Ericsson reports continued solid performance
Friday, April 21 2006
* Net sales SEK 39.2 (31.5) b. in the quarter
* Operating income SEK 7.0 (6.6) b., excl. amortization of Marconi
intangible assets of SEK 0.4 b.
* Net income SEK 4.6 (4.6) b. in the quarter 1)
* Earnings per share SEK 0.29 (0.29) in the quarter 1)
“The evolution to mobile broadband is accelerating. This new powerful HSPA technology dramatically improves the consumer experience of new multimedia services such as mobile office, music and mobile TV,” says Carl-Henric Svanberg, President and CEO of Ericsson. "We have a clear lead and are rolling out HSPA networks in four continents. We have also established a leadership position in fixed and mobile softswitch. This new software-based switching technology offers considerably lower upfront operator investments and an evolution path toward converged networks.
Our good organic sales growth continues, in this quarter primarily driven by services. Through our early lead in services we have gained a strong position with an exciting growth potential. All areas within services are growing, especially managed services and hosting, as a consequence of operators’ need for focus on business development and total cost of ownership.
The strategic move to acquire Marconi has been well received by our customers as they plan for convergence and development toward next-generation IP networks. Our position in the growing broadband and transmission segments has also been significantly strengthened. The integration process is well underway and business development has been better than expected. We have postponed the timings of certain actions to safeguard the increased orders and delivery commitments. As a consequence, the targeted cost savings will be realized slightly later than originally planned.
Our strong market position and technology leadership provide us with opportunities to organically grow our business further. Such opportunities often include certain start up costs and may therefore be less profitable short-term but are of obvious long-term value" concludes Carl-Henric Svanberg.
Income statement and cash flow
First quarter Fourth quarter
SEK b. 2006 2005 Change 2005 Change
Net sales 39.2 31.5 24% 45.7 -14%
Gross margin 43.3% 48.5% 44.2%
Operating income 6.6 6.6 - 10.4 -36%
Operating margin 16.9% 21.0% 22.7%
financial items 6.7 6.7 - 10.1 -34%
Net income 1) 4.6 4.6 - 8.5 -46%
Cash flow before
activities -16.1 -6.5 - 13.5 -
Earnings per share,
SEK 1) 0.29 0.29 - 0.54 -
Earnings per share, SEK,
excl. amortization of Marconi
intangibles 0.31 0.29 6% 0.54 -
1) Attributable to stockholders of the parent company, excluding minority interest.
Sales in the quarter were up 24% year-over-year due to growth in basically all areas and with services being especially strong. Excluding sales in the former Marconi operations of SEK 2.9 b., sales were up 15% year-over-year.
Gross margin was 43.3% during the quarter, reflecting the increased proportion of services sales and the integration of former Marconi operations. Excluding former Marconi operations, gross margin was in line with the previous quarter.
The operating margin decreased year-over-year from 21.0% to 16.9%, primarily due to effects from new contracts with an increased proportion of network rollouts and initial phases of large-scale services contracts as well as the integration of Marconi. Operating income remained unchanged at SEK 6.6 b. The former Marconi operations generated an operating loss of approximately SEK 0.6 b. including amortization of intangible asset of SEK 0.4 b.
The financial net was 0.1 b. in the quarter.
Net income and earnings per share were flat compared to same quarter last year.
Cash flow before financial investing activities was SEK -16.1 b. in the first quarter. Excluding the acquisition of Marconi of SEK 17.6 b., the cash flow was SEK 1.5 b., including the dividend from Sony Ericsson Mobile Communications of SEK 1.2 b.
Balance sheet and other performance indicators
Three months Full year
SEK b. 2006 2005 2005
Net cash 33.7 41.4 50.6
provisions and liabilities 32.7 30.1 30.9
Days sales outstanding 101 97 81
Inventory turnover 4.2 4.0 5.0
Net customer financing 3.2 4.2 4.9
Equity ratio 50.2% 45.6% 49.0%
Net cash decreased by SEK 16.9 b. to SEK 33.7 (41.4) b. during the quarter, and the equity ratio was 50.2% (45.6%).
Days sales outstanding were 101 days, an increase of four days compared to the same period last year. Inventories, including work in progress, were up in the quarter by SEK 4.3 b. to SEK 23.5 (19.2) b.
Deferred tax assets were reduced by SEK 1.8 b. in the quarter, from SEK 18.5 b. at year-end to SEK 16.8 b.
MARKET AND BUSINESS HIGHLIGHTS
Long-term industry growth drivers remain solid. Subscriber growth continues, primarily driven by emerging markets. Voice and data traffic is increasing steadily as a result of new subscribers, new and improved services and lower tariffs. In emerging markets, the anticipated subscriber increase puts focus on cost efficient infrastructure, handsets and local operations. The mobile phone is often the only means to communicate in emerging markets, and demand is therefore high also for advanced data services.
WCDMA/HSPA continues to gain traction with rollouts and launches in many countries. Currently we have 30 HSPA networks under deployment around the world, of which seven have been commercially launched. At the same time, the success of GSM continues. With rollouts continuing towards three billion mobile subscribers, GSM will continue to be a cornerstone of enabling communication across the world.
The strong growth in services continues as operators seek lower operating costs. As a consequence, we see a growing interest for Ericsson’s managed services portfolio. Having gained volumes and momentum, we can leverage our strong position in services to offer cost savings to operators.
Western Europe sales were up by 13% compared to the same quarter last year mainly due to increased services sales and added Marconi sales. Germany, Italy, Spain and United Kingdom contributed significantly to the sales increase. Operator consolidation continues and accelerates focus on operators’ total cost of ownership.
Central and Eastern Europe, Middle East and Africa sales grew by 21% compared to the same quarter last year. The activity level was high in Egypt, Pakistan, Saudi Arabia and South Africa with new and extension contracts for GSM and WCDMA. Consolidation among operators accelerates.
Asia Pacific sales grew by 44% compared to the same quarter last year, primarily driven by strong growth in Australia, India, Indonesia and Japan. China is still in a waiting mode for the pending 3G- license decision.
North America sales grew by 58% compared to the same quarter last year. The sales growth is primarily driven by continued successful WCDMA/HSPA launches in the US.
Latin America sales grew by 3% compared to the same quarter last year. The market is now slower after two exceptionally strong rollout years. The planning has started for WCDMA and the first decisions are expected later this year.
During the quarter, two new WCDMA networks were commercially launched, bringing the total to 93. Ericsson is a supplier to 50 of these networks. The number of WCDMA subscriptions grew by approximately 8 million to more than 55 million during the quarter.
Net mobile subscription additions were some 100 million in the quarter. At the end of the quarter, worldwide subscription penetration reached 36% with close to 2.3 billion subscriptions in total, of which more than 1.8 billion are GSM. The strong subscriber additions continue, and the global number of subscriptions is expected to pass three billion during 2007.
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 both new services and new subscribers. For 2006 we continue to believe that the global mobile systems market, measured in USD, will show moderate growth compared to 2005.
We also continue to believe that the addressable market for professional services will continue to show good growth in 2006.
With our technology leadership and global presence we are well positioned to take advantage of the market opportunities.
First quarter Fourth quarter
SEK b. 2006 2005 Change 2005 Change
Net sales 36.8 29.0 27% 43.0 -14%
Mobile networks 26.7 23.5 14% 33.6 -20%
Fixed networks 2.9 1.0 174% 1.3 126%
Professional services 7.2 4.5 60% 8.1 -11%
Operating income 6.0 6.2 - 9.4 -
Operating margin 16% 21% 22%
Sales of mobile networks were up by 14% compared to the same quarter last year. A significantly larger proportion of initial network build outs reflects our strong position in the marketplace. Of radio access sales, 52% was WCDMA/EDGE related in the quarter.
The strong sales growth of fixed networks was due to the added Marconi sales. Of the SEK 2.9 b. of added Marconi sales SEK 0.5 b. of are recorded as part of professional services.
Sales of network rollout and professional services increased 58%, excluding Marconi, compared to the same quarter last year. During the quarter, growth in network rollout was particularly high due to a high proportion of new networks being built. Sales of professional services, excluding Marconi, developed strongly during the quarter and grew 48% compared to the same quarter last year.
First quarter Fourth quarter
SEK b. 2006 2005 Change 2005 Change
Net sales 2.7 2.7 - 3.0 -11%
Operating income 0.1 0.0 - 0.2 -75%
Operating margin 2% 2% 7%
Cables and Ericsson Mobile Platforms continued to show strong performance. The restructuring of Power Modules is drawing to a close.
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 strong performance. Units shipped in the quarter reached 13.3 million, a 41% increase compared to the same period last year, higher than general market growth. Sales for the quarter were EUR 1,992 m., a year-on-year increase of 55%, reflecting increased average sales price. Income before taxes was EUR 151 m., a year-on-year increase of 115%. Ericsson’s share in Sony Ericsson’s income before tax was SEK 0.7 (0.3) b.
A dividend of EUR 123 m. for 2005 was paid to each parent company on March 30, 2006.
PARENT COMPANY INFORMATION
Net sales for the quarter amounted to SEK 0.2 (0.4) b. and income after financial items was SEK 2.6 (0.5) b.
From January 1, 2006, the Parent Company has adopted IAS 39. The impact on equity and balance sheet, mainly related to derivatives and external borrowings, was not significant. Major changes in the Parent Company’s financial position for the first quarter include decreased current and non-current liabilities to subsidiaries of SEK 16.5 b. and decreased cash and short-term cash investments of SEK 15.6 b. These changes are partly attributable to the Marconi acquisition. At the end of the quarter, cash and short-term cash investments amounted to SEK 59.4 (75.0) b.
In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 3,981,580 shares from treasury stock were sold or distributed to employees during the first quarter. The holding of treasury stock at March 31, 2006, was 264,083,661 Class B shares.
ANNUAL GENERAL MEETING
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 0.45 per share for 2005 and with April 13, 2006, as the date of record for dividend. The total dividend payment amounts to SEK 7.3 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 2006 (LTI 2006). The LTI 2006 is based upon the same principles as the LTI 2005, which covers all employees, key contributors and senior management. The Annual General Meeting resolved to transfer own shares in relation to the LTI 2006.
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, the LTI 2004 and the LTI 2005.
Stockholm, April 21, 2006
President and CEO
Date for next report: July 21, 2006
We have reviewed the interim report for the period January 1 to March 31, 2006, for Telefonaktiebolaget LM Ericsson (publ). Management is responsible for the preparation and fair presentation of this interim financial information in accordance with IAS 34. 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 does not give a true and fair view of the financial position of the entity as at March 31, 2006, and of its financial performance and its cash flows for the three-month period then ended in accordance with IAS 34.
Stockholm, April 21, 2006
Bo Hjalmarsson Peter Clemedtson Thomas Thiel
Authorized Public Authorized Public Authorized
Accountant Accountant Public
PricewaterhouseCoopers AB PricewaterhouseCoopers AB
To read the complete report with tables please go to: www.ericsson.com/investors/financial_reports/2006/3month06-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 21.
An 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
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.
- Contact Information
- Henry Sténson
- Senior Vice President, Communications
- Contact via E-mail
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