Ericsson Reports Q4

Despite cutting 7,100 employees in the quarter and boosting sales by 10% Q/Q to SEK 36.7B (US$4.29B), Ericsson still posts a net loss of SEK 0.7B (US$81.7M)

February 3, 2003

11 Min Read

STOCKHOLM -- Ericsson today announced an increase in sales for the fourth quarter of 2002, but a net loss for that quarter and for the year 2002.CEO COMMENTS"Sales of GSM/WCDMA are up sequentially for the third quarter in a row and the order intake in Europe, Middle East and Africa (EMEA) improved significantly after a weak third quarter," says Kurt Hellström, President and CEO of Ericsson.We improved Systems operating margins once again this quarter. Our position in GSM/WCDMA remains solid and we are encouraged by our progress in CDMA2000 with key wins in Asia and Latin America. Sony Ericsson's performance also improved in the quarter and the joint venture expects to start reporting profit during 2003."The strategy to expand our Systems business through increased sales of professional services is proving successful. By capitalizing on our systems know-how we have taken an early lead in this growing market segment. The recurring nature of this business will make our revenue base more stable.The sequential increase in sales and orders is more a factor of seasonality than an indication of a market recovery. However, with orders and sales at expected levels, good progress in our restructuring and positive cash flow, our fourth quarter results indicate that our business is beginning to stabilize.Our overriding objective is to return to profit at some point in 2003 and improve cash flow. Our cost cutting is proceeding as planned with a significant reduction of operating expenses already evident. We will intensify our efforts to lower cost of sales to meet our gross margin target.MARKET VIEWThere are now more than 1.1 billion mobile subscribers worldwide with approximately 51 million new subscribers added during the fourth quarter. For the full year we estimate about 190 million net subscriber additions, within our forecast of 175-215 million. We believe that the number of mobile subscribers remains on track to exceed 1.5 billion within three years with 165-180 million net additions anticipated in 2003.In line with the industry consensus and our previous estimate, we believe that the mobile systems market declined about 20% to an estimated USD 42 b. during 2002. For 2003, we believe that the mobile systems market may decline by as much as 10%.The telecommunications market correction is ongoing. We expect the historical correlation between operator capital expenditure (CAPEX) growth and revenue growth to eventually resume. However, the current level of lower CAPEX spending as a percentage of operator revenues will most likely remain.An estimated 115 million mobile phones were sold through during the fourth quarter bringing the total for the year to approximately 395 million units. This compares with our full-year estimate of about 390 million units and approximately 390 million in 2001. We believe that the total units sold through during 2003 will be more than 430 million units.The overall wireline systems market, which includes traditional circuit-switching, broadband access, optical transmission and multi-service networks, declined by over 30% during 2002 - in line with our estimate of a decline significantly more than 20%.Complementing the infrastructure market, there is also a large and growing opportunity for providing services to network operators. Excluding network rollout services, which are embedded within the Systems market, the available market in 2003 for professional services is estimated to be more than USD 30 b. with a compound annual growth rate (CAGR) of more than 10%. Professional Services include systems integration, network operations outsourcing as well as a range of other advisory and operational support services.Cost reductions and operational realignmentIn the fourth quarter our operating expense annual run rate excluding restructuring costs was reduced to SEK 51 b. During the quarter we reduced our headcount by 7,100 employees, bringing our year-end headcount to 64,600. We remain on track to reach a SEK 38 b. run-rate for the fourth quarter 2003 and expect to be less than 60,000 employees by year-end.Reduced excess capacity costs as well as improvements in processes and product design contributed to the stable gross margin level offsetting the negative effects of an unfavorable product mix.During the quarter, restructuring charges were SEK 6.3 b. of which SEK 5.8 b. is related to redundancies. SEK 0.2 b. were related to the write-down of inventory and fixed assets as well as other costs for establishing more flexible operations. Of the SEK 28.6 b. planned restructuring costs SEK 5.5 b. remains. Cash outlays in 2003 are expected to be approximately SEK 10.8 b.OPERATIONAL and FINANCIAL REVIEWSYSTEMSOrder intake in the quarter improved sequentially to SEK 30.8 b., mainly due to seasonality. Compared to the fourth quarter last year, order intake declined by 10%. Cancellations of SEK 2.3 b. negatively affected orders booked. The Europe, Middle East and Africa (EMEA) region showed strong improvement compared to the previous quarter, while Latin America was down, partly due to order cancellations but also weaker demand.Sales in the quarter were SEK 33.2 b., up SEK 2.6 b. compared to the third quarter and down 34% compared to last year. Europe, Middle East and Africa (EMEA) and North America increased sequentially, while Latin America and Asia Pacific declined somewhat. The strongest parts of the Systems businesses were GSM, CDMA and professional services.Adjusted operating income for Systems was SEK -0.3 (0.4) b.. Excluding risk provisions for customer financing of SEK 0.7 b. the result was SEK 0.4. b., compared to SEK 0.2 b. in the third quarter. Gross margin has kept up well and operating expenses have gradually been reduced through our restructuring activities.As an extension of our System business, Global Services generated sales of SEK 9.5 b. in the quarter. Excluding products, which from 2003 are excluded from services, sales of professional services grew 29% sequentially to SEK 5.7 b. and now represent 17% of Systems sales.Mobile SystemsOrders in the quarter for our GSM/WCDMA track increased 51% sequentially, mainly driven by the Europe, Middle East and Africa (EMEA) region. Sales of GSM/WCDMA grew 4% sequentially and declined only 14% for the full year, implying a sustained strong market position. Full year sales of WCDMA equipment and associated network rollout services represented 9% of Mobile Systems sales.The sharp decline in TDMA and PDC systems continued and combined they now account for less than 10% of mobile systems sales.Multi-Service NetworksOrders and sales in the quarter increased sequentially by 9% and 28% respectively, but declined compared to last year by 29% and 50%, primarily driven by continued weak demand for traditional circuit-switching equipment, although our ENGINE solution continues to develop favorably.PHONESOur 50% share of income from Sony Ericsson Mobile Communications is included in "Earnings from Joint Ventures and Associated Companies."Sony Ericsson Mobile Communications (SEMC)The joint venture increased its shipments by 42% to 7.1 million units during the quarter, mainly as a result of the expansion of their product portfolio. Our 50% share of income before taxes in the quarter was SEK -0.3 b., compared to SEK -0.5 b. in the third quarter and SEK -0.7 b. a year ago. As previously announced, Ericsson and Sony will each invest EUR 150 million into the joint venture during the first quarter of 2003.OTHER OPERATIONSAfter transferring a portion of our holdings in a Chinese subsidiary to Sony Ericsson Mobile Communications, the company has become an associated company. As a result, from this quarter phone operations in China are included in our results as share in earnings of Joint Ventures and Associated Companies.Other Operations now include the following commercial businesses: Defense Systems, Network Technology, Enterprise Systems, the retained parts of Microelectronics as well as the investment areas of Mobile Platforms and Bluetooth.Sales improved by 4% sequentially, driven by Defense Systems.Compared to the third quarter, adjusted operating income in Other Operations was flat. Positive effects from the divestiture of parts of Microelectronics and profit from Defense Systems only partly offset losses in other units.CONSOLIDATED ACCOUNTSIncomeSales in the quarter were SEK 36.7 b., up 10% sequentially and down 37% compared to the fourth quarter of 2001.Gross margin remained stable, with a reduction of cost of goods sold and excess capacity costs offsetting negative effects of an unfavorable product mix. The seasonally adjusted operating expense run rate was SEK 51 b. for the quarter excluding risk provisions of SEK 0.7 b. for customer financing. The run rate also excludes the effects of capitalization of development expenses since they currently affect comparability.The capitalization of development costs was started in January 2002 to conform to changes in Swedish GAAP. As no such costs were reported in previous years, net capitalized amounts do not yet include a normal rate of depreciation of a capitalized base. Therefore, the positive net effect of this is deducted when reporting adjusted operating income and adjusted income before taxes.Net capital losses were SEK 0.7 b. of which SEK 0.3 b. were related to restructuring, and SEK 0.3 b. related to write-downs and sales of shares. Share in earnings of associated companies was net zero, including the loss of SEK 0.3 b. in Sony Ericsson.In the quarter, the net effect of changes in foreign currency exchange rates compared to rates one year ago was SEK -0.1 b. The net effect in the first, second and third quarters were SEK 0.4, 0.8 and 0.6 b., respectively and SEK 1.7 b. for the year.Financial net improved by SEK 0.7 b., as a result of interest income on the proceeds from the rights offering in September 2002.Adjusted income before taxes, excluding restructuring costs, non-operational capital gains and net effects of capitalization of development expenses, was SEK -2.2 b. in the quarter. Income before taxes in the previous quarters of 2002 adjusted in the same manner was SEK -5.3, -3.3 and -3.7 b., respectively and for the full year SEK -14.5 (-21.1) b..Net income was negatively affected by SEK 2.5 b. as certain tax costs were recognized in the quarter. Of these, SEK 0.8 b., relate to foreign withholding taxes that were not deductible due to insufficient taxable income and SEK 1.4 b. due to rulings by Swedish tax authorities disallowing deductions of capital discounts on convertible debentures and other costs.Full-year diluted earnings per share were SEK -1.51 (-1.94). Prior periods have been adjusted for the stock dividend element of the stock issue.Balance sheet and financingThe equity ratio was 37%, about the same level as last quarter, despite the loss incurred during the fourth quarter. Total assets were reduced during the quarter by SEK 28.9 b., of which SEK 8.2 b. is related to cash. Repayments of loans, including the lease arrangement for test plant equipment from December 2001, amounted to SEK 10.0 b..Net debt improved in the quarter from SEK -5.2 b. to SEK -5.6 b. with total cash continuing to exceed all interest bearing debts.Lower purchase volumes and increased sales significantly reduced inventory during the quarter, with inventory turnover (ITO) improving to 5.1 turns from 4.3 last quarter.Our days sales outstanding (DSO) improved sequentially from 103 days to 91 days. Even with the higher sales, we reduced accounts receivable by SEK 3.8 b. compared with the third quarter.Customer financing risk exposure was reduced by SEK 3.1 b. in the quarter. As previously announced, the 2001 portfolio of customer credits was discontinued. The credits, including Mobilcom, were taken back on the balance sheet and an associated cash collateral released. Certain of these credits have subsequently been sold in the market and the Mobilcom credits are to be replaced with France Telecom convertible bonds.Deferred tax assets at year-end were SEK 26.0 b., an increase of SEK 5.1 b. during 2002. Deferred tax assets are related to countries with long or indefinite periods of utilization.Cash flowCash flow before financing activities was positive by SEK 1.6 b. The main contributing factors were reduced inventory and improved collection of receivables. The SEK -2.8 b. effect from customer financing was mitigated by the release of a cash collateral of SEK 1.2 b. for the 2001 Credit Portfolio.With the discontinuance of pro forma reporting, capitalization of development expenses of SEK 0.8 b. are now reported among investing activities rather than as an item adjusting income.Net income as well as items adjusting net income to cash was affected by the increased tax costs in the quarter.Adjusted for exceptional items, cash flow was SEK 5.2 b. in the quarter. These items include the buyback of Mobilcom credits of SEK -4.1 b. and SEK 0.5 b. in proceeds from the divestiture of certain R&D operations.OutlookIn our last report we indicated that our fourth quarter Mobile Systems sales could decline more than the overall market due to our exposure to the sharply declining TDMA and PDC markets. For 2003, we believe that we will maintain our overall share of the mobile systems market with an increase in 3G sales partly offsetting lower sales of TDMA and PDC.While we believe that the worst of the market decline is behind us, the market remains unpredictable. Normal seasonality will most likely prevail during the first quarter and sequential sales will consequently be down.We are planning to return to profit at some point in 2003 by lowering our costs and adjusting to the prevailing market conditions.LM Ericsson

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