Jan Frykhammar CFO and Executive vice president
financial performance YTD REVENUE GROWTH PROFITABILITY CAPITAL EFFICIENCY 25%* 117% 112% 11% 16% 11% 9% 12% 10% 66% 92% 89% 3Q Acc 4% 16% 25% 2007 2008-1% 2009-2% 2010 2011 YTD Growth in 2011 driven by mobile broadband Services back to growth 3Q 2011 Slow down in North America Networks business during 2Q-3Q 2007 2008 Op. Margin (%) 2009 Op. Income (SEK b)* 2010 Business mix shift in 3Q 2011 JVs weaker YTD 2011 2011 YTD 2007 2008 2009 2010 2011 YTD Cash conversion low due to growth, supply and high share of coverage projects Note: * Comparable net sales adjusted for FX and hedge. Note: * Restructuring charges included in 2011 Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 2 This slide contains forward-looking statements. Actual result may be materially different.
Key concerns from Investors Grow faster than the market Technology and services leadership North America including CDMA Best in class margins Competition, price pressure Gross margin development Strong cash conversion Working capital development Use of cash Growth in JV earnings Turn around ST-Ericsson Possible impact on business due to macroeconomic development Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 3
1 2 FINANCIAL MANAGEMENT CAPITAL MANAGEMENT 3 RISK Management
1 FINANCIAL MANAGEMENT
business mix impacting Profitability TECHNOLOGY CYCLE BUSINESS MIX Expansion phase (capacity) Upgrade, capacity increase and expansion of installed base Shorter order cycle and projects More SW and integration services Lower capital tied-up Higher margins 2G 3G HSPA 4G time Initial phase (coverage) Break-in and green field Open bidding More HW and roll-out services Higher capital tied-up Lower margins Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 6
economics of installed base GROWING THE BUSINESS WITH AN INSTALLED BASE Services Software Hardware Services Software Hardware Managed Services OSS/BSS Consulting & Systems Integration INITIAL PHASE (Coverage) EXPANSION PHASE (Capacity) ADD-ON BUSINESS (Examples) An installed base may generate more than double the initial business volume during its life cycle The outcome depends on factors like subscriber growth, traffic growth and new software features Our performance is key to retaining the installed base 2G/3G lifecycle spans 10 years or more Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 7
Network modernization in Europe What it is about Replacing old 2G and 3G radio base stations with more efficient and capable multi-standard radio base stations prepared for LTE All vendors fighting for this footprint in open tenders Business rationale This footprint - for all technologies including LTE - will remain for many years Our future revenue in Europe for many years to come will depend on our footprint Accomplishments Won 80% of targeted deals and increased market share by 3%-points (2G/3G combined when equipment is installed) Expect that all won projects will have started by 4Q 2011. Estimated project duration 18-24 months. Business case Low margins in initial phase (equipment and services) and higher margins in expansion phase when more capacity needed With only 2 years perspective the return is lower than normal expected contract yield With 5 years perspective the profitability is in line with normal expected yield Our equipment usually stays in customer network for more than ten years Negative side effects on financials If we modernize existing footprint we lose capacity business. A slower-paced rollout will maintain capacity business for longer Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 8 This slide contains forward-looking statements. Actual result may be materially different.
Development of portfolio mix SHARE OF NET SALES 100% Services 38% 39% Software 26% 24% Hardware 36% 37% 2009 2010 1H Trends 2011 2H Hardware share increase driven by mobile broadband coverage. Business mix shift in 2H 2011 Software share reduced since 2009 due to less core network and revenue management business Services increase 2H 2011 driven by managed services and network roll-out (coverage projects) Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 9 This slide contains forward-looking statements. Actual result may be materially different.
Business mix key to gross margin dynamics Drivers DRIVERS IMPACTING GROSS MARGIN DEVELOPMENT Business mix coverage/capacity Modernization projects Service share 38.8% 38.3% 36.6% 35.5% 4Q2010 1Q2011 2Q2011 3Q2011 Shift from capacity to coverage projects to continue and prevail in coming quarters Growth momentum in services Expect that all won modernization projects will have started by 4Q 2011 4Q gross margin historically lower Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 10 This slide contains forward-looking statements. Actual result may be materially different. Gross margin excluding restructuring
Improving Gross MARGIN Market Opportunities Mobile data growth drives need for expansion/capacity investments Further scale opportunities e.g. gaining second and third Managed Services deal in same country More SW centric business such as 4th Gen IP, OSS/BSS and VoLTE Actions Continue to execute on global services delivery strategy Common components and reduction of manufacturing costs Secure price premium by combining technology and services leadership Capitalize on our IPR portfolio Profit improvements for modernization projects Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 11 This slide contains forward-looking statements. Actual result may be materially different.
2 Capital Management
Strong Financials a competitive advantage Equity Ratio 56% 55% 50% 52% 52% 50% 51 35 Net Cash (SEK b) 41 35 36 24 2006 2007 2008 2009 2010 3Q 2011 Rationale for maintaining strong financial position 1. Generate business 2. Opportunistic M&A 3. Invest in future growth Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 13
BUSINESS DYNAMICS impact on WORKING CAPITAL BUSINESS MIX CAPITAL TIED UP BY PROJECT TYPE Expansion phase (capacity) Contract 1 Hardware & Software Capital tied up Contract 2 Network Roll-out (services) + Payment days Capital tied up + Payment days Low capital tied up Bundled Contract Hardware, Software & Services Initial phase (coverage) Capital tied up Progress payments High capital tied up + Payment days Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 14
Steady improvement in Working capital* WC/Net sales (rolling 4 quarters) % Working capital (SEK b) 80 60 74 77 72 69 65 63 70 64 59 65 65 68 40% 35% 40 30% 20 25% 0 Q4 2008 Q1 Q2 Q3 2009 Q4 Q1 Q2 2010 Q3 Q4 Q1 Q2 2011 Q3 20% Working Capital targets remain DSO < 90 days Inventory days < 65 days Payable days > 60 days Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 15 *Working capital defined as Operating net assets less provisions & accrued expenses
Improving working Capital Market Opportunities Mobile data growth drives need for expansion/capacity investments Growth in Managed Services means less capital tied up More SW-driven business models drive less capital Actions Change programs will continue to improve working capital Terms & Conditions Ensure payment aligned with project milestones Improved scope and change order handling Project execution Improve competence and seniority of project management Improve tools for project execution and supply Ways of working and incentives Capital effciency key area in short and long term incentive plans Customer project governance Pro-active collection Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 16 This slide contains forward-looking statements. Actual result may be materially different.
3 Risk Management
NAVIGATING MARKET UNCERTAINTIES REFLECTIONS ON FINANCIAL CRISIS 2008 Limited impact on Ericsson due to Stable customer performance Early actions to reduce cost and adapt to economic environment Positive impact from smartphone introduction in the US Positive effects Our competitive advantage increased Secured number one position as LTE provider in the US Acquired Nortel's CDMA business REFLECTIONS ON TODAY S ECONOMIC ENVIRONMENT With economic uncertainty in parts of the world, we can not exclude somewhat more cautious short-term operator spending Proactive measures in place Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 18
Building on ways of working from 2008 Leading Indicators (Examples) Global Macroeconomic Macro: GDP growth + inflation + FX Consumer: confidence index + unemployment Corporate: confidence + bonds Operators Financial performance and guidance Operations (subscriber, smartphones, data growth) Operational indicators (selected) Order cancellations/orders book growth Accounts receivables overdue Other leading indicators Performance adjacent industries Regional Macro economic conditions Industry (operator and competition) Business mix/technology shift Political and regulatory Base Case Measures Governance: tighter and more frequent Close dialogue with customers and partners Proactive cost alignment measures being executed Discipline to control expenses Guidelines on work force development Speed up execution of efficiency programs Contingency Planning Implementation of measures depending on outlook Impact of economic outlook Duration and intensity Potential actions Reduce expenses Secure technology and service leadership Preserve cash Portfolio choices Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 19
summary Executive Performance Stock Plan Net sales growth in SEK, organic 4-10% CAGR 2010-2013 Operating income growth, including JVs and restructuring, base year 2010 excl. restructuring 5-15% CAGR 2010-2013 Cash conversion Above 70%, annually Decided to build installed base for the future despite short-term margin pressure Working capital objectives remains, but growth and business mix create short-term challenges Proactive measures to manage 2012 base case in place contingency plans ready The Board of Directors will consider the impact of larger acquisitions, divestitures, the creation of joint ventures and any other significant capital event on the three targets on a case by case basis Financial position a competitive advantage, even more so in uncertain times Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 20
Telefonaktiebolaget LM Ericsson 2011 Ericsson Capital Markets Day 2011 Page 21