Ericsson reports first quarter 2008 results

4/25/2008, 7:30 AM (Source: GlobeNewswire)
[Ericsson discloses the information provided herein pursuant to the
Securities Markets Act and/or the Financial Instruments Trading Act.
The information was submitted for publication at 07.30 CET, on April
25, 2008.]
 
 
* Sales SEK 44.2 (42.2) b., organic growth in constant currencies 9%
* Operating income SEK 4.3 (8.2) b., excl. restructuring charges of
SEK 0.8 b.
* Operating margin 9.7% (19.3%), excl. restructuring charges of SEK
0.8 b.
* Cash flow SEK 4.7 (4.6) b., cash conversion 83% (80%)
* Net income SEK 2.6 (5.8) b. 3), incl. restructuring charges of SEK
0.8 b.
* Earnings per share SEK 0.17 (0.37) 3)
 
CEO COMMENTS
 
"Our business developed well in the quarter, considering the present
market environment and the declining USD," said Carl-Henric Svanberg,
President and CEO of Ericsson (NASDAQ:ERIC). "We still find it
prudent to plan for a flattish mobile infrastructure market in 2008.
The ongoing cost reductions as we adjust to such a scenario are
running according to plan.
 
The sales development in the quarter reflects the demand for mobile
infrastructure, especially in high-growth markets. Sales are picking
up in the US while Western Europe remains slow. The proportion of new
network builds in high-growth markets, especially in India, is
increasing. In combination with a weaker USD, this continues to put
pressure on our margins.
 
Professional Services continue to show good growth with increasing
demands in all areas, especially in managed services and systems
integration. In Multimedia, we continue to invest in R&D in new
business opportunities which reduce profitability. Multimedia's
result was also affected by Sony Ericsson's lower sales which
impacted sales of mobile platforms.
 
The rollout of mobile broadband continues throughout the world. HSPA
will be the dominant standard for many years and is now an effective
alternative to fixed broadband. Mobile broadband will play a
significant role in bridging the digital divide. Furthermore, it is
encouraging that LTE, the evolution of HSPA, is supported by the
largest operators around the world. We are investing significantly in
this technology to secure leadership also in this area," said
Carl-Henric Svanberg.
 
FINANCIAL HIGHLIGHTS
Income statement and cash flow
 

  First quarter Fourth quarter
SEK b. 2008 2007 Change 2007 Change
Net sales 44.2 42.2 5% 54.5 -19%
Gross margin 38.6% 1) 43.0% - 36.1% -
EBITDA margin 14.7% 1) 23.8% - 18.4% -
Operating income 4.3 1) 8.2 -47% 7.6 -44%
Operating margin 9.7% 1) 19.3% - 14.0% -
Operating margin
excl. Sony Ericsson 7.7% 1) 15.5% - 9.8% -
Income after
financial items 4.5 1) 8.3 -46% 7.6 -41%
Net income 3) 2.6 2) 5.8 -55% 5.6 -53%
EPS, SEK 3) 0.17 2) 0.37 -54% 0.35 -51%
Cash flow from
operating activities 4.7 4.6 3% 12.0 -61%
Cash flow excl.
Sony Ericsson 2.5 1.1 - 12.0 -

 
1) Excluding restructuring charges of SEK 0.8 b., of which SEK 0.2 b.
in cost of sales and SEK 0.6 b. in operating expenses in 2008.
2) Including restructuring charges of SEK 0.8 b.
3) Attributable to stockholders of the Parent Company, excluding
minority interest.
 
The year-over-year sales increased by 5%. Growth was negatively
affected by a continued weakened USD. Organic growth in constant
currencies is estimated to 9% and acquisitions added 2%.
 
Gross margin amounted to 38.6% (43.0%) and declined year-over-year,
mainly due to the business mix with a high proportion of new network
buildouts. Sales of software and IPRs were slightly higher in the
quarter.
 
Operating income amounted to SEK 4.3 (8.2) b. in the quarter.
Operating expenses amounted to SEK 14.1 (11.8) b. in the quarter due
to the impact of the acquired companies, including amortization of
intangibles, and increased R&D investments, mainly in LTE, mobile
platforms and IPTV. Sony Ericsson's pre-tax profit contributed SEK
0.9 (1.6) b. to Group operating income in the quarter.
 
Cash flow from operating activities reached SEK 4.7 (4.6) b. in the
quarter. The cash flow includes a dividend from Sony Ericsson of SEK
2.2 b. In the first quarter 2007, Sony Ericsson made an advance
payment equivalent to a dividend of SEK 3.5 b. The working capital
was slightly up. Cash conversion for the quarter amounted to 83%
(80%). Days sales outstanding have increased by eight days in the
quarter.
 
Cash flow from investing activities was SEK 3.2 (-9.2) b. First
quarter 2007 was impacted by acquisitions.
 
Balance sheet and other performance indicators
 

  Three months Full year
SEK b. 2008 2007
Net cash 28.3 24.3
Interest-bearing
liabilities and post
employment benefits 32.0 33.4
Trade receivables 56.4 60.5
Days sales outstanding 110 102
Inventory 24.5 22.5
Of which work in progress 13.8 12.5
Inventory turnover 4.6 1) 5.2
Payable days 57 57
Customer financing, net 2.7 3.4
Return on capital
employed 12% 1) 21%
Equity ratio 56% 55%

 
1) Excluding effects from restructuring.
 
During the quarter, approximately SEK 0.8 b. of provisions was
utilized for costs related to product warranties, customer projects,
restructuring and other. Additions of SEK 2.0 b., including
restructuring charges of SEK 0.7 b., and reversals of SEK 0.6 b. have
been made as a result of risk assessments in the ongoing business.
 
At the end of the period, equity amounted to SEK 134.6 b., an
increase by SEK 7.3 b. compared to same period last year.
 
Cost reductions
 
As announced in the fourth quarter report 2007, cost reductions of
SEK 4 b. in annual savings will be made. These reductions will have
full effect in 2009. Restructuring charges are estimated to SEK 4 b.
and will be recognized as each activity is decided.
 
During the first quarter, restructuring costs of SEK 0.8 b., of which
SEK 0.2 b. in cost of sales and SEK 0.6 b. in operating expenses,
have been taken, primarily for reductions in Western Europe. Charges
for the restructuring program in Sweden that was announced in April
will be effected in the second quarter 2008.
 
SEGMENT RESULTS
 

  First quarter Fourth quarter
SEK b. 2008 2007 Change 2007 Change
Networks sales 30.0 29.3 2% 37.5 -20%
Of which
network rollout 4.5 3.8 20% 6.4 -30%
Operating margin 9% 1) 17% - 10% -
EBITDA margin 15% 1) 23% - 15% -
Professional Services
sales 10.3 9.5 8% 12.1 -15%
Of which managed
services 3.1 2.6 20% 3.3 -6%
Operating margin 13% 1) 15% - 15% -
EBITDA margin 15% 1) 16% - 16% -
Multimedia sales 3.9 3.4 16% 4.9 -20%
Operating margin -13% 1) 8% - -9% -
EBITDA margin -6% 1) 9% - -3% -
Total sales 44.2 42.2 5% 54.5 -19%

 
1) Excluding effects from restructuring.
 
 
Networks
 
Sales in Networks grew by 2% year-over-year despite a negative impact
from the USD decline. The sales increase was driven by increased
sales of GSM in high-growth markets, especially in China and India.
This is reflected in the strong growth in Network rollout services
which is a lower margin business. Sales of software and IPRs were
slightly higher in the quarter. The EBITDA margin was 15%, flat
sequentially.
 
The demand for GSM remains healthy and the business activity is
increasing, particularly in India and China. 3G rollouts are ongoing
throughout the world, including major rollouts in Russia and Latin
America. The largest proportion of R&D investments in Networks is
spent on WCDMA and an increasing part on LTE. Several major operators
have announced plans to upgrade their networks to 14.4 Mbps and
Ericsson will introduce 21 Mbps during the second half of the year.
 
Redback has significantly increased its sales outside the US through
leveraging Ericsson's global sales organization. Since the
acquisition, Ericsson has signed agreements for the delivery of
Redback-based solutions with more than 100 carriers in over 65
countries.
 
Professional Services
 
Sales in Professional Services grew by 8% year-over-year with a
growth in constant currencies of 10%. As expected, managed services
sales decreased sequentially with the reduced scope of the
3 UK contract announced in the fourth quarter 2007 but increased 20%
year-over-year. Operating margin in Professional Services declined to
13% (15%) due to the high proportion of new managed services
contracts in a start-up phase. With increased network complexity,
system integration is a growth area but sales will vary with customer
projects.
 
Multimedia
 
Sales growth amounted to 16% year-over-year, largely driven by
acquisitions. The business activity has been high in the quarter with
important reference contracts in IPTV as well as increased traction
in Tandberg Television.
 
Within segment Multimedia, revenue management, service delivery
platforms, Tandberg Television and mobile platforms account for the
vast majority of sales and generate good growth and margins. The
strategy is to leverage these leading positions and invest in new
areas for future growth, such as IPTV, IMS and enterprise
applications. In these areas, sales are still low and R&D investments
are significant.
 
Sales and operating income for mobile platforms were negatively
affected by approximately
SEK 0.3 b. in the quarter following Sony Ericsson's lower sales in
the first quarter.
 
Sony Ericsson Mobile Communications
For information on transactions with Sony Ericsson Mobile
Communications, please see Financial statements and Additional
information.
 

  First quarter Fourth quarter
EUR m. 2008 2007 Change 2007 Change
Number of units
shipped (m.) 22.3 21.8    2% 30.8  -27%
Average selling
price (EUR) 121 134   -10% 123   -2%
Net sales 2,702 2,925    -8% 3,771  -28%
Gross margin 29% 30%     - 32%    -
Operating margin 7% 12%     - 13%    -
Income before taxes 193 362   -47% 501 -61%
Net income 133 254   -48% 373 -64%

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Units shipped in the quarter reached 22.3 million, a 2% increase
compared to the same period last year. Sales declined by 8%
year-over-year due to a slowing market growth in the mid-to-high end
phones in markets where Sony Ericsson has a strong presence. Gross
margin was one percentage point lower than first quarter 2007,
reflecting a less favorable product mix.
 
Ericsson's share in Sony Ericsson's income before tax was SEK 0.9
(1.6) b. in the quarter. During the quarter, Ericsson received a
dividend from Sony Ericsson of SEK 2.2 b. A second dividend payment
is planned for this year.
 
REGIONAL OVERVIEW
 

  First quarter Fourth quarter
Sales, SEK b. 2008 2007 Change 2007 Change
Western Europe 11.7 12.5 -7% 15.4 -24%
Central and Eastern 11.1 11.0 1% 14.3 -22%
Europe, Middle East
and Africa
Asia Pacific 12.9 12.3 5% 13.7  -6%
Latin America 4.2 3.3 25% 6.8 -38%
North America 4.3 3.1 39% 4.3   0%

 
Western Europe sales declined by 7% year-over-year. The trend of
operator consolidation continues. Germany showed good growth, driven
by managed services. UK was affected by an overall slow market. The
adjusted scope of the managed services contract with 3 UK affects
sales but not margins. Spain also showed slower sales in the quarter
compared to a strong first quarter 2007.
 
The overall business activity is high in Central and Eastern Europe,
Middle East and Africa although sales were flat year-over-year.
During the quarter, Africa and parts of the Middle East showed strong
performance. In Russia 3G rollouts are underway.
 
Asia Pacific sales were up 5% year-over-year. India was up
significantly, offsetting a slower investment level in Bangladesh due
to political uncertainty. China showed good growth while Japan and
Australia were down due to tough year-over-year comparisons.
 
Latin America sales were up 25% year-over-year. Continued 2G
expansions as well as new 3G rollouts in Brazil and Mexico
contributed to the strong development.
 
North America sales grew by 39% year-over-year, due to investments in
WCDMA/HSPA. A higher level of IPR-related sales also contributed to
the sales growth. The spectrum auction has been concluded and the
successful bidders are planning for mobile broadband rollouts over
the coming years.
 
MARKET DEVELOPMENT
Growth rates based on Ericsson and market estimates.
 
The industry consolidation among operators and our competitors
continues and the competition is still intense, especially from
Chinese vendors.
 
Mobile broadband rollouts continue and are expanding to new markets
throughout the world. The strong data traffic growth confirms
consumer interest in the new multimedia services that are made
available.
 
The concluded 700 MHz auction in the US, the upcoming Chinese telecom
reform as well as other license auctions around the world should pave
the way for deployments of new networks. The tariff competition
continues to be strong in many markets, driving traffic growth
further.
 
HSPA will be the dominant mobile broadband standard for many years.
Furthermore, the support from the world's largest operators underpins
LTE's status as the next global standard.
 
Mobile subscriptions grew with some 160 million in the quarter to a
total of 3.48 billion. 205 million are WCDMA subscriptions, up by 22
million in the first quarter. There are 211 WCDMA networks in 91
countries, of which 185 networks are upgraded to HSPA.
 
In the twelve-month period ending December 31, 2007, fixed broadband
connections grew by 20% to some 335 million.
 
PLANNING ASSUMPTIONS
 
Unchanged industry fundamentals and consumer behavior support a
positive longer-term outlook. For 2008, we continue to plan for a
flattish development in the mobile infrastructure market while the
professional services market is expected to show good growth.
 
PARENT COMPANY INFORMATION
 
Net sales for the first quarter amounted to SEK 2.0 (0.7) b. and
income after financial items was SEK 4.4 (4.0) b. 
 
Major changes in the Parent Company's financial position for the
first quarter include decreased current and non-current receivables
from subsidiaries of SEK 5.8 b. and increased cash and bank and
short-term investments of SEK 5.5 b. Current and non-current
liabilities to subsidiaries decreased by SEK 2.5 b. At the end of the
quarter, cash and bank and short-term investments amounted to SEK
51.1 (45.6) b.
 
Major transactions with related parties include the following
transactions and balances with Sony Ericsson Mobile Communications:
revenues of SEK 0.6 (0.5) b.; receivables of SEK 0.7 (0.9) b.;
dividend of SEK 2.2 (2.6) b.
 
In accordance with the conditions of the Stock Purchase Plans and
Option Plans for Ericsson employees, 7,291,951 shares from treasury
stock were sold or distributed to employees during the first quarter.
The holding of treasury stock at March 31, 2008, was 224,699,592
shares of class B.
 
OTHER INFORMATION
 
Annual General Meeting
 
The Annual General Meeting (AGM) decided, as previously announced and
in accordance with the proposal from the Board of Directors, on a
dividend payment of SEK 0.50 per share for 2007 and with April 14,
2008, as the date of record for dividend. The total dividend payment
amounts to SEK 8.0 b.
 
In accordance with the proposal from the Board of Directors, the AGM
resolved on a reversed split of shares 1:5, to the effect that five
shares of class A and five shares of class B, respectively, are
consolidated into one share of class A and one share of class B
respectively. The record date for the reversed split is June 4, 2008.
 
In accordance with the Board of Directors' proposals, the AGM
resolved the completion of LTV 2007 (Long Term Variable
compensation). The AGM also resolved the implementation of LTV 2008,
including directed issue of shares, directed acquisition offer and
transfer of shares. In addition, the AGM resolved the transfer of
treasury stock for previously decided LTV programs. For more details,
see www.ericsson.com/investors.
 
Divestiture of enterprise PBX solutions
 
On February 18, 2008, Ericsson entered into an agreement to divest
its enterprise PBX solutions business, part of segment Multimedia, to
Aastra Technologies. The agreement includes transfer of approximately
630 employees. The transaction is expected to close in April 2008.
 
Delisting from London Stock Exchange
 
As of April 15, 2008, Ericsson has delisted its class B shares from
the London Stock Exchange.
 
Assessment of risk environment
 
Ericsson's operational and financial risk factors and exposures are
described under "Risk factors" in our Annual Report 2007 and we have
determined that the risk environment has not materially changed.
However, the increased activities related to the new Multimedia
segment may result in a more volatile quarterly sales pattern.
Specific additional risks for the near term are associated with the
acquisitions made during 2007, as a timely and effective integration
of these is essential to make them accretive as planned.
 
Risk factors and exposures in focus for the Parent Company and the
Ericsson Group for the forthcoming six-month period include:
unfavorable product mix in the Networks segment with reduced sales of
software, upgrades and extensions and an increased proportion of new
network build-outs and break-in contracts, which may result in lower
gross margins and/or working capital build-up, which in turn puts
pressure on our cash conversion rate; variability in the seasonality
could make it more difficult to forecast future sales;  effects of
the ongoing industry consolidation among the Company's customers as
well as between our largest competitors, e.g. intensified price
competition; changes in foreign exchange rates, in particular a
continued weakness or further deterioration of the USD/SEK rate;
increases in interest rates and the potential effect on operators'
willingness to invest in network development; and continued political
unrest or instability in certain markets.
 
Ericsson conducts business in certain countries which are subject to
trade restrictions or which are focused on by certain investors. We
stringently follow all relevant regulations and trade embargos
applicable to us in our dealings with customers operating in such
countries. Moreover, Ericsson operates globally in accordance with
Group level policies and directives for ethics and conduct. In no way
should our business activities in these countries be construed as
supporting a particular political agenda or regime. We have
activities in such countries mainly due to that certain customers
with multi-country operations put demands on us to support them in
all of their markets.
 
Please refer further to Ericsson's Annual Report 2007, where we
describe our risks and uncertainties along with our strategies and
tactics to mitigate the risk exposures or limit unfavorable outcomes.
 
Stockholm, April 25, 2008
 
Carl-Henric Svanberg
President and CEO
Telefonaktiebolaget LM Ericsson (publ)
 
Date for next report: July 22, 2008
 
REVIEW REPORT
 
We have reviewed this report for the period January 1 to March 31,
2008, for Telefonaktiebolaget LM Ericsson (publ). The board of
directors and the CEO are responsible for the preparation and
presentation of this interim financial information in accordance with
IAS 34 and the Annual Accounts Act. Our responsibility is to express
a conclusion on this interim financial information based on our
review.
 
We conducted our review in accordance with the Standard on Review
Engagements SÖG 2410, Review of Interim Financial Information
Performed by the Independent Auditor of the Entity, issued by FAR. A
review consists of making inquiries, primarily of persons responsible
for financial and accounting matters, and applying analytical and
other review procedures. A review is substantially less in scope than
an audit conducted in accordance with Standards on Auditing in
Sweden, RS, and other generally accepted auditing practices. The
procedures performed in a review do not enable us to obtain a level
of assurance that would make us aware of all significant matters that
might be identified in an audit. Therefore, the conclusion expressed
based on a review does not give the same level of assurance as a
conclusion expressed based on an audit.
 
Based on our review, nothing has come to our attention that causes us
to believe that the accompanying interim financial information is
not, in all material respects, in accordance with IAS 34 and the
Annual Accounts Act.
 
 
Stockholm, April 25, 2008
 

PricewaterhouseCoopers AB  
   
Bo Hjalmarsson Peter Clemedtson
Authorized Public Accountant Authorized Public Accountant
Lead partner  

 
EDITOR'S NOTE
 
To read the complete report with tables, please go to:
www.ericsson.com/investors/financial_reports/2008/3month08-en.pdf
 
Ericsson invites media, investors and analysts to a press conference
at the Ericsson headquarters, Torshamnsgatan 23, Stockholm, at 09.00
(CET), April 25.
 
An analysts, investors and media conference call will begin at 15.00
(CET).
 
Live webcasts 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
E-mail: investor.relations@ericsson.com or
press.relations@ericsson.com
 
Investors
Gary Pinkham, Vice President,
Investor Relations
Phone: +46 8 719 0000
E-mail: investor.relations@ericsson.com
 
Susanne Andersson,
Investor Relations
Phone: +46 8 719 4631
E-mail: investor.relations@ericsson.com
 
Andreas Hedemyr,
Investor Relations
Phone: +46 8 404 37 48
E-mail: investor.relations@ericsson.com
 
Media
Åse Lindskog, Vice President,
Head of Media Relations
Phone: +46 8 719 9725, +46 730 244 872
E-mail: press.relations@ericsson.com   
 
Ola Rembe, Vice President,
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
www.ericsson.com
 
 
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; (xii) plans to
launch new products and services; (xiii) assessments of risks; (xiv)
integration of acquired businesses; (xv) compliance with rules and
regulations and (xvi) infringements of intellectual property rights
of others.
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 or interest rate
fluctuations; and (vii) the successful implementation of our business
and operational initiatives.

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