Ericsson Interim Report Nine Months Ended September 30, 1999 - Company Financial Information

Cambridge Telcom Report, Nov 1, 1999

- Continued strong sales growth, over 20 percent for the Network Operators and Service Providers segment, driven by Mobile Systems with an over 40 percent increase, and increased operating margin.

- Positive reception of new product portfolio in Consumer Products with benefits from the fourth quarter.

- Action program for improving internal efficiency and cost structure starting to show results. Confirmed profitability improvement for Wireline Systems. Positive cash flow in third quarter.

- The strategic direction is right in the forefront of where the industry is heading - Mobile Internet

- Outlook 1999: Pre tax earnings of SEK 15-16 billion is achievable.

SEK m.                       Nine Months            Third Quarter
Orders                        157,812                   58,139
Sales                         141,648                   49,265
Income before taxes             7,907                    3,649
Earnings per share (SEK)         3.07                     1.33
Cash flow                     -12,000                    6,700

Ericsson's order intake increased for the period by 13 percent and for the third quarter by 36 percent. The increase in orders for the period is mainly related to the US, Japan and the European market area. The order intake improved in Asia Pacific during the third quarter, but is down 8 percent for the nine-month period, which mainly relates to China.

Net sales for the nine-month period were SEK 141,648 million, an increase of 14 percent for comparable units. The income before taxes decreased by 35 percent to SEK 7,907 m. compared to 1998. Earnings per share year to date were SEK 3.07 (4.25).

Continued strong performance of Mobile Systems helped to offset negative results in Consumer Products and in the Enterprise Solutions segment.

Third quarter sales were SEK 49,265 m., up 14 percent over last year. Income before taxes, SEK 3,649 m., down 19 percent from last year, but better than last quarter, mainly due to reduced operating expenses. The cash flow for the third quarter was strong, SEK 6.7 billion, improving year-to-date cash flow to SEK -12,0 b.. Earnings per share were SEK 1.33 (1.59) for the third quarter.

SALES AND OPERATING INCOME Ericsson increased net sales by 13 percent year to date and by 14 percent compared with the third quarter of last year. Strong sales growth in North America and Europe from the Network Operators and Service Providers business segment were the main contributors. Sales in the third quarter are in line with the normal seasonality of Ericsson's business and declined 3 percent compared with the previous quarter.

Overall gross margin declined to 41.1 (43.2) percent. Gross margins for Mobile Systems and Wireline Systems remained robust. The decline in overall gross margins from last year is mainly a consequence of significantly lower margins for Consumer Products.

Operating expenses for the nine months were SEK 50,659 m., or 36 percent of sales, an increase of 21 percent over last year. For the third quarter, operating expenses were SEK 16,164 m., or 33 percent of sales. Although the rate of increase has been reduced some in the third quarter, the level of selling, general and administration expenses is still of great concern and subject to reduction efforts.

Expenses for R&D year to date were SEK 23,250 m., which remains around 16 percent of sales. The R&D expenses include increased efforts in areas such as 3G mobile systems, datacom technologies (IP and ATM) and new mobile phones.

Operating income was SEK 8,903 (12,803) m. for the nine month period, a decrease by 30 percent from last year. An increase of SEK 3,011 m. for Network Operators and Service Providers was offset by lower results in all other segments, mainly Consumer Products, SEK -3,732 m. lower than in the same period last year. Costs for the restructuring program amount to SEK 1,500 m. so far, of which SEK 900 m. during the third quarter. Benefits amounted to SEK 300 m. giving a net cost of SEK 1,200 m. for the period. Included in these charges are SEK 400 m. for a couple of projects in the Dedicated Networks unit.

For the third quarter, operating income increased by 11 percent compared to the second quarter, mainly due to lower operating expenses.

The operating margin declined from 10.2 percent of sales in 1998 to 6.3 percent.

Financial net for the first nine months was SEK -803 (124) m., related to negative cash flow and increased borrowings. During the third quarter the financial net improved, mainly due to positive cash flow.

Capital gains net were SEK 1,115 m., including among other factors profits from the sale of shares in Powertel (SEK 396 m.) during the third quarter and Intracom (SEK 910 m.) in the second quarter. Capital gains associated with Powertel are accounted for as part of selling expenses.

Net foreign currency exchange rate effects on income were positive with approximately SEK 200 m. in the third quarter and SEK 900 m. year to date. The devaluation of the Brazilian currency is the main cause of negative translation effects in stockholders' equity of approximately SEK -2,700 m..