Global News

June 11, 2003
Ericsson determined to hit profitability this year

SWEDEN -- Ericsson has taken substantial actions to increase its competitiveness in an increasingly challenging global telecom market. As per its Q1 summary, net sales dipped 30 percent. Gross margin rose slightly despite falling volumes, as a result of lower component prices, better capacity utilisation and other cost reductions. Operating expense reductions were on plan reaching a run rate of SEK 47bn. Cash flow before financing was positive with reductions in working capital. The firm has a payment readiness of SEK 66bn.

Commenting on the outlook for 2003, Carl-Henric Svanberg, president and CEO, Ericsson, said: "We expect to maintain our shares of the mobile systems and professional services markets this year. However, our total sales reported in SEK will decline more than the total market, mainly due to foreign exchange effects. Divestments and closure of certain businesses as part of our restructuring activities also continue to affect our sales. Previously, we indicated that we planned to return to profit at some time during 2003. This plan did not include additional restructuring measures. Excluding the additional charges for restructuring announced today we remain determined to return to profit during 2003. We are increasingly confident in our cost reduction activities. For the second quarter, we believe sales will be up slightly on a sequential basis.

"I am positively surprised by the spirit and strong commitment among our employees given our challenging situation and ongoing restructuring. Despite the near-term uncertainties, the longer-term market opportunities are obvious and I am convinced that the convenience of mobility and the benefits of 3G will continue to attract new customers and increase usage. However, our ambition as the industry leader is to create a strong and profitable company, irrespective of market fluctuations."

Table I
Ericsson: Financial performance Q1
Q1 Q4
SEK bn 2003 2002 Change 2002 Change
Orders booked, net 27.1 41.9 -35% 30.7 -12%
Net sales 25.9 37.0 -30% 36.7 -30%
Adj gross margin (%) 34.1 31.7 - 32.6 -
Adj oprtg. income -3.4 -4.4 - -2.3 -
Adjusted income after
financial items -3.5 -5.2 - -2.1 -
Net income -4.3 -3.0 - -8.3 -
Earnings per share -0.27 -0.27 - -0.58 -
Cash flow before
financing activities 0.7 -4.1 - 1.6 -
Opex run rate, annualized 47 68 -31% 51 -8%
Number of employees` 60,940 82,012 -26% 64,621 -6%

He further added: "We remain determined to return to profit during 2003 excluding additional charges for the further restructuring. Although Q1 sales are likely to be the low point this year, I want us to be able to generate profit even if sales remain at current levels. We are, therefore, implementing further operating expense reductions of SEK 5bn and additional cost of sales reductions of SEK 8bn. The additional SEK 11bn restructuring charges have a relatively quick pay back and we have sufficient liquidity to carry us through. The ongoing restructuring actions, including announced outsourcing projects, would have brought the headcount down to 54,000 during this year. With the additional actions, headcount will approach 47,000 next year."

Decline in YoY systems bookings
Orders and sales for network equipment and professional services have been reported separately. As before, network equipment, including network rollout services will be subdivided into mobile networks and
fixed networks.
Q1 Q4
SEK b. 2003 2002 Change 2002 Change
Orders booked 25.0 37.7 -34% 28.5 -12%
Mobile networks 17.5 29.3 -40% 20.9 -16%
Fixed networks 2.0 2.7 -26% 1.9 4%
Professional Services 5.5 5.7 -2% 5.7 -3%
Net sales 24.0 33.3 -28% 33.2 -28%
Mobile networks 17.6 25.6 -31% 24.7 -28%
Fixed networks 1.9 3.3 -42% 3.0 -38%
Professional Services 4.4 4.5 -1% 5.5 -20%
Adjusted operating
Income -2.1 -2.8 - -0.3 -
Adjusted operating
margin (percent) -9 -8 - -1 -

The decline in orders booked YoY for systems is mainly attributable to lower network equipment demand as operators continue to limit capital expenditures. The 34 percent decline includes ten percentage points due to negative effects of currency exchange rate changes and seven-percentage points due to lower equipment orders for TDMA/PDC. Orders for the GSM/W-CDMA track declined 28 percent. However,
professional services were up adjusting for foreign currency effects.

Orders for GSM/W-CDMA were down 10 percent sequentially while other mobile equipment, including CDMA, were down even further. Orders for professional services were down 3 percent sequentially, mainly due to seasonal effects.

Orders in Latin America improved sequentially, mainly due to orders for GSM and EDGE equipment in Brazil. Demand in the US and China was weak with most other areas of Asia holding up relatively well. The Europe, the Middle East and Africa (EMEA) region was generally weak with the exception of the UK and Spain.

Of the 28 percent YoY decline in systems sales, seven-percentage points were related to negative currency exchange rate effects. Sales of the GSM/W-CDMA track declined 12 percent, less than the mobile systems
market overall. TDMA/PDC declined almost 90 percent. Sales of TDMA/PDC now represent less than 5 percent of systems sales. Sales of W-CDMA equipment and associated network rollout services represented 12 percent of mobile network sales.

Although system sales were almost SEK 10bn, the losses were reduced by SEK 0.7bn to an adjusted operating income of SEK -2.1bn. Excluding risk provisions for customer financing of SEK 0.1bn (0.6bn) the result was SEK -2bn (-2.2bn). The sequential decline before customer financing provisions was SEK 2.4bn, mainly due to the SEK 9.2bn lower sales.

Market view
Touching on the growth of mobile users worldwide, Svanberg noted that it will likely exceed 1.5bn within three years. Ericsson estimated between 165 and 180 million net additions this year, of which 44 million were likely during Q1. It sold around 98 million mobile phones during Q1, and the volume is likely to increase 10 percent.

He added that the effects of weakening macroeconomic environment on mobile operator investment plans for network infrastructure were unclear. Mobile operators continued to reduce capital expenditures implicating a continuing, weak demand for systems. As a result of the uncertainty in the macroeconomic environment, many operators reduced their capital expenditure. This implied an over 10 percent decline in the mobile systems market this year.

Box Item
Ericsson Q1 summary
· Net sales down 30 percent to SEK 25.9bn -- GSM/W-CDMA track down 12 percent;
· Net income SEK -4.3 bn;
· EPS SEK -0.27;
· Cash flow before financing SEK 0.7bn -- maintaining good liquidity;
· W-CDMA 12 percent of mobile network sales, five Ericsson networks launched; and
· Restructuring program well on plan -- additional opportunities identified and in progress.