Ericsson reports second quarter results
- Sales SEK 52.1 (48.5) b, up 11% in comparable units, down 3% currency adjusted
- Operating income 1) before JVs SEK 6.9 (4.7) b, incl capital gains of SEK 0.8 (0.2) b
- Operating margin 1) before JVs 11.7% (9.3%), excl capital gains
- Share in earnings from JVs SEK -2.1 (0.1) b
- Income after financial items1) SEK 4.8 (4.7) b
- Restructuring charges of SEK 3.6 (1.8) b, excl JV
- Net income SEK 0.8 (2.0) b
- Earnings per share SEK 0.26 (0.60)
- Cash flow 2) SEK 9.9 (8.7) b
1) Excluding restructuring charges
2) Excluding cash outlays for restructuring of SEK 0.8 (0.2) b
"There are different trends in the current market environment. The effects of the global economic climate on the mobile infrastructure market are now more notable, especially in markets with currencies under pressure and tougher credit environment," said Carl-Henric Svanberg, President and CEO of Ericsson (NASDAQ:ERIC). "At the same time the consumer demand for new services and broadband capabilities are quickly accelerating and rollout of new technologies is ongoing in the world's leading economies. There is also an increasing demand for professional services from operators across the world.
Network sales were down year-over-year currency adjusted, reflecting the present market environment. The continued strong acceleration of mobile data traffic is leading to high growth in sales of WCDMA and transmission as well as upgrades of IP networks. Meanwhile, GSM buildouts, primarily ongoing in emerging markets, have slowed and offset sales growth in other areas.
Services in total now represent 38% of sales, driven by strong Professional Services growth. Our leading position was confirmed by our first managed services contract in Africa with Zain and the network services contract with Sprint in the US. In the present economic climate, where operators focus on efficiency and cost reductions, Ericsson is benefiting from its sizeable services operation with both scale and global presence.
Our early decision to reduce costs is giving results and margins improved across all segments. Our target to reduce costs by SEK 10 b. from the second half of 2010 remains, and significant restructuring charges were made in the quarter. We continue to focus on our capital structure and have added long-term loans on favorable conditions. Our net cash position was further strengthened by a strong cash flow in the quarter," concluded Carl-Henric Svanberg.
Sales in the quarter increased 11% year-over-year for comparable units, i.e. excluding Ericsson Mobile Platforms and PBX operations, but decreased 3% when adjusted for currency exchange rate effects and hedging.
In the quarter, gross margin, excluding restructuring charges, decreased year-over-year to 36.3% (37.0%), but was flat sequentially. Services sales have grown from 33% to 38% of total sales year-over-year. The margin decline is attributable to this mix shift and the transfer of Ericsson Mobile Platforms to ST-Ericsson.
Operating expenses amounted to SEK 13.6 (14.0) b. in the quarter, excluding restructuring charges. The year-over-year improvement is primarily a result of ongoing cost reduction activities, despite negative impact from currency exchange rate effects. Operating expenses as a percentage of sales declined to 26% (29%).
Operating income, excluding joint ventures, restructuring charges and capital gains of SEK 0.8 (0.2) b., amounted to SEK 6.1 (4.5) b. in the quarter resulting in an improved operating margin of 11.7% (9.3%). All three segments showed a positive margin development during the quarter. A weaker SEK affected income positively but was partly offset by a currency hedging loss.
Ericsson's share in earnings from joint ventures in the quarter amounted to SEK -2.1 (0.1) b., including restructuring costs.
Financial net was SEK -0.1 (0.0) b. in the quarter, mainly resulting from negative effects of revaluation of financial assets and a lower interest net.
Net income amounted to SEK 0.8 (2.0) b. in the quarter and was negatively impacted by the losses in Sony Ericsson and ST-Ericsson.
Adjusted cash flow amounted to SEK 9.9 (8.7) b., excluding cash outlays for restructuring of SEK 0.8 (0.2) b. The improvement in cash flow was mainly due to strong collections and improved working capital efficiency. Year-to-date cash conversion rate was 73%.
Trade receivables decreased sequentially due to strong collections. Despite this, days sales outstanding (DSO) remained high at 121 (124) days due to increased business activity and high invoicing in the later part of the quarter. There are also some effects from operators optimizing their cash situation in the tougher credit environment.
Including dividend payment of SEK 6.0 b., the net cash position amounted to SEK 27.9 (22.9) b. Cash, cash equivalents and short-term investments amounted to SEK 75.5 (64.1) b.
In May, a USD 483 m. bond under the EMTN program matured and was paid. During the quarter, a 7-year long-term bilateral loan of USD 625 m. was signed with the Swedish Export Credit Corporation and in addition a EUR 600 m. 4-year bond was issued. These activities lengthen Ericsson's average debt maturity profile and provide a more efficient capital structure. Of a total debt of SEK 39.5 b., SEK 3.6 b. mature in the next twelve months.
Customer financing remains low at a level of SEK 3.1 (2.8) b.
During the quarter, approximately SEK 2.0 b. of provisions were utilized, of which SEK 0.8 b. were related to restructuring. Additions of SEK 3.7 b. were made, of which SEK 1.8 b. related to restructuring. Reversals of SEK 0.1 b. were made.
In January, 2009, cost reduction activities were announced that target annual savings of SEK 10 b. from the second half of 2010, with an equal split between cost of sales and operating expenses. Restructuring charges are estimated to SEK 6-7 b. Restructuring charges related to activities launched in the second quarter amounted to SEK 3.6 b. At the end of the quarter, cash outlays of SEK 4.2 b. remain to be made.
Networks sales increased in the quarter by 4% year-over-year but were down when adjusted for currency exchange rate effects. The EBITDA-margin of 15% was flat year-over-year despite the higher level of network rollout in the quarter, reflecting the cost improvement actions. The cost reduction activities announced at the beginning of this year are running according to plan.
WCDMA shows strong growth, reflecting the accelerating consumer demand for broadband services and the ongoing rollouts in China, Japan and the US. Meanwhile volumes of GSM equipment decreased from an all-time high in 2008, primarily as a result of operators' increased cautiousness in several emerging markets.
In July, mobile broadband with MIMO technology enabling speeds of 28 Mbps, was commercially launched in Telecom Italia's network. The continued traffic growth is driving upgrades of IP networks and transmission. As a result, SmartEdge, Packet Core and MiniLink products are all showing strong growth.
Ericsson has completed the world's largest upgrade of a live mobile network for Vodafone Essar India in record time. Ericsson replaced more than 10,500 GSM radio sites, reaching a peak rate of one site every minute. This was achieved in just 13 months, two months ahead of schedule.
Professional Services sales increased 28% year-over-year. Growth in local currencies amounted to 16% with managed services and systems integration growing the most. The demand for managed services is strong in the present economic environment and sales increased by 34% year-over-year.
EBITDA-margin in the quarter reached 17% (16%) as a result of continued efficiency gains. This excludes a capital gain of SEK 0.8 b. for the divested TEMS operation.
A groundbreaking 7-year services agreement has been made with Sprint in the US at a total value of USD 4.5 - 5 b. The contract includes the transfer of approximately 6,000 employees. The first major managed services contract in Africa was signed with Zain, Nigeria. Both contracts will commence during the third quarter and, as in previous large services contracts, there will be some transition and transformation costs which will impact margins. The agreement with 3 in Italy, signed 2005, has been renewed with a smaller scope which will impact sequential quarterly growth.
Including these contracts, the total number of subscribers in managed operations is now 350 million, of which 50% are in high-growth markets.
Multimedia sales increased by 23% year-over-year for comparable units, i.e. excluding the divested PBX operations and Ericsson Mobile Platforms. Revenue Management and multimedia brokering (IPX) continued to show good growth. EBITDA-margin in the quarter for comparable units was 17% (8%), reflecting a higher proportion of software license sales and positive effects from cost reduction activities. Margins may still vary between quarters.
Units shipped in the quarter were 13.8 million, a decrease of 43% year-over-year. Sales in the quarter were EUR 1,684 million, a decrease of 40% year-over-year. This was due to continued challenging market conditions in all regions, particularly in Latin American markets. Gross margin improved sequentially, despite lower volumes and sales, driven by a more favorable product mix and less significant write-off costs than the previous quarter.
Income before taxes for the quarter, excluding restructuring charges, was a loss of EUR 283 (19) million. The lower loss, compared to the previous quarter, was due to the better gross margin, as well as reduced operating expenses that are a result of the ongoing cost savings program. As of June 30, 2009, Sony Ericsson retained a good net cash position of EUR 965 million.
Ericsson's share in Sony Ericsson's income before tax was SEK -1.5 (0.0) b. in the quarter.
Net sales in the quarter were higher than normal seasonal patterns and showed an increase of 18.5% sequentially. This was mainly due to higher demand in China, driven by TD-SCDMA, and in the rest of Asia-Pacific as well as alignment of inventory to demand levels across the handset supply chain.
Adjusted operating loss in the quarter was USD -165 (-69) m. The USD 250 m. cost synergies program, defined by ST-NXP Wireless in the third quarter 2008, is expected to be completed by year-end, according to schedule. The new restructuring plan of USD 230 m. cost synergies, announced at the end of April, has been initiated and is expected to be completed by the second quarter 2010.
ST-Ericsson is reported in US-GAAP. Ericsson's share in ST-Ericsson's income before tax, adjusted to IFRS, was SEK -0.6 b. in the quarter, including restructuring charges of SEK 0.1 b. Ericsson Mobile Platforms incurred a loss of SEK 0.5 b. in January 2009, which is added to the result in segment ST-Ericsson.
Western Europe sales were up 4% year-over-year for comparable units, i.e. excluding Ericsson Mobile Platforms and the PBX operations. Italy and the Netherlands showed good growth while Spain remains weak. UK showed positive development driven by good growth in managed services.
In Central and Eastern Europe, Middle East and Africa, sales increased by 12% year-over-year but with significant variations between countries reflecting the economic development. Several countries in Eastern Europe are weak although Russia improved in the quarter. Egypt, Saudi Arabia and Turkey showed good development, while sales in Middle East overall was slightly down.
Asia Pacific sales increased 10% year-over-year. China remains strong and was Ericsson's largest market in the quarter. The ongoing nationwide 3G rollout is progressing well, with the first phase already completed. The activity in the Indian market remains high, even though sales were slightly lower year-over-year due to project phasing. Australia, Indonesia and Japan were also strong, while operators in Bangladesh and Pakistan have reduced investments dramatically due to tough local business conditions. Republic of Korea is another country signing up for LTE technology as part of a strategy to build an intelligent sustainable society.
Latin American sales were also affected by the economic slow-down and decreased by 3% year-over-year. Central America, Brazil and Mexico were weaker, while Chile and Argentina showed good growth.
North American sales increased by 34% year-over-year, driven by demand for mobile broadband and currency exchange rate effects. Ericsson signed its first network services deal in the region on July 9 with Sprint. Ericsson is now a strategic supplier to the four largest mobile operators in the US.
Growth rates are based on Ericsson and market estimates.
The global economic slowdown is affecting all parts of the society. However, we believe that the fundamentals for longer-term positive development for our industry remain solid. The need for telecommunication continues to grow and plays a vital role for the development of a sustainable and prosperous society. Ericsson is well positioned to drive and benefit from this development.
There is continued growth in mobile subscriptions, although the current growth rate is lower than in 2008. Mobile subscriptions grew by some 149 million in the quarter to a total of 4.3 billion. The number of new WCDMA subscriptions is accelerating and grew by 40 million in the quarter to a total of 377 million. In the first quarter, fixed broadband connections grew to 408 million, adding 13 million subscribers.
The traffic in the mobile networks is accelerating, which creates need for new and expanded mobile networks and corresponding professional services. GSM/WCDMA/LTE is the dominating technology track. WCDMA is growing strongly and currently surpasses GSM in deliveries. The build-out of telecommunications in emerging markets continues, and although they represent less than one third of global GDP they represent significantly more of the market for mobile network equipment.
Data traffic, as part of operator revenues, continues to increase. Mobile operators' data revenues have increased from 20% in the first quarter to some 25% of total revenues and in some markets mobile data is now more than 30% of total revenues. In addition to capacity enhancements, operators face the challenge of converting to all-IP broadband networks. This will include increased deployments of broadband access, routing and transmission equipment along with next-generation service delivery and revenue management systems.
There is continued strong growth in services, fueled by operators' desire to reduce operating expenses and improve efficiency in network operation and maintenance. The move toward all-IP and increased network complexity will create further demand for systems integration and consulting.
Parent company Information
Net sales for the six-month period amounted to SEK 0.3 (3.1) b. and income after financial items was SEK 5.2 (7.0) b. Effective January 1, 2009, the right to all license revenues from third parties related to patent licenses was transferred to Ericsson AB, a wholly owned subsidiary, and consequently net sales in 2009 will be insignificant compared to 2008. During the second quarter, the TEMS operations were sold with a capital gain of SEK 0.8 b.
Major changes in the Parent Company's financial position for the six-month period include investments of SEK 8.4 b. in the joint venture ST-Ericsson, decreased current and non-current receivables from subsidiaries of SEK 6.6 b., decreased other current receivables of SEK 3.5 b. and increased cash, bank and short-term investments of SEK 3.1 b. During the second quarter, the dividend payment of SEK 5.9 b. decided by the Annual General Meeting was made. Notes and bond loans increased by SEK 11.1 b. through new borrowings of EUR 0.6 b. and USD 0.6 b., while current maturities of long-term borrowings decreased by SEK 3.7 b. at repayment of a USD 0.5 b. loan. Other current liabilities decreased by SEK 6.0 b. As per June 30, 2009, cash, bank and short-term investments amounted to SEK 62.3 (59.2) b.
In the second quarter, as decided by the Annual General Meeting 2009, a stock issue and a subsequent stock repurchase of 27,000,000 shares was carried out related to Ericsson's Long-Term Variable Remuneration Program 2009 (LTV 2009). In accordance with the conditions of the Stock Purchase Plans and Option Plans for Ericsson employees, 1,577,990 shares from treasury stock were sold or distributed to employees during the second quarter. The holding of treasury stock at June 30, 2009, was 84,380,337 Class B shares.
New President and CEO appointed
On June 25, 2009, the Ericsson Board of Directors announced the appointment of Hans Vestberg as President and CEO as of January 1, 2010. Carl-Henric Svanberg has decided to leave as President and CEO of Ericsson and take on the position as Chairman of BP as of January 1, 2010. Svanberg remains as a member of the Ericsson Board of Directors.
Acquisition of Elcoteq's operations in Tallinn
On June 17, 2009, Ericsson announced the purchase of Elcoteq's manufacturing operation in Tallinn to secure manufacturing capacity. The purchase price was EUR 30 m., relating to inventory and some minor assets. The agreement includes transfer of about 1,200 employees.
Ericsson holds more than 95% of LHS shares
On July 3, 2009, Ericsson announced that it held shares representing more than 95% of the outstanding shares in LHS. Ericsson has informed LHS that it requests a squeeze-out resolution to be passed at next meeting of shareholders in LHS.
Increase in total number of votes
On June 30, 2009, Ericsson announced an increase in the number of votes caused by the Company having converted 27,000,000 newly issued Class C shares into Class B shares. This is in accordance with the resolution by the Annual General Meeting 2009 to expand the treasury stock as part of the financing of the long-term variable remuneration program. Shares held by the Company are not eligible for exercise of any voting rights.
Acquisition of systems integration company Bizitek in Turkey
On May 28, 2009, Ericsson announced that is has acquired all shares in Bizitek, the leading Turkish integrator of business support systems. All 116 employees will be transferred to Ericsson.
Assessment of risk environment
Ericsson's operational and financial risk factors and uncertainties are described under "Risk factors Assessment of risk environment" in our Annual Report 2008.
Risk factors and uncertainties in focus during the forthcoming six-month period for the Parent Company and the Ericsson Group include:
- potential negative effects of the continued uncertainty in the financial markets and the weak economic business environment on operators' willingness to invest in network development as well as uncertainty regarding the financial stability of suppliers, for example due to lack of borrowing facilities, or reduced consumer telecom spending, or increased pressure on us to provide financing;
- effects on gross margins and/or working capital of the product mix in the Networks segment between sales of software, upgrades and extensions and the proportion of new network build-outs and break-in contracts;
- a volatile sales pattern in the Multimedia segment or variability in our overall sales seasonality could make it more difficult to forecast future sales;
- results and capital needs of our two major joint ventures, Sony Ericsson and ST-Ericsson, which both are negatively affected to a larger extent than our three other segments by the current economic slowdown;
- effects of the ongoing industry consolidation among our customers as well as between our largest competitors, e.g. intensified price competition;
- changes in foreign exchange rates, in particular USD and EUR;
- 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 business 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 2008, where we describe our risks and uncertainties along with our strategies and tactics to mitigate the risk exposures or limit unfavorable outcomes.
The Board of Directors and the CEO certify that the financial report for the first six months gives a fair view of the performance of the business, position and profit or loss of the Company and the Group, and describes the principal risks and uncertainties that the Company and the companies in the Group face.
Auditors' review report
We have reviewed this report for the period January 1 to June 30, 2009, for Telefonaktiebolaget LM Ericsson (publ). The board of directors and the CEO are responsible for the preparation and presentation of this financial information in accordance with IAS 34 and the Annual Accounts Act. Our responsibility is to express a conclusion on this 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 SRS. 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 interim report is not prepared, in all material respects, in accordance with IAS 34 and the Swedish Annual Accounts Act regarding the Group and with the Swedish Annual Accounts Act regarding the Parent Company.
Disclosure Pursuant to the Swedish Securities Markets Act
Ericsson discloses the information provided herein pursuant to the Securities Markets Act. The information was submitted for publication at 07.30 CET, on July 24, 2009.
Safe Harbor Statement of Ericsson under the US 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) 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.