Good morning Jenna, et al. Ericsson news.
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Ericsson Interim Report Six Months Ended June 30, 1999
Business Wire - July 23, 1999 06:18
NEW YORK--(BUSINESS WIRE)--July 23, 1999--
- Mobile systems' growth over 40 percent.
- Strengthened leadership in third generation (3G) wireless systems
with key contracts and acquisitions.
- Consumer products down at breakeven profitability on 31 percent
volume increase. New mobile phones will have a positive impact on
income.
- New executive leadership for fast improvement of operational
performance.
- Ericsson forecasts the pretax profit for 1999 to be lower than in
1998. For the year 2000 Ericsson anticipates strong improvements
with a profit before taxes better than in 1998.
Net sales SEK 92,383 m. + 12 percent
Income before taxes SEK 4,258 m. - 44 percent
Income per share SEK 1.74 - 35 percent
Net sales by comparable units increased by 14 percent. The benefits of strong sales growth were offset by a drop in sales and profitability within Consumer Products, increased operating expenses for all segments, negative results associated with acquired units and a deteriorated financial net due to a negative cash flow.
Executive leadership
The negative trend of Ericsson's financial and operating performance has been of major concern to the Board of Directors. Consequently, a change of the executive leadership was implemented on July 7, 1999. Its primary charter is a fast improvement of the operational performance of the company. The immediate focus will be to secure a faster implementation of the restructuring program and to complete the transition to the new organization. Improved time to market of new products and competitive positioning will also be secured. The Board of Directors and the new executive leadership confirm and fully support the previously outlined strategy.
Income before taxes was SEK 4,258 million (7,571), which is 44 percent lower than the income in the first six months of 1998. This includes SEK 900 m of capital gains from sales of shares in Intracom. The reduction in income before taxes from last year is due to a SEK 2,600 m. lower operating margin within Consumer Products, restructuring costs of SEK 600 m., SEK 300 m. in negative results for acquired units and additional provisions of SEK 1,300 m. for market risks and customer financing. (Total provisions at the end of the period were almost SEK 13,200 m.)
Sales and Margins
Ericsson's net sales in the first six months of 1999 increased by 12 percent to SEK 92,383 m. (82,250). Second quarter sales were strong, up 16 percent over last year and 22 percent over the previous quarter. The largest business segment, Network Operators and Service Providers, increased sales by 22 percent to SEK 64,314 m. Enterprise Solutions increased sales by 10 percent to SEK 8,278 m. whereas sales for Consumer Products declined by 8 percent to SEK 20,064 m.
Sales in Europe, Middle East and Africa increased by 17 percent to SEK 48,995 m. Strong developments were reported in Turkey, Spain, France, Netherlands, Greece, Portugal and Ireland. Mobile system sales were strong and increased by more than 60 percent.
Asia Pacific reported flat sales during the first six months of SEK 19,815 m. Strong sales increases were however reported in Japan and Taiwan. New business activity in China has slowed down significantly during the period compared to a very strong first six months last year. The situation in China is a result of regulatory uncertainties and restructuring affecting operators. Mobile subscriber growth, however, continues to be very strong in China with well over one million new subscribers per month. Sales decreased also in Malaysia, Philippines, Singapore and Thailand.
Latin America sales of SEK 12,186 m. were at the same level as last year. Sales were lower in Chile, Argentina and Venezuela. Brazil, however, shows a very strong growth which, despite the devaluation, generated a growth of 20 percent when converted to SEK. Sales in Mexico were more than 30 percent higher than during the first six months of 1998.
North America had a very strong second quarter and sales for the six month period were SEK 11,387 m., up 41 percent over last year. Sales of mobile systems showed strong growth and new business continued to develop very favorably. With a 49 percent increase in sales, the US passed China and again became Ericsson's largest geographical market.
Total gross margin dropped by 1.5 percentage points mainly due to the price erosion for mobile phones. Gross margins within mobile and wireline systems remained stable.
Operating expenses increased by 25 percent compared with the first six months of 1998. Selling and administrative expenses increased by almost 30 percent, considerably faster than the sales growth also when adjusting for provisions for market risks and customer financing. The increase in operating expenses is mainly driven by costs for IT infrastructure, which is partly related to the process reengineering and installation of business support systems, as well as Y2K charges. This situation now has strong management attention and will be in focus for improvement during the coming quarters. Technical development expenses in new areas such as 3G mobile systems, datacom and mobile phones have also increased substantially.
Financial net for the first six months was SEK -675 m. (112). This is because financial assets and liabilities net is reduced by approximately SEK 20,000 m. from year-end due to unfavorable cash flow. Cash is reduced by SEK 6,000 m. and liabilities are increased by SEK 15,000 m., of which further utilization of the increased Medium Term Note program was SEK 11,000 m.
Net capital gains of SEK 754 m. include the results for sales of shares in Intracom, AU-System and Ericsson Vertriebs GmbH plus an additional loss related to the divestiture of Cosir.
Net foreign currency exchange rate effect on income is positive with approximately SEK 700 m. (100). The devaluation of the Brazilian currency is the main driver of a negative translation effect in equity of approximately SEK -1,500 m.
Income per share after full conversion decreased by 35 percent to SEK 1.74 (2.66). The lower tax rate reflects low taxes on this period's capital gains.
Cash flow before financing activities was SEK -18,654 m. This is due to investing activities of SEK -8,200 m., customer financing of SEK -3,500 m., and poor performance regarding working capital relating primarily to receivables and inventories of SEK -8,000 m.
Investments in tangible fixed assets were SEK 3,599 m. (3,414) of which SEK1,310 m. (1,648) in Sweden. Net investment in acquisitions were SEK 4,483 m.
Employee headcount at the end of the period was 102,378 (103,667 December 31, 1998) including additions from acquired companies of 2,128. Reductions from the restructuring program were 1,837.
BUSINESS SEGMENTS
Segment share of sales
Consumer products 20%
Other operations 7%
Enterprise solutions 8%
Network Operators/
Other 18%
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