M.B.N.Y. Management Briefing November 20th 2007 1 2007-11-20
Safe harbor statement This presentation contains forward looking statements. Such statements are based on our current expectations and are subject to certain risks and uncertainties that could negatively affect our business. Please read our earnings reports and our most recent annual report for a better understanding of these risks and uncertainties. 2 2007-11-20
Today s agenda 2003 2007 in perspective Business dynamics Recapture of Q3 numbers Regional and Segments update Way forward near term agenda 3 2007-11-20
Today s agenda 2003 2007 in perspective Business dynamics Recapture of Q3 numbers Regional and Segments update Way forward near term agenda 4 2007-11-20
Our accomplishments 2003-2007 We have a compounded average growth rate of >10% grown mobile systems market share significantly secured our technology leadership established a clear leadership in services generated industry leading margins, also in the weaker Q3 invested in new growth areas Wireline - Redback, Marconi, Entrisphere Multimedia - Tandberg, LHS, Drutt, Mobeon 5 2007-11-20
Our strategy remains True world leadership Expand portfolio Next gen and multimedia Profitable growth Drive growth and market share Technology leadership Operational excellence Opex and cost of sales Supply and R&D road maps 6 2007-11-20
Our strategy remains True world leadership Customer satisfaction Profitable growth Financial performance Operational excellence Employee satisfaction 7 2007-11-20
Ericsson employee satisfaction Human Capital Index results 1999-2007 80 70 70 Excellence 65 66 60 55 56 60 59 58 58 Strength Potential 50 40 1999 2000 2001 2002 2003 2004 2005 2006 2007 Improvements needed 8 2007-11-20
Financial performance Net sales & operating margin 60000 60,00% 50000 50,00% 40000 40,00% 30000 30,00% 20000 20,00% 10000 10,00% 0 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 0,00% Operating margin including SEMC Operating margin excluding SEMC 9 2007-11-20
Satisfied customers 03 04 05 06 071H 03 04 05 06 071H 03 04 05 06 071H 03 04 05 06 071H 03 04 05 06 071H 03 04 05 06 071H Ericsson Ericsson Ericsson Ericsson Ericsson Ericsson Innovation Vision End-user Partnership Reputation Revenue understanding generation Source: Image Tracking survey 2003-2007, BPRI (Business Planning & Research Limited), Operator perception study 10 2007-11-20
Today s agenda 2003 2007 in perspective Business dynamics Recapture of Q3 numbers Regional and Segments update Way forward near term agenda 11 2007-11-20
Business dynamics Market mix mature, emerging markets Business mix rollouts, expansions, upgrades, services Product mix mobile, fixed, software, technologies Cost rationalization vs price erosion vs volume growth Industry consolidation and change in business landscape In addition General economic development and FX exchange rates 12 2007-11-20
Value creation circle From new to established positions Lower margins Entering new segments Low volumes New Technology New roll outs 2G to 3G to LTE MSC to MSS ADSL to VDSL to GPON Higher margins Scale Upgrades Mature products Expand foot prints 13 2007-11-20
Today s agenda 2003 2007 in perspective Business dynamics Recapture of Q3 numbers Regional and Segments update Way forward near term agenda 14 2007-11-20
Quarter three Sales, down 4.2 b from Q2 Less than expected capacity upgrades in North America and Western Europe - China negative, lumpy invoicing Lower software sales USD exchange rate decline Margins, down 3.7 b from Q2 Lower sales volumes More new network buildouts - less high margin expansions Unfavorable mix - lower software, more hardware, services 15 2007-11-20
Our networks business - background Balance between rollouts, expansions and upgrades Margins Highest Medium Lowest Historical business mix Upgrades Expansions Network build outs Characteristics Upgrading installed base, Short order cycle Expanding installed base Shorter projects Building installed base Open bidding, long projects 16 2007-11-20
Our networks business mix change Strategy has been effective in regaining scale Shortfall in expansions and upgrades have hit Q3 margins New network builds to weigh on margins next several quarters Margins Highest Medium Current business mix Upgrades Expansions Characteristics Upgrading installed base Expanding installed base Lowest Network build outs Building installed base 17 2007-11-20
Today s agenda 2003 2007 in perspective Business dynamics Recapture of Q3 numbers Regional and Segments update Way forward near term agenda 18 2007-11-20
Regional characteristics WE ~25% of sales - Ericsson leading but not in all markets The customer perspective Cost focus and consolidation, flat capex at best New services to drive ARPU Customer retention rather than acquisition Fixed/mobile substitution, growing MoU Mobile broadband excitement, business models? Business focus Effects on Ericsson Market outlook Leverage current assets Managed services Transmission Multimedia Technology migration Leverage synergies Product mix shift Invest in Multimedia GBit/RNC/h 50 40 30 20 10 0 sep- 06 WE Packet data traffic development in measured 3G nodes oct- 06 nov- 06 dec- 06 jan- 07 feb- 07 mar- 07 apr- 07 may- 07 jun- 07 Mid term Longer term jul- 07 aug- 07 sep- 07 oct- 07 *This slide contains forward-looking statements 19 2007-11-20
Regional characteristics North America ~10% of sales, Ericsson leading GSM/WCDMA The customer perspective Non-voice revenue growth Next generation networks Triple play with mobile broadband New entrants PC centric 350 000 300 000 250 000 200 000 150 000 100 000 50 000 0 2005 2006 2007 2008 2009 2010 2011 2012 Business focus Effects on Ericsson Market outlook Technology leadership Triple play capabilities Fiber to the home Internet orientation Leverage on mobile position Leverage acquired assets Build footprint in wireline Drive prime integrator role Mid term Longer term Petabyte Classic Voice VoIP Internet IPTV *This slide contains forward-looking statements 20 2007-11-20
Regional characteristics Emerging markets ~55% of sales, Ericsson s home turf The customer perspective Subscriber growth Market share costly to loose time 90% of all new global subscribers Mobile centric limited fixed networks Mobile broadband opens for internet Reported Subscriptions (Millions) 6000 5000 4000 3000 2000 1000 0 2005 2006 2007 2008 2009 2010 2011 2012 Analogue & Other TDMA CDMA Mobile WiMAX GSM/GPRS/EDGE WCDMA/HSPA LTE Business focus Effects on Ericsson Market outlook Time to market Turn key Local presence Internet goes mobile Build GSM footprint and expand Working capital build up Driver of global scale Mobility to close digital divide Mid term Longer term *This slide contains forward-looking statements 21 2007-11-20
Networks Strategy for growth Net sales and operating margin, % Technology leadership Scale Operational excellence 45 40 80% 70% 35 60% 30 50% 25 20 40% 15 30% 10 20% 5 10% 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 0% World s largest telecom equipment supplier Well over 40% market share in mobile networks 2007 another record year for GSM HSPA boosting Expanding leading end-to-end portfolio to fixed and converging networks Strengthened IP capabilities through acquisitions 22 2007-11-20
Professional services Strategy for growth Net sales and operating margin, % Scale leverage Maximize use of assets Skill leverage Maximize use of knowledge 12 10 80% 70% 60% Seamless organization Standardized tools Standardized processes Best practices Best knowledge sharing Business process expertise 8 6 4 50% 40% 30% 20% 2 10% Technology leadership and customer base 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 0% World s largest telecom services provider Support, systems integration, consultancy, managed services 150 countries, 28,000 employees, 14,000 partners Networks with 1 b subs supported 24/7 Networks with 160 m subs under management 23 2007-11-20
Multimedia Strategy for growth Net sales and operating margin, % 5 80% Leverage: - Ericsson s position in mobility and convergence - local expertise with global resources - leadership in managing e2e solutions and complexity - global customer base to energize the consumer experience 4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 70% 60% 50% 40% 30% 20% 10% 0% Expand in new areas Networked media and messaging, including TV Enterprise mobility Building on our leadership in Revenue management, service delivery platforms, mobile platforms 24 2007-11-20
Today s agenda 2003 2007 in perspective Recapture of Q3 numbers Regional and Segments update Way forward near term agenda 25 2007-11-20
Planning assumptions for Q4 At day of profit warning Sales of SEK 53-60 b Operating margin in mid-teens, incl. SEMC Recent developments Some further issues in the networks market Europe and US tightens Political unrest in certain emerging markets Further dollar decline create translation effects We are likely to end up in the lower end of the range *This slide contains forward-looking statements 26 2007-11-20
Market outlook 2008 Early expectation for 2008 is that the current market conditions will prevail Longer term market outlook remains unchanged *Measured in USD, this slide contains forward-looking statements. 27 2007-11-20
Ericsson moving forward Business objectives Focus Areas Key priorities Grow faster Grow faster than than the market Enable Best in class Ericsson margins Cash conversion Improve > 70% profitability Leverage leading position and grow in new areas Technology leadership operational excellence and scale Build Innovate on foot print Leverage Expand acquisitions in Services Grow New client in Multimedia segments Base Expand account services growth Balance Globally growth/margin integrated Costs Industrialize alignment Cash focused Standardize activities R&D Best efficiency practices 28 2007-11-20
CEO agenda Closely monitor business development in different markets Seek underlying market changes - uncertainties in Europe Even stronger focus on operational excellence Adjust cost wherever possible Leverage leading position balance margins and growth Capitalize on restored scale advantage Leverage acquired assets sales growth over margins Converging networks, IPTV, US position, Charging Improve cash conversion Even with continued growth in turnkey projects Strategy remains unchanged expanding growth platform 29 2007-11-20
CFO agenda Improve trends analysis and forecasting All data available - reporting systems OK Improve financial communications Business dynamics impact, etc Conclusion from September sales shortfall Analyze underlying trends Costs alignment with business developments Contingency plans in place for possible slowdown Improve cash conversion even with cont d turnkey growth T&C s, incentives, processes 30 2007-11-20
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