Ericsson Posts $380M 2Q Loss

Intensified cost reductions lower operating expenses.

Table 1: Ericsson Q2 Interim Report, July 19, 2002

CEO COMMENTS
"We continue to plan our operations to return to profit at some pointin 2003. In light of our lowered market expectations for this year,we have intensified the cost reductions that we started last year andare substantially ahead of schedule," says Kurt Hellström, Presidentand CEO of Ericsson.

"We will continue reducing our costs until we can breakeven at saleslevels around SEK 120 b. By the end of next year, we believe we willhave a low enough cost base to return to profit. Our strategy is tofocus on the two main systems tracks - GSM/WCDMA and CDMA/CDMA2000 -and the promising market for services. During the quarter, we won twomore significant service contracts for network management services.

Although Sony Ericsson reports a loss for the quarter, we believe inthe potential of this joint venture.

We have made significant progress toward the successful execution ofour rights offering as Investor, Industrivärden and several otherinvestors have committed to subscribe for a total of up to SEK 10 b.Further, a group of banks has agreed to underwrite the remaining SEK20 b. As a result of these developments, the entire SEK 30 b. isfully underwritten.

With intensified cost reductions, a stronger balance sheet and apremier customer base, we are confident that we have the rightstrategy to restore profitability and reinforce our leadership inthis long-term growth industry," says Kurt Hellström.

MARKET VIEW
We are convinced that global telecommunications, particularlywireless communication, is a long-term growth market.

Though strong subscriber growth continues, the demand for mobilesystems and phones is expected to remain weak at least well into nextyear. Many operators are facing increasingly adverse fundingconditions due to lowered credit ratings and pressure from thecapital markets to improve cash flow and reduce debt levels. As aresult, they are minimizing phone subsidies and limiting networkexpansion, which negatively affects replacement rates and quality ofservice.

Based on our preliminary estimates, approximately 45 million newsubscribers were added worldwide during the second quarter. At thisrate, we expect net subscriber additions this year to be at the lowerend of our forecast of 175 to 215 - still in line with our long-termforecast of 1.8 billion subscribers by 2007.

In our first quarter report, we indicated that the market for mobilesystems could decline by more than 10% this year. Our judgment ofoperators' investment plans imply that the market will decline bymore than 15% this year. This is also reflected by our order andsales development during the quarter.

With a slow replacement rate, we believe the number of mobile phonessold during the quarter was approximately the same as in the firstquarter at 85 million. We now expect the mobile phone market to beflat to down slightly compared to last year's 390 million units. Wehad previously estimated the market to be 400-420 million this year.

Our overall view of the wireline systems market for 2002 remainsunchanged with an anticipated decline of more than 20%. However, wenow expect the market for traditional circuit-switching equipment toshrink even more than the previously estimated 40%.

Cost reductions and operational realignment
During 2001, we initiated a company-wide cost reduction program,which was intensified earlier this year and is now ahead of schedule.

We continue to adapt the company to the current market situation.Cost reduction measures under our Efficiency Program were fullyimplemented by the first quarter 2002 which resulted in savings ofSEK 20 b. on an annualized basis. Cost reduction measures targeting afurther SEK 20 b. of annual savings are planned for implementation bythe first quarter 2003. Additional measures generating SEK 10 b. ofannual savings are planned for implementation by the third quarter2003. By the end of 2003, we expect to have an operating expense runrate that would enable us to break-even at annualized sales levels ofaround SEK 120 b., although our goal is to return to profit at sometime next year.

The total restructuring cost for 2002 and 2003, for actions to reduceoperating expenses and cost of sales, is estimated to be SEK 17.5 b.of which the intensification of the initiatives represents anincrease of SEK 7.0 b.

Rights offering
Based on the authorization granted by the extraordinary meeting ofshareholders on June 6, 2002, the board of Ericsson has now set theterms of the rights offering. One share of series A or series B ofEricsson, held as of the record date of August 13, 2002, carries theright to subscribe for one new share of series B. The subscriptionprice is SEK 3.80 per share. Equivalent terms are offered to holdersof the Nasdaq-traded ADSs. The offering will raise approximately SEK30 billion, before expenses.

Due to the current negative sentiment in stock markets in general andthe telecom industry in particular, and in order to ensure thesuccess of the rights issue, the Board of Ericsson has decided tohave the rights issue fully underwritten.

Industrivärden and Investor, representing 7.4 percent of the sharecapital and 66.7 percent of the votes, have together undertaken tosubscribe for SEK 8 billion of the rights issue. In addition, Alecta,Skandia Life, Second National Pension Fund and Third National PensionFund, representing approximately 7.0 percent of eligible shares haveundertaken to subscribe for their respective rights in the issue,corresponding to slightly more than an aggregate of SEK 2 billion.

The remaining SEK 20 billion is underwritten by a consortium of banksconsisting of Morgan Stanley, SEB/Enskilda Securities, Goldman SachsInternational, Handelsbanken Securities and Schroder Salomon SmithBarney.

The timetable and other details of the rights offering are describedin a separate press release.

The company will use the proceeds from the offering for repayment ofdebt and to fund the intensified restructuring activities, afterwhich payment readiness and equity ratio is expected to be at leastas strong as today.

OPERATIONAL AND FINANCIAL REVIEW
In addition to the primary format, financial statements are alsoreported in a pro forma format. The primary format is based onSwedish GAAP (please see section Accounting Principles), and theprevious year is restated for consolidation of finance companiespreviously accounted for according to the equity method. The proforma format is presented to facilitate comparability between yearsand portrays results of operations as if capitalization ofdevelopment costs was made on a continuous basis, and with results ofoperations transferred to Sony Ericsson October 1, 2001, reported in"Share in earnings of Associated companies and JVs." Comments belowrefer to pro forma statements unless otherwise indicated.

Systems
Orders booked declined by 17% and sales increased 4% compared to thefirst quarter 2002. Compared to the second quarter last year, ordersdeclined 39% and sales 32%.

Sales of systems integration, network operations outsourcing andadvisory services now account for 14% of Systems sales and grew bymore than 15% compared to the second quarter last year.

Mobile Systems
Sales in the GSM/WCDMA track declined 13%, compared to the secondquarter last year, maintaining our leading market position.

Sales in the U.S. were up by almost 50% from the first quarter,reflecting the transition from TDMA to GSM/GPRS. In Japan, J-Phonecompleted a soft-launch of an Ericsson WCDMA network on-schedule andis aiming for commercial launch in December 2002. A growing number ofcustomers have launched MMS services in Europe and Asia. We have wonover 30 commercial agreements and more than 90 MMS trials areunderway.

Multi-Service Networks
Orders and sales continued to decline, primarily driven by weaknessin the traditional circuit-switching equipment market in both LatinAmerica and Western Europe. The decline compared to second quarterlast year is around 60% for both orders and sales. Our new businessunit structure will reduce our exposure to the circuit-switchingbusiness while still supporting our customers' migration to nextgeneration packet switching.

Phones
Our 50% share of income from Sony Ericsson Mobile Communications isincluded in "Earnings from Joint Ventures and Associated Companies."The retained activities, including technology licensing and phonemanufacturing in China, are reported as part of "Other Operations."

Sony Ericsson Mobile Communications (SEMC)
A high average selling price (ASP) was maintained with sales of SEK8.8 b. and 5.0 million phones sold. However, the joint venturereported a loss of SEK 0.8 b., due to lower volumes, some productdelays and increased marketing costs from the introduction of newproducts as well as branding activities.

Other Operations
Orders for Other Operations were flat, compared to both the firstquarter 2002 and the second quarter 2001. Sales increased slightlysequentially but were down 20% compared to the same period last yearwith reductions in all areas but Defense systems. The operatingmargin was -16%, largely driven by unfavorable sales volumes forMicroelectronics, Network Technology and Enterprise systems.

Our mobile phone platform business continues to develop with sixlicensing agreements so far. However, Mobile Platforms and Bluetoothare still below break-even as we continue to invest in these newbusinesses.

Restructuring activities continue in cables and enterprise systemsand we have signed an agreement with Infineon for the sale of a largepart of the Microelectronics operations.

CONSOLIDATED ACCOUNTS
Income
The gross margin improved during the quarter to 33%, partly relatedto reduced excess capacity costs.

Operating expenses excluding restructuring charges were 28% lowerthan second quarter last year and SEK 2.1 b. lower than in the firstquarter this year, which reflects continued good progress in our costsavings activities.

SEK 1.5 b. of restructuring costs net were charged to income in thesecond quarter. For the ongoing cost reductions, SEK 0.4 b. werecharged to cost of sales, and SEK 1.3 b. to operating expenses. A netpositive amount of SEK 0.2 b. was related to restructuring of ourprevious handset business. Lagging costs of SEK 1.6 b. for inventorywrite downs, scrapping and warranty costs were offset by insurancecompensation of SEK 1.8 b. related to damages as a consequence of afire in a supplier's factory. The compensation, not recognized asrevenue in 2001, has now been recognized upon final settlement.

Net effect of capitalization and amortization of development expenseson income before taxes was SEK -0.2 b. in the quarter (SEK 0.2 b.).However, in our primary accounts the net capitalization effect wasSEK 1.0 b., due to lower amortizations, as capitalization for primarypurposes began January 1, 2002.

Net effect of changes in foreign currency exchange rates compared tothe rates one year ago was SEK 0.8 b.

The net capital loss of SEK 0.3 b. is mainly related to equipmentscrapping and divestitures of equity investments. Non-operationalcapital gains were insignificant.

Share in earnings of joint ventures and associated companies amountto SEK -0.5 b., of which SEK -0.4 is related to Sony Ericsson MobileCommunications. The financial net improved to SEK -0.6 b. comparedwith SEK -0.8 b in the first quarter due to a lower net debt.

Adjusted income before taxes was SEK -3.5 b. in the quarter comparedwith SEK -5.4 b. in the first quarter and SEK -5.1 b. in the secondquarter last year. Due to the effect of capitalization of developmentexpenses, adjusted income before tax in our primary accounts was SEK-2.4 b. (-5.3).

Primary earnings per share, diluted, were SEK -0.72 (-1.75).

Balance sheet and financing
Our total gross customer financing exposure, on- and off-balancesheet, was stable compared to the previous quarter at SEK 27.7 b.Total customer financing risk provisions were SEK 6.6 b. at the endof the quarter.

This quarter we are also disclosing unutilized customer financingcommitments. Our commitments are conditioned upon the customersmeeting future operational or financial criteria. In some cases,incremental commitments become available to the customers as theysign additional contracts with us.

Our objective is to find alternative funding sources for ourcustomers prior to the time of utilization, which in some cases aresecured by Ericsson guarantees to the lending banks. We also seek toplace portfolios of credits with third party lenders.

Unutilized commitments at the end of the second quarter were SEK 25.3b.

Draw-downs of commitments are related to our shipments and aretherefore spread over time. In our experience, this level ofcommitments has not materially increased our net exposure asrepayments and transfers of drawn amounts normally balance thedraw-down of unutilized facilities.

Repayment of loans and negative cash flow before financing activitiesresulted in a cash reduction of SEK 8.4 b. Payment readiness was 27%compared with 36%, and the equity ratio was improved by onepercentage point compared to the end of the first quarter.

Current long-term ratings from Moody's and Standard and Poor's areBaa3 and BBB, respectively, whereas the short-term ratings are P-3and A-3 respectively. Both agencies downgraded Ericsson in the secondquarter. Downgrades increase our interest expenses and may triggerput options by lending banks of customer financing credits. Certaincredit facilities were renegotiated during the quarter to excluderating triggers.

Cash flow
Cash flow before financing improved by SEK 2.0 b. Working capitalimproved moderately with further reductions in receivables and wedivested certain operating assets.

Days Sales Outstanding (DSO) improved to 101 from 108 days in thefirst quarter. Inventory turnover (ITO) improved slightly to 4.2,whereas capital turnover remained unchanged. Cash flow related tocustomer financing was SEK -0.8 b. In connection with finalizing aprevious credit portfolio, cash collateral for secured customerfinancing of SEK 2.1 b. was released.

Net cash from divestitures in the quarter was SEK 0.7 b.

SEK 1.0 b. of the SEK 1.8 b. insurance compensation remains to bereceived in the third quarter.

Outlook
In our first quarter report, we indicated that our Mobile Systemssales were expected to be in line with the market development of downby more than 10% during 2002. As described in the market view above,we now believe the market will decline by more than 15% this year. Wealso indicated that we expected to make a loss this year, excludingrestructuring costs and non-operational items, and planned to managethe business to return to profit at some point in 2003 with ongoingcost reductions.

We believe that our sales will develop in line with our updatedmarket outlook, resulting in a loss for 2002. With ongoing costreductions, we still believe we can return to profit at some point in2003.

Parent Company information
The Parent Company business consists mainly of corporate managementand holding company functions. It also includes activities performedon a commission basis by Ericsson Treasury Services AB and EricssonCredit AB regarding internal banking and customer credit management.The Parent Company has branch- and representative offices in 16 (15)countries.

Net sales for the period amounted to SEK 0.8 (2.7) b. and incomeafter financial items was SEK 1.1 (9.4) b.

Major changes in the company's financial position were:
- Increased current and long-term commercial and financialreceivables from subsidiaries of SEK 17.1 b.
- Increased short-term and long-term customer financing of SEK 4.9 b.
- Decreased cash and short-term cash investments of SEK 12.0 b.

The investments were financed primarily through increased internalborrowing of SEK 11.9 b. At the end of the quarter, cash andshort-term cash investments amounted to SEK 37.0 (49.0) b.

In accordance with the conditions of the Stock Purchase Plan forEricsson employees, 28,020 shares from treasury stock weredistributed during the second quarter to employees who left Ericsson.Approximately 6 million shares of treasury stock of the totalallotment for the employee stock purchase plan of 35 million sharesare now reserved for the matching of employee investments. Theholding of treasury stock at June 30, 2002 was 156,775,980 Class Bshares.

Ericsson AB