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Margins improve in second quarter for Swedish vendor.

Ericsson Reports Q2

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7/18/2014
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STOCKHOLM -- ERICSSON SECOND QUARTER HIGHLIGHTS

-- Sales in the quarter were SEK 54.8 (55.3) b. Sales for comparable units, adjusted for currency, decreased -1% YoY and increased 13% QoQ
-- Sales recovered compared to the previous quarter driven by growth in the Middle East, China and India, as well as continued capacity business in North America
-- Gross margin increased YoY to 36.4% (32.4%), driven by strong development in capacity business, increased IPR revenues and lower restructuring charges
-- With current visibility, key contracts awarded will gradually impact sales and business mix, in the second half of the year
-- Operating margin improved YoY to 7.3% (4.5%), mainly driven by stronger performance in segment Networks
-- Operating income amounted to SEK 4.0 (2.5) b.
-- Cash flow from operating activities was SEK 2.1 (4.3) b.

Comments from Hans Vestberg, President and CEO of Ericsson (NASDAQ:ERIC):
Sales for comparable units, adjusted for currency, recovered compared to the previous quarter and were down by -1% year-over-year. Operating margin improved year-over-year, mainly driven by stronger performance in segment Networks.

Sales in the quarter year-over-year were driven by growth in the Middle East, China and India, as well as continued capacity business in North America. This was offset by, as previously communicated, lower revenues from two large mobile broadband coverage projects in North America that peaked in the first half of 2013, and reduced activity in Japan.

The operating margin improved year-over-year, especially in segment Networks. This was due to a higher gross margin primarily from improved business mix with an increased share of mobile broadband capacity projects in advanced LTE markets, as well as higher recurring IPR revenues and efficiency improvements.

After a slow start of the year, we are executing on previously awarded 4G/LTE contracts in Mainland China and Taiwan. Furthermore, the investment climate in India is improving following the concluded spectrum auctions and government elections held in May.

Political unrest prevails in parts of the Middle East and Africa and is still impacting sales. There is also a continued political uncertainty in Russia and the Ukraine, but this had no negative impact on sales in the quarter.

As previously stated and with current visibility, key contracts awarded will gradually impact sales and business mix in the second half of the year.

In line with our strategic agenda, we have continued investing into new and targeted areas. The addition of the modems and Mediaroom businesses, as well as increased investments in IP, have resulted in increased R&D spending. At the same time, we continue to execute on profit improvement activities.

Our modems business will start generating sales by the end of this year, as our modem M7450 will be featured in smartphones and data devices. During the first half of 2014, we have invested SEK 1.2 b. primarily in R&D and we have a strong technology platform. However, the performance of the business is linked to our customers' success. As previously communicated, success will be measured in an 18-24 months timeframe after integration of the modems business, which was completed in August 2013.

Support Solutions showed negative result in the quarter due to lower sales related to legacy portfolio. However, the transition from traditional telecom software license business models to recurrent license revenue deals continues.

Operating cash flow was positive in the quarter driven mainly by improved income and maintained working capital days. The execution of the company-wide order-to-cash initiative continues and shows good progress.

In a transforming ICT market, we continue to evolve through investments in both our core business as well as in new and targeted areas. Through our technology and services leadership we are well positioned to continue to be a strategic partner to our customers as they move to capture new market opportunities.

Ericsson AB (Nasdaq: ERIC)

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