All numbers are preliminary and unaudited.
Ericsson (NASDAQ:ERIC) expects sales of SEK 43.5 b., an operating income of SEK 5.6 b. and a cash flow of SEK -1.6 b. for the third quarter 2007. This is below the company's own as well as current market expectations and primarily a result of an unexpected shift in the business mix.
"The unexpected development in the quarter is mainly due to a shortfall in sales in mobile network upgrades and expansions which resulted in an unfavorable business mix that also negatively affected Group margins," said Carl-Henric Svanberg, President and CEO of Ericsson. "All other businesses performed as expected. The effect of market dynamics is always a matter of judgment. This quarter we have underestimated the effects."
Ericsson's networks business continues to develop most rapidly in regions where new network rollouts and break-in contracts are predominant. This is where competition is intense as it builds footprint for long-term profitable growth. So far the margin pressures from these business activities have been offset by higher margin sales such as network expansions and upgrades. Such expansions and upgrades have a short sales cycle and builds during the quarter. This quarter, sales of these higher margin offerings did not materialize as much as in previous quarters. High margin software sales are also lower than normal.
The Professional Services segment continues to show strong growth and stable margins. The Multimedia segment is expected to also show a strong growth with operating income slightly above breakeven level, reflecting the continued investments in new business areas.
"In infrastructure scale is critical for success. Our strategy to regain scale advantage through increased mobile systems market shares has been effective. The present market dynamics are however working to our disadvantage from a short-term financial perspective. Now that we have reestablished our scale advantage from the pre-industry consolidation we will shift our focus slightly and capitalize on our market share gains," said Carl-Henric Svanberg
FINANCIAL HIGHLIGHTS
Income statement and cash flow
All numbers are preliminary and unaudited.
Third quarter Second quarter Nine months
SEK b. 2007 2006 1) Change 2007 Change 2007 2006 1) Change
Net sales excl.
divested operations 43.5 40.9 6% 47.6 -9% 133.3 124.1 7%
Net sales 43.5 41.3 6% 47.6 -9% 133.3 125.6 6%
Gross margin 35.6% 38.2% - 43.0% - 40.6% 41.5% -
EBITDA margin 17.4% 25.4% - 23.9% - 21.8% 23.2% -
Operating income 5.6 8.8 -36% 9.3 -39% 23.0 23.6 -3%
Operating margin 12.9% 21.2% - 19.4% - 17.3% 18.8% -
Operating margin
ex Sony Ericsson 9.0% 16.5% - 16.4% - 13.7% 16.0% -
Income after
financial items 5.6 8.9 -37% 9.3 -40% 23.1 23.8 -3%
Net income 2) 4.0 6.2 -36% 6.4 -38% 16.2 16.5 -2%
1)Excludes sales from the in 2006 divested defense business, Ericsson Microwave systems.
2)Attributable to stockholders of the parent company, excluding minority interest.
The year-over-year sales increase of 6% consisted of organic growth of 4%. The USD has continued to weaken during the quarter and affected reported sales growth negatively.
The decline in gross margin is mainly due to an unfavorable business mix consisting of a high proportion of new network rollouts and lower software sales. In addition to the good growth in network rollout, sales of transmission systems, with a lower margin, showed strong growth, also negatively affecting Group gross margins.
Operating income amounted to SEK 5.6 (8.8) b. in the quarter and SEK 23.0 (23.6) b. year-to-date. In the Networks business mix, new network rollouts are now dominating and in combination with lower sales of software this caused the group operating margins to decline significantly during the quarter. Sony Ericsson's pre-tax profit contributed 4% to Group operating margin in the quarter.
Cash flow from operating activities is estimated to be SEK -1.6 (4.8) b. in the quarter and SEK 7.2 (7.5) b. year-to-date.
SEGMENT RESULTS
All numbers are preliminary and unaudited.
Third quarter Second quarter Nine months
SEK b. 2007 1) 2006 2) Change 2007 1) Change 2007 1) 2006 2) Change
Networks
sales 28.5 29.2 -2% 33.7 -15% 91.6 88.7 3%
Of which
network
rollout 4.0 3.5 14% 4.3 -7% 12.1 10.9 11%
Operating
margin 8% 9% - 19% - 15% 15% -
EBITDA margin 13% 15% - 24% - 20% 21% -
Professional
Services sales 11.0 8.7 26% 10.3 7% 30.8 26.3 17%
Of which
managed
services 3.4 2.2 50% 2.9 15% 8.9 7.0 27%
Operating
margin 15% 12% - 15% - 15% 14% -
EBITDA margin 16% 13% - 16% - 16% 15% -
Multimedia
sales 4.0 3.1 31% 3.7 10% 11.0 9.3 18%
Operating
margin 1% 3% - 0% - 3% 2% -
EBITDA margin 7% 4% - 5% - 7% 3% -
Total sales 43.5 40.9 6% 47.6 -9% 133.3 124.1 7%
1)Acquired companies are included from date of acquisition.
2)Excludes sales from the in 2006 divested defense business, Ericsson Microwave Systems.
Networks
Sales in Networks declined mainly due to lower sales of expansions and upgrades of mobile networks with its related high software content. Sales of lower margin network rollouts and break-ins currently represent the majority of the networks business. It is this shift in business mix that is negatively affecting group margins rather than a change in the underlying margins.
Professional Services
Sales in Professional Services grew by 26% year-over-year and continue to outpace the market. Managed services grew by 50% year-over-year. More than two thirds of Professional Services revenues are currently of a recurring nature.
Multimedia
Growth was 31% year-over-year. Operating income in the quarter was slightly above breakeven level. The businesses Ericsson Mobile Platforms, Service Delivery Platforms, Tandberg Television and Charging are all showing strong growth with healthy margins. IPTV, IMS and Messaging are new business development areas with significant R&D investments but with limited sales.
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