Ericsson
Interim Report six months ended September 30, 1998
Ericsson reports increased net sales and a continuing good development of
income during the first nine months of 1998. The financial crisis in certain
markets and the related general economic uncertainty made itself increasingly
manifest, which emphasizes the need for reinforced rationalization efforts.
Market successes for Mobile Systems continue.
Net sales SEK 125,396 m + 11 percent
Income before taxes SEK 12,097 m + 17 percent
Income per share SEK 4.25 + 18 percent
During the nine-month period under review, consolidated net sales rose 11
percent compared to the corresponding period last year, and amounted to SEK
125,396 m.
Income before taxes, amounting to SEK 12,097 m, was up 17 percent compared to
the same period in 1997. Ericsson profitability was strengthened through
improved margins as a result of continued success with mobile systems. Foreign
exchange earnings of SEK 400 m contributed to income. Income per share
amounted to SEK 4.25 (3.60).
China, as the biggest single Ericsson market, grew even more dominant,
followed by the United States, the United Kingdom, Brazil and Italy. Sales in
Asia rose 9 percent. Excepting China, sales in Asia declined 29 percent,
however. Latin America saw sales increase by 29 percent, and Europe (excluding
Sweden) grew 15 percent, while sales in North America declined 7 percent.
Selling expenses rose during the year, mainly due to business process
reengineering and marketing programs in the Mobile Phones and Terminals
business area. As a percentage of sales, however, selling expenses dropped
from 13.8 percent during the first quarter to 13.2 percent for the first nine
months of the year. The trend is expected to continue during the fourth
quarter.
Disregarding the acquisition of the bulk of Ericsson minority holdings in its
Brazilian subsidiary, the third-quarter cash flow was positive. Positive cash
flow for the whole year is expected, with the exception of investments in
American and Brazilian subsidiaries' minority holdings, as well as the
acquisition of the U.S.-based computer firm, Advanced Computer Communications
Inc. (ACC).
The equity ratio was 38.6 percent (38.4 percent).
The number of employees at the end of the period was 104,001, an increase of
3,227 since December, 1997 (1,419 of which due to the consolidation of MET in
France).
Consolidated investments in property, plant and equipment were SEK 5,048 m
(4,559). During the period, Ericsson made a bid for the out-standing shares in
its listed Brazilian subsidiary, Ericsson S.A., bringing Ericsson
participation to 97.5 percent. The agreed acquisition of ACC will be
implemented during the fourth quarter.
Business areas
Mobile Systems continued to show strong growth, with sales increasing by 19
percent. Important contracts were signed in Argentina, Brazil, Italy, Mexico
and Spain, and several new solutions to wireless Internet and data
communications were introduced during the period. The number of mobile
subscriptions to digital networks is growing rapidly. Several network
operators introduced advantageous rates to encourage usage, resulting in a
rise in minutes usage on mobile networks. Strong global support for a third
generation standard for mobile telephony, based on WCDMA technology, marks a
major success for Ericsson. The business area is reporting a very strong
operating income.
Net sales of Infocom Systems increased by 2 percent. However, weak development
in certain Asian and Latin American markets, as well as for the Italian
network construction company, Cosir, contributed to hampering the rate of
sales increase. The divestment of Cosir has not been made due to weakening
market conditions. Previously reported delivery problems for the new AXE
switching systems were essentially remedied, but nonetheless affected sales
for the business area during the third quarter.
Earnings of the business area are still unsatisfactory. The lower growth rate
in sales, combined with adjustments for reduced demand at Cosir and delays in
the restructuring program in the Public Networks business unit, mean that the
objective of achieving acceptable earnings will not be reached until during
next year.
Mobile Telephones and Terminals showed an increase of 11 percent in sales and
a strong operating income. The business area shows continued strong volume
growth, with an increase of more than 50 percent. Total Ericsson market share
was well defended. Nevertheless, price pressure has continued and is expected
to result in a 25-30 percent price reduction in Ericsson's product portfolio
on an annual basis. Customer interest in prepaid services caused a rise in
demand for entry-level mobile phones. Price competition in this segment is
particularly severe, which influenced sales during the period. This trend was
particularly evident in Europe. The U.S. market has seen a positive
development. Ericsson has during the period launched a number of new models.
Other operations (including energy systems, components, cable and defense
electronics) reported an overall sales increase of 12 percent for the period
under review.
Stockholm, October 22, 1998
Sven-Christer Nilsson
(This report is unaudited)
CHIEF EXECUTIVE OFFICER'S COMMENTS
Income before taxes at Ericsson rose 17 percent to SEK 12,097 m during the
first nine months of this year. Gross margins also showed further improvement
during the period. The growth in income and improved margins were primarily
due to favorable developments in the Mobile Systems business area.
In the shorter perspective, concern about the global economy and stock market
turbulence continued during the period. On the whole, we have benefited from
the broad geographical spread of our operations, which reduces exposure to the
problems afflicting individual national economies. Notwithstanding, economic
developments have caused reduced sales compared to historic growth rates.
Lower global demand is expected in the near term. For our part, this
highlights the importance of continuing ongoing rationalization efforts. Our
new organization creates important synergies that will be fully leveraged.
Lower global demand is cause for additional cost reductions.
Economic uncertainty in Asia has continued. The situation in the Russian
economy has worsened, and increasing uncertainty regarding certain Latin
American economies also became apparent during the period.
At Ericsson, we have concluded that overall development in Asia continued to
yield growth for our operations. We are still experiencing strong growth in
China. Other economies in Asia that demonstrate good growth with positive
impact on our sales include Singapore, Taiwan and India.
The serious state of the Russian economy has had very marginal influence on
Ericsson's results. Sales in Russia represent only about 1 percent of total
sales.
During the period, Ericsson purchased the majority of outstanding shares in
our listed Brazilian subsidiary. The purchase reflects our positive assessment
of the Brazilian telecommunications market. With more than 100 years of
presence in Brazil, Ericsson enjoys a strong position in fixed and mobile
telephony. Continued success in the Brazilian market, particularly in the
third quarter, means that Ericsson's market share of mobile systems now
exceeds 50 percent.
In early October, Ericsson announced a new strategic direction and a new
organization that will secure growth as well as a leading role in the new
telecoms world taking shape in coming years. This new direction is the result
of a comprehensive review of Ericsson technology, strategy and organization
that was launched last spring. Implementation is now underway across the
world.
In terms of strategy, Ericsson aims at occupying a leading position in the
growing market for wireless communications and Internet-based technologies.
The strategy will fundamentally affect Ericsson as well as the entire
industry.
The new strategy also means that Ericsson capitalizes on its strengths @
telecommunications know-how including highly accessible and reliable networks,
coupled with world-leading skills in wireless communications. Third-generation
mobile systems based on WCDMA technology, in which Ericsson enjoys a leading
position, will play a key role in the development of the new telecoms world.
Earlier this year, Ericsson became the first company to launch the new packet-
linked GPRS (General Packet Radio Service) technology, which improves GSM
network capacity to handle data services. Another new development is EDGE,
which further speeds up data transmissions, giving network operators today the
opportunity to offer services with third-generation characteristics.
GPRS, EDGE and WCDMA all represent potential avenues for further joint
development of existing D-AMPS and GSM networks toward third-generation mobile
services.
The coming years will be dominated by convergence between data and
telecommunications, and where demands for mobility will characterize
development.
At a press conference on October 12, we announced that our goal is to long
term exceed market growth. Ericsson will achieve this objective by capturing
strong positions in the new growth markets within our customer segments. Such
new-growth markets include wireless data and voice communications within all
three customer segments: network operators and service providers, enterprises,
and consumers. The strategy allows us to defend our world-leading position in
mobile telephony, while simultaneously establishing the same position in the
emerging market for mobile data communications.
Our position in data communications will be secured by our own development
efforts and by acquisition of small and medium-sized companies with
complementary cutting-edge technologies. In the third quarter, one such
strategic acquisition was negotiated regarding California-based ACC, one of
the leading suppliers of remote-access products. This acquisition gives
Ericsson additional strategic competence in the Internet protocol sphere.
Our strategic intent is supported by continued forceful investments in
research and development. Our R&D resources will focus on the growth segments
emphasized in the strategy.
The Mobile Systems business area has experienced strong growth in sales as
well as income. During the third quarter, considerable sales successes were
achieved, especially in Argentina, Brazil, Italy, Mexico and Spain.
China remains the largest market for Mobile Systems, followed by the United
States and the United Kingdom. During the period, Telecom Italia Mobile,
Europe's biggest mobile operator, ordered a WCDMA test system. In addition,
Ericsson recently announced a three-year agreement with Wind, the third
largest Italian mobile operator. Ericsson will be the main supplier of both
fixed-line and mobile networks to Wind. The agreement comprises turnkey
solutions for dual-band GSM 900/1800 networks, as well as fixed networks @
both based on AXE architecture. Ericsson will also provide an IN (Intelligent
Network) solution, enabling Wind to offer customers with coordinated fixed and
mobile services, such as the use of a common mailbox for voice mail.
Ericsson has also signed contracts with Retevisión Móvil, Spain's third-
ranking mobile operator, involving the major part of the nationwide GSM 1800
network. As a result of this contract, Ericsson is now a provider to all three
GSM operators in the Spanish market, and has strengthened its position as
leading supplier.
Ericsson has received word that the United States Patent and Trademark Office
has validated a total of 36 new and amended claims in one of Ericsson's key
patents on 'soft handoff', an Ericsson invention that is essential to the
practice of U.S. wireless telecommunications standard IS-95.
Over the past three months the U.S. Patent Office has allowed three such
Ericsson patents. The successful reissue of these three patents confirms that
Ericsson is the true inventor of the 'soft handoff' and 'macrodiversity'
concepts that are fundamental to
IS-95.
The Infocom Systems business area vigorously continues its restructuring. This
work will be pursued and reinforced in the new organization, creating
conditions for increased and sustainable efficiency.
In the third quarter, Ericsson won a strategic contract in China against tough
competition from other datacom suppliers. The contract covers delivery of the
ATM system AXD 301, which will provide the basis for one of the largest ATM-
based networks in China to date.
The market for the Mobile Phones and Terminals business area is characterized
by shorter product cycles, to which we are adapting. Toward the end of the
period, several new models of mobile phones were launched. In September,
Ericsson introduced a mobile phone that offers international travelers the
opportunity to communicate using one and the same phone in more than 120
countries @ in Europe, Africa, Asia Pacific and America. This new mobile
phone, I 888 World, featuring a dual-band GSM 900/1900 frequency function, is
indeed truly global.
Thanks to an infrared modem built into the I 888 World, travelers can
communicate effortlessly with their stationary or portable PCs or hand-held
devices. The function facilitates checking e-mail, surfing the Internet, or
logging into a company network without having to carry cables, or to search
for a suitable telephone outlet.
In September, Ericsson also introduced model S 868, a new mobile phone with
advanced dual-band functions. Because the S 868 is compatible with both GSM
900 and GSM 1800 networks, it facilitates international usage while reducing
the incidence of lost connections.
The business area also reports rising selling expenses, due to increased
market activities as well as the implementation of a global business support
system, which will increase efficiency, and should be viewed as an investment
for the future.
The new organization, based on customer segments, will be fully implemented by
year end, and will replace the present division into business areas. A
proforma account of the new segments will be presented in conjunction with the
1998 Report.
FOR FURTHER INFORMATION, PLEASE CONTACT
Lars A. Stålberg, Senior Vice President, Corporate Relations
Phone: +46 8 719 3162 or +46 70 555 6066
E-mail: lars.stalberg@lme.ericsson.se
Johan Fant, Senior Vice President
Corporate Financial Control
Phone: +46 8 719 3707 or +46 70 540 4011
E-mail: johan.fant@lme.ericsson.se
Pia Gideon, Manager, External Relations
Phone: +46 8 719 2864 or +46 70 519 2864
E-mail: pia.gideon@lme.ericsson.se
Karin Almqvist Liwendahl, Director, Investor Relations
Phone: +46 8 719 5340 or +46 70 590 5340
E-mail: karin.almqvist.liwendahl@lme.ericsson.se
CONSOLIDATED (unaudited
INCOME STATEMENT )
July-Sep July-Sep Changes Jan-Sep Jan-Sep Changes
SEK millions 1998 1997 in % 1998 1997 in %
Net sales 43,146 40,407 7 125,396 112,617 11
Cost of sales -24,301 -23,832 2 -71,173 -65,789 8
Gross margin 18,845 16,575 14 54,223 46,828 16
Research and
development and
other technical -6,803 -5,798 17 -19,645 -17,196 14
expenses
Selling -5,422 -4,720 15 -16,508 -13,867 19
expenses
Administrative -2,114 -1,645 29 -5,882 -5,193 13
expenses
Other operating 129 186 -31 507 671 -24
*)
revenues
Share in earnings 45 71 -37 108 339 -68
of associated
companies
Operating 4,680 4,669 0 12,803 11,582 11
income
Financial 688 394 75 1,794 1,210 48
income
Financial -676 -331 104 -1,670 -1,263 32
expenses
Income after 4,692 4,732 -1 12,927 11,529 12
financial items
Minority interest -166 -502 -67 -830 -1,204 -31
in income before
taxes
Income before 4,526 4,230 7 12,097 10,325 17
taxes
Taxes -1,416 -1,317 8 -3,801 -3,264 16
Net 3,110 2,913 7 8,296 7,061 17
income
*)
Including 6 - 15 92 - 36
capital
gains/losses net
CONSOLIDATED BALANCE SHEET
Sep 30 Dec 31 Sep 30
SEK millions 1998 1997 1997
Intangible 4,039 748 780
assets
Tangible assets 20,033 19,225 18,126
Equity in associated companies and 3,757 4,077 4,234
other investments
Long-term customer 4,038 2,000 2,161
financing
Other fixed 3,333 3,365 4,003
assets
Total fixed 35,200 29,415 29,304
assets
Invento 27,475 23,614 25,054
ries
Accounts 49,033 46,151 41,173
receivable -
trade
Other 21,412 19,133 15,584
receivables
Cash, bank and short-term cash 21,494 29,127 20,431
investments
Total current 119,414 118,025 102,242
assets
Total 154,614 147,440 131,546
assets
Stockholders' 57,593 52,624 46,471
equity
Minority 2,075 4,395 4,067
interest in
equity
Convertible 6,180 6,034 855
debentures
Interest bearing provisions 20,364 17,112 19,092
and liabilities
Non-interest bearing provisions 68,402 67,275 61,061
and liabilities
Total stockholders' equity, 154,614 147,440 131,546
provisions and liabilities
TREND OF OPERATIONS IN
BRIEF
Jan-Sep Jan-Sep Changes
SEK millions 1998 1997 in %
Net 125,396 112,617 11
sales
Income before 12,097 10,325 17
taxes
Net 8,296 7,061 17
income
Average number of shares 1,997 1,971 1
outstanding, million
Income per 4.25 3.60 18
share, SEK
Equity ratio 38.6 38.4
(percent)
Additions to tangible fixed 5,048 4,559 11
assets
Depreci 4,067 3,872 5
ation
Number of employees, end of 104,001 99,113 5
period
SALES BY BUSINESS
AREA
July-Sep July-Sep Changes Jan-Sep Jan-Sep Changes
SEK 1998 1997 in % 1998 1997 in %
millions
Mobile Systems 19,958 17,200 16 56,084 47,300 19
Infocom Systems 10,951 11,218 -2 33,291 32,688 2
Mobile Phones and 10,822 11,000 -2 32,701 29,387 11
Terminals
Other 4,557 3,862 18 13,149 11,741 12
operations
Less: -3,142 -2,873 9 -9,829 -8,499 16
Intersegment
sales
Total 43,146 40,407 7 125,396 112,617 11
SALES BY
GEOGRAPHIC AREA
July-Sep July-Sep Changes Jan-Sep Jan-Sep Changes
SEK 1998 1997 in % 1998 1997 in %
millions
Sweden 2,100 2,002 5 6,539 6,246 5
Europe (excl. 18,062 16,402 10 51,326 44,666 15
Sweden)
USA and Canada 4,308 4,619 -7 12,382 13,329 -7
Latin 5,039 5,488 -8 17,387 13,478 29
America
Africa 795 540 47 2,387 1,724 38
The Middle East 2,366 1,256 88 4,890 3,314 48
Asia 9,600 8,422 14 27,151 24,965 9
Oceania 876 1,678 -48 3,334 4,895 -32
Total* 43,146 40,407 7 125,396 112,617 11
* Of 17,152 15,409 11 48,552 43,490 12
which EU
Closing exchange
rate SEK/USD =
7.8605
|
