. Orders for
Mobile Networks increased by 7%, mainly driven by 3G orders, WCDMA as
well as CDMA2000.
Systems sales increased 3% sequentially to SEK 25.9 (30.6) b., with
encouraging strong performance in professional services. The
GSM/WCDMA track decreased by 4% sequentially and was down 9%
year-over-year, adjusted for currency exchange effects. The WCDMA
equipment and associated network rollout services share of total
Mobile Network sales remained stable.
Sales of Professional Services increased by 8% sequentially to SEK
4.4 (4.3) b., and now represents 17% of total Systems sales. Adjusted
for currency exchange effects year-over-year growth was 12%.
Benefits of the restructuring programs contributed to the increase of
adjusted operating income to SEK 1.2 (-1.1) b.
OTHER OPERATIONS
Third quarter Second quarter
SEK b. 2003 2002 Change 2003 Change
Orders booked 2.0 3.1 -35% 2.3 -13%
Orders booked
less divestitures 2.0 2.4 -17% 2.3 -13%
Net sales 2.5 3.4 -26% 2.5 0%
Net sales
less divestitures 2.5 2.6 -4% 2.5 0%
Adjusted operating
income 0.1 -1.2 - -0.3 -
Adjusted operating
income less divestitures 0.1 -0.7 - -0.3 -
Adjusted operating
margin (%) 5% -35% - -14% -
Adjusted operating
margin less divestitures (%) 5% -27% - -14% -
Orders booked for comparable units, excluding divested operations,
declined 17% year-over-year and 13% sequentially.
Sales for comparable units were flat year-over-year as well as
sequentially. Adjusted operating income improved sequentially partly
due to some positive one-time effects.
PHONES
The operating results of Sony Ericsson Mobile Communications (SEMC)
improved in the quarter. Ericsson's share in earnings was SEK 0.2
(-0.6) b., compared to SEK -0.2 b. in the second quarter. This
improvement was due to positive market acceptance of new imaging
phones, supply chain improvements and increased operating efficiency.
Year-over-year, GSM unit shipments increased 73% and shipments to the
Japanese market increased 130%, primarily driven by high demand for
imaging phones.
SEMC expects to be profitable for the second half of 2003. Volume and
sales are expected to grow during the fourth quarter but due to an
increased proportion of lower priced models in the product mix the
current level of profitability may not be sustained in the next
quarter.
RELATED PARTY TRANSACTIONS
Transactions with Sony Ericsson Mobile Communications (SEMC)
Third quarter Third quarter
SEK m. 2003 2002
Sales to SEMC 989 1,684
Royalty from
SEMC 145 61
Purchases from
SEMC 590 1,049
Receivables from
SEMC 249 361
Liabilities to
SEMC 495 1,046
Parent Company information
Net sales for the nine-month period amounted to SEK 1.3 (1.2) b. and
income after financial items, excluding restructuring costs, was SEK
3.5 (0.3) b.
Major changes in the company's financial position for the nine-month
period were increased current and long-term commercial and financial
receivables from subsidiaries of SEK 23.2 b., which were financed
primarily through increased internal borrowings of SEK 26.6 b. At the
end of the quarter, cash and short-term cash investments amounted to
SEK 65.3 (59.3) b.
In accordance with the conditions of the 2001 Stock Purchase Plan for
Ericsson employees, 2,010,687 shares from treasury stock were sold or
distributed to employees during the third quarter. The holding of
treasury stock at September 30, 2003 was 307,542,178 Class B shares.
Stockholm, October 30, 2003
Carl-Henric Svanberg
President and CEO
Date for next report: February 6, 2004
Auditors' Report
We have reviewed the report for the nine-month period ended September
30, 2003, 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 third quarter report does not comply with the
requirements for interim reports in the Annual Accounts Act.
Stockholm, October 30, 2003
Carl-Eric Bohlin Bo Hjalmarsson Thomas Thiel
Authorized Public Authorized Public Authorized
Accountant Accountant Public
Accountant
PricewaterhouseCoopers AB PricewaterhouseCoopers AB
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.
A glossary of all technical terms is available at:
http://www.ericsson.com/about and in the Annual Report.
To read the full report, please go to:
http://www.ericsson.com/investors/9month03-en.pdf
The full report including tables can also be downloaded from the
following link.
http://hugin.info/1061/R/922725/124870.pdf
FOR FURTHER INFORMATION PLEASE CONTACT
Henry St�nson, Senior Vice President, Communications
Phone: +46 8 719 4044; E-mail: henry.stenson@ericsson.com
Investors
Gary Pinkham, Vice President, Investor Relations
Phone: +46 8 719 0000; E-mail: investor.relations@ericsson.com
Lotta Lundin, Investor Relations
Phone: +46 8 719 6553; E-mail: lotta.lundin@ericsson.com
Glenn Sapadin, Investor Relations
Phone: +1 212 843 8435; E-mail: investor.relations@ericsson.com
Media
Pia Gideon, Vice President, Market and External Communications
Phone: +46 8 719 2864, +46 70 519 8903; E-mail:
pia.gideon@ericsson.com
�se Lindskog, Director, Media Relations
Phone: +46 8 719 9725, +46 730 244 872; E-mail:
ase.lindskog@ericsson.com
Ola Rembe, Director, Media Relations
Phone: +46 8 719 9727, +46 730 244 873; E-mail:
ola.rembe@ericsson.com
Telefonaktiebolaget LM Ericsson (publ)
Org. number: 556016-0680
Torshamnsgatan 23
SE-164 83 Stockholm
Phone: +46 8 719 00 00
www.ericsson.com
FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION
Financial Statements Page
Consolidated income statement 9
Consolidated balance sheet 10
Consolidated statement of cash flows 11
Changes in stockholders' equity 12
Consolidated income statement isolated quarters 13
Additional Information Page
Accounting policies and reporting 14
Orders booked by segment by quarter 15
Net sales by segment by quarter 16
Adjusted operating income, operating margin
and employees by segment by quarter 17
Orders booked by market area by quarter 18
Net sales by market area by quarter 19
External orders booked by market area by segment 20
External net sales by market area by segment 20
Top ten markets in orders and sales 21
Customer financing risk exposure 21
Trend of net sales and operating expenses 21
Other information 22
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