UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
¨ | Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934 |
or
x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Fiscal Year Ended December 31, 20082009
or
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from/to
or
¨ | Shell company report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Date of event requiring this shell company report:
Commission file number 000–12033
TELEFONAKTIEBOLAGET LM ERICSSON
(Exact Name of Registrant as Specified in Its Charter)
LM ERICSSON TELEPHONE COMPANY
(Translation of Registrant’s Name Into English)
Kingdom of Sweden
(Jurisdiction of Incorporation or Organization)
SE-164 83 Stockholm, Sweden
(Address of Principal Executive Offices)
Roland Hagman, Vice President Group Function Financial Control
Telephone: +46 8 719 53 80, Facsimile: +46 8 719 42 22
SE-164 83 Stockholm, Sweden
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
American Depositary Shares | The NASDAQ Stock Market LLC | |
B Shares* | The NASDAQ Stock Market LLC |
* | Not for trading, but only in connection with the registration of the American Depositary Shares representing such B Shares pursuant to the requirements of the Securities and Exchange Commission |
Securities registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report:
B shares (SEK | ||
A shares (SEK | ||
C shares (SEK 1.00 nominal value) | 0 |
Indicate by check mark if the registrant is a well-seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨ No x
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
x Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board x Other ¨
Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 x Item 18 ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
i | ||
1 | ||
3 | ||
150 | ||
152 | ||
159 | ||
Management’s Report on Internal Control Over Financial Reporting | ||
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
FORM 20-F 20082009 CROSS REFERENCE TABLE
Our Annual Report on Form 20-F consists of the Swedish Annual Report for 2008,2009, with certain adjustments to comply with U.S. requirements, together with certain other information required by Form 20-F which is set forth under the heading Supplemental Information. The following cross reference table indicates where information required by Form 20-F may be found in this document.
Form 20-F Item Heading | Location in this document | Page Number | ||||||
PART I | ||||||||
1 | Identity of Directors, Senior Management and Advisers | Not applicable | ||||||
2 | Offer Statistics and Expected Timetable | Not applicable | ||||||
3 | Key Information | |||||||
A | Selected Financial Data | Five-Year Summary | ||||||
| ||||||||
| ||||||||
B | Capitalization and Indebtedness | Not applicable | ||||||
C | Reason for the Offer and Use of Proceeds | Not applicable | ||||||
D | Risk Factors | Risk Factors | ||||||
4 | Information on the Company | |||||||
A | History and Development of the Company | Board of Directors’ Report | ||||||
| ||||||||
Business | ||||||||
Capital Expenditures (capex) | ||||||||
| ||||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C26 Business Combinations | ||||||||
Note C32 Events After the Balance Sheet Date | ||||||||
Information on the Company | ||||||||
Company History | ||||||||
General Facts on the Company | ||||||||
| ||||||||
B | Business Overview |
| ||||||
Sustainability and Corporate Responsibility | 35 | |||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C3 Segment Information | ||||||||
Risk Factors | ||||||||
| ||||||||
| ||||||||
Market Environment | 171 | |||||||
Segment Overview | 173 | |||||||
Supplemental Information | ||||||||
Operating Results | 219 | |||||||
C | Organizational Structure | Information on the Company | ||||||
General Facts on the Company | ||||||||
Supplemental Information | ||||||||
Investments | ||||||||
D | Property, Plants and Equipment | Information on the Company | ||||||
Sourcing, Manufacturing and |
i
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Form 20-F Item Heading | Location in this document | Page Number | ||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C11 Property, Plant and Equipment | 84 | |||||||
Note C27 Leasing | ||||||||
Board of Directors’ Report | ||||||||
Capital Expenditures (capex) | ||||||||
4A | Unresolved staff comments | Not applicable | ||||||
5 | Operating and Financial Review and Prospects | |||||||
A | Operating Results | Market Trends | 159 | |||||
Board of Directors’ Report | ||||||||
Business Results | ||||||||
Supplemental Information | ||||||||
| ||||||||
Restructuring in 2008 and 2009 | 221 | |||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C1 Significant Accounting Policies | ||||||||
Note C2 Critical Accounting Estimates and Judgments | ||||||||
Note C20 Financial Risk Management and Financial Instruments | ||||||||
| ||||||||
| ||||||||
Risk Factors | ||||||||
Board of Directors’ Report | ||||||||
Risk Management | 37 | |||||||
B | Liquidity and Capital Resources | Board of Directors’ Report | ||||||
Financial Position | ||||||||
Cash Flow | ||||||||
| 24 | |||||||
Risk Management | ||||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C19 Interest-bearing Liabilities | ||||||||
Note C20 Financial Risk Management and Financial Instruments | ||||||||
Note C25 Statement of Cash Flows | ||||||||
C | Research and Development, Patents and Licenses, etc | Five-Year Summary | 10 | |||||
Board of Directors’ Report | ||||||||
| ||||||||
Consolidated Balance Sheet | 46 | |||||||
Information on the Company | ||||||||
| ||||||||
| ||||||||
D | Trend Information | Board of Directors’ Report | ||||||
Business Results | ||||||||
25 | ||||||||
Market Trends | ||||||||
E | Off-Balance Sheet Arrangements | Board of Directors’ Report | ||||||
Sony Ericsson Borrowings Guaranteed | 23 | |||||||
Off Balance Sheet Arrangements |
ii
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Form 20-F Item Heading | Location in this document | Page Number | ||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C24 Contingent Liabilities | 117 | |||||||
F | Tabular Disclosure of Contractual Obligations | Board of Directors’ Report | ||||||
Material Contracts | 33 | |||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C33 Contractual Obligations | ||||||||
6 | Directors, Senior Management and Employees | |||||||
A | Directors and Senior Management | Corporate Governance Report | ||||||
Members of the Board of Directors | ||||||||
Members of the Group Management Team | ||||||||
B | Compensation | Board of Directors’ Report | ||||||
Corporate Governance | 33 | |||||||
Corporate Governance Report 2009 | ||||||||
Board of Directors | 195 | |||||||
Company Management | 207 | |||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C17 Post-Employment Benefits | ||||||||
Note C29 Information Regarding | ||||||||
C | Board Practices | Corporate Governance Report | ||||||
Board of Directors | ||||||||
Members of the Board of Directors | ||||||||
Members of the Group Management Team | ||||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C29 Information Regarding | ||||||||
D | Employees | Five-Year Summary | 10 | |||||
Board of Directors’ Report | ||||||||
| ||||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C29 Information Regarding | ||||||||
E | Share Ownership | Share Information | ||||||
Shareholders | ||||||||
Corporate Governance Report | ||||||||
Members of the Board of Directors | ||||||||
Members of the Group Management Team | ||||||||
| ||||||||
|
iii
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Form 20-F Item Heading | Location in this document | Page Number | ||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C29 Information Regarding Members of the Board of Directors, Management and Employees | 126 | |||||||
7 | Major Shareholders and Related Party Transactions | |||||||
A | Major Shareholders | Share Information | ||||||
Shareholders | ||||||||
B | Related Party Transactions | Notes to the Consolidated Financial Statements | ||||||
Note C30 Related Party Transactions | ||||||||
C | Interests of Experts and Counsel | Not applicable | ||||||
8 | Financial Information | |||||||
A | Consolidated Statements and Other Financial Information | Consolidated Financial Statements | ||||||
Please see also Item 17 cross references | ||||||||
Report of Independent Registered Public Accounting Firm | ||||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C4 Net Sales | ||||||||
Board of Directors’ Report | ||||||||
Legal and Tax Proceedings | ||||||||
Supplemental Information | ||||||||
Dividends | ||||||||
B | Significant Changes | Board of Directors’ Report | ||||||
Post-Closing Events | 42 | |||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C32 Events after the Balance Sheet Date | ||||||||
9 | The Offer and Listing | |||||||
A | Offer and Listing Details | Share Information | ||||||
Offer and Listing Details | ||||||||
B | Plan of Distribution | Not applicable | ||||||
C | Markets | Share Information | ||||||
Stock Exchange Trading | ||||||||
D | Selling Shareholders | Not applicable | ||||||
E | Dilution | Not applicable | ||||||
F | Expenses of the Issue | Not applicable | ||||||
10 | Additional Information | |||||||
A | Share Capital | Not applicable | ||||||
B | Memorandum and Articles of Association | Supplemental Information | ||||||
Memorandum and Articles of Association | ||||||||
C | Material Contracts | Board of Directors’ Report | ||||||
Material Contracts | ||||||||
| ||||||||
| ||||||||
|
iv
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Form 20-F Item Heading | Location in this document | Page Number | ||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C33 Contractual Obligations | 141 | |||||||
D | Exchange Controls | Supplemental Information | ||||||
Exchange Controls | 225 | |||||||
E | Taxation | Supplemental Information | ||||||
Taxation | ||||||||
F | Dividends and Paying Agents | Not applicable | ||||||
G | Statement by Experts | Not applicable | ||||||
H | Documents on Display | Information on the Company | ||||||
| ||||||||
I | Subsidiary Information | Not applicable | ||||||
11 | Quantitative and Qualitative Disclosures About Market Risk | |||||||
A | Quantitative Information about Market Risk | Board of Directors’ Report | ||||||
Risk Management | ||||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C20 Financial Risk Management and Financial Instruments | ||||||||
B | Qualitative Information about Market Risk | Board of Directors’ Report | ||||||
Risk Management | 209 | |||||||
Notes to the Consolidated Financial Statements | ||||||||
Note C20 Financial Risk Management and Financial Instruments | 108 | |||||||
C | Interim Periods | Not applicable | ||||||
D | Safe Harbor | Not applicable | ||||||
E | Small Business Issuers | Not applicable | ||||||
12 | Description of Securities Other than Equity Securities | Not applicable | ||||||
A | Debt Securities | Not applicable | ||||||
B | Warrants and Rights | Not applicable | ||||||
C | Other Securities | Not applicable | ||||||
D | American Depositary Shares | Supplemental Information | ||||||
Depositary Fees and Charges | 230 | |||||||
PART II | ||||||||
13 | Defaults, Dividend Arrearages and Delinquencies | Not applicable | ||||||
14 | Material Modifications to the Rights of Security Holders and Use of Proceeds | Not applicable | ||||||
15 | Controls and Procedures | |||||||
A | Disclosure Controls and Procedures | Corporate Governance Report | ||||||
Disclosure Controls and Procedures | ||||||||
B | Management’s annual report on internal control over financial reporting | Management’s Report on Internal Control Over Financial Reporting | ||||||
|
| |||||||
|
| |||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| ||||||||
| 218 |
v
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Form 20-F Item Heading | Form 20-F Item Heading | Location in this document | Page Number | Form 20-F Item Heading | Location in this document | Page Number | ||||||||||
F | Change in Registrant’s Certifying Accountant | Not applicable | C | Attestation report of the registered public accounting firm | Report of Independent Registered Public Accounting Firm | 43 | ||||||||||
G | Corporate Governance | Corporate Governance Report 2008 | D | Changes in internal control over financial reporting | Corporate Governance Report 2009 | |||||||||||
Independence Requirements | 210 | Disclosure Controls and Procedures | 214 | |||||||||||||
PART III | ||||||||||||||||
17 | Financial Statements | Consolidated Income Statement | 41 | |||||||||||||
Consolidated Balance Sheet | 42 | |||||||||||||||
Consolidated Statement of Cash Flows | 43 | |||||||||||||||
Consolidated Statement of Recognized Income and Expense | 44 | |||||||||||||||
Notes to the Consolidated Financial Statements | 47 | |||||||||||||||
Report of Independent Registered Public Accounting Firm | 40 | |||||||||||||||
18 | Financial Statements | Not applicable | ||||||||||||||
19 | Exhibits1) | |||||||||||||||
16 | Reserved | |||||||||||||||
Exhibit 1 | Articles of Association, incorporated by reference to our Form 6-K dated May 16, 2006 | A | Audit Committee Financial Expert | Corporate Governance Report 2009 | ||||||||||||
Exhibit 2 | Not applicable | The Audit Committee | 199 | |||||||||||||
Exhibit 3 | Not applicable | B | Code of Ethics | Corporate Governance Report 2009 | ||||||||||||
Exhibit 4.1 | Frame Agreement with STMicroelectronics N.V. on establishment of a JV | An Ethical Business | 191 | |||||||||||||
Exhibit 5 | Not applicable | C | Principal Accountant Fees and Services | Notes to the Consolidated Financial Statements | ||||||||||||
Exhibit 6 | Please see Notes to the Consolidated Financial Statements, Note C1 Significant Accounting Policies | 45 | Note C31 Fees to Auditors | 140 | ||||||||||||
Exhibit 7 | For definitions of certain ratios used in this report, please see Financial Terminology | 230 | Corporate Governance Report 2009 | |||||||||||||
Exhibit 8 | Please see Supplemental Information, Investments | 228 | Audit Committee Pre-Approval Policies and Procedures | 200 | ||||||||||||
Exhibit 9 | Not applicable | D | Exemptions from the Listing Standards for Audit Committees | Corporate Governance Report 2009 | ||||||||||||
Exhibit 10 | Not applicable | Independence of the Directors | 196 | |||||||||||||
Exhibit 11 | Our Code of Business Ethics and Conduct is included on our web site at | E | Purchase of Equity Securities by the Issuer and Affiliated Purchasers | Not applicable | ||||||||||||
Exhibit 12 | 302 Certifications | F | Change in Registrant’s Certifying Accountant | Not applicable | ||||||||||||
Exhibit 13 | 906 Certifications | G | Corporate Governance | Corporate Governance Report 2009 | ||||||||||||
Exhibit 14 | Not applicable | Independence of the Directors | 196 | |||||||||||||
Exhibit 15.1 | Consent of Independent Registered Public Accounting Firm | Supplemental Information | ||||||||||||||
Exhibit 15.2 | Consolidated Financial Statements of Sony Ericsson Mobile Communications AB | Independence Requirements | 230 | |||||||||||||
Exhibit 15.3 | Consent of Independent Accountants | |||||||||||||||
PART III | PART III | |||||||||||||||
17 | Financial Statements | Consolidated Income Statement | 44 | |||||||||||||
Consolidated Statement of Comprehensive Income | 45 | |||||||||||||||
Consolidated Balance Sheet | 46 | |||||||||||||||
Consolidated Statement of Cash Flows | 47 | |||||||||||||||
Consolidated Statement of Changes in Equity | 48 | |||||||||||||||
Notes to the Consolidated Financial Statements | 49 | |||||||||||||||
Report of Independent Registered Public Accounting Firm | 43 | |||||||||||||||
18 | Financial Statements | Not applicable | ||||||||||||||
19 | Exhibits | |||||||||||||||
Exhibit 1 | Articles of Association | |||||||||||||||
Exhibit 2 | Not applicable | |||||||||||||||
Exhibit 3 | Not applicable | |||||||||||||||
Exhibit 4 | Not applicable | |||||||||||||||
Exhibit 5 | Not applicable | |||||||||||||||
Exhibit 6 | Please see Notes to the Consolidated Financial Statements, Note C1 Significant Accounting Policies | 49 |
vi
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Form 20-F Item Heading | Location in this document | Page Number | ||||||
Exhibit 7 | For definitions of certain ratios used in this report, please see Financial Terminology | 234 | ||||||
Exhibit 8 | Please see Supplemental Information, Investments | 232 | ||||||
Exhibit 9 | Not applicable | |||||||
Exhibit 10 | Not applicable | |||||||
Exhibit 11 | Our Code of Business Ethics and Conduct is included on our web site at | |||||||
Exhibit 12 | 302 Certifications | |||||||
Exhibit 13 | 906 Certifications | |||||||
Exhibit 14 | Not applicable | |||||||
Exhibit 15.1 | Consent of Independent Registered Public Accounting Firm | |||||||
Exhibit 15.2 | Consolidated Financial Statements of Sony Ericsson Mobile Communications AB | |||||||
Exhibit 15.3 | Consent of Independent Registered Public Accounting Firm |
vii
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
THIS IS ERICSSON IN 20082009 MILESTONES
AsJANUARY-MARCH
Verizon Wireless chose Ericsson as one of two primary suppliers to build its LTE network infrastructure. Verizon Wireless will be the first operator to offer commercial LTE services in the United States. Later in the year, Metro-PCS chose Ericsson as the sole supplier of its LTE network buildout. Both operators are new Ericsson customers.
China Unicom selected Ericsson to supply 3G networks and services for 15 Chinese provinces and to upgrade its GSM networks to support 2G/3G interoperability in 10 provinces.
The ST-Ericsson joint venture was launched as a leading supplier of semiconductors and platforms for mobile devices to four of the top five handset manufacturers.
With Ericsson as its partner for mobile learning, the BBC World Service Trust uses the creative power of media to reduce poverty and promote human rights in Bangladesh. The Financial Times reported that more than 300,000 people had already signed up to learn English over their mobile phones.
APRIL-JUNE
In the first agreement of its kind in Africa, leading mobile operator Zain awarded Ericsson the management responsibility for more than 4,000 sites across Nigeria, including network operations, field operations and business support systems.
In support of the initiative Caring for Climate of the UN Global Compact, Ericsson’s CEO Carl-Henric Svanberg addressed the UN Secretary General Ban-Ki Moon during the World Business Summit on Climate Change. The message was that a modernized telecommunications infrastructure can significantly contribute to the creation of a carbon-lean economy.
The world’s largest upgrade of a live mobile network was accomplished at a record pace for Vodafone Essar in India. Ericsson replaced more than 10,500 of the operator’s GSM radio sites in just 13 months, reaching a peak rate of one site every minute and without disrupting service to more than 13 million subscribers.
JULY-SEPTEMBER
Ericsson’s first major services contract in North America is also the world’s largest, valued at USD 4.5–5 billion over seven years. Operator Sprint and its 50 million customers benefit from Ericsson’s leadership and best-in-class economies of scale in network services.
Ericsson signed framework agreements worth USD 1.7 billion for 2G/3G mobile communication equipment and related services for 2009 with two major Chinese telecom operators: China Mobile and China Unicom.
All three telecom operators in China selected Ericsson to provide fixed broadband access to millions of consumers in nine provinces.
Ericsson was selected by AT&T as one of two domain suppliers of wireline access products and services. This breakthrough win for Ericsson in North America significantly accelerates AT&T’s ability to bring new broadband services to the market.
OCTOBER-DECEMBER
With the acquisition of Nortel’s CDMA and LTE business, Ericsson became the largest supplier of infrastructure and services in North America, based on Ericsson reported sales and publicly reported sales and estimated sales for Ericsson’s main competitors.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Shipments of Ericsson’s mobile broadband modules almost reached 1.5 million units. Asus, the inventor of the netbook, started to use Ericsson’s embedded modules and Ericsson is now a supplier to 3 of the top 5 PC manufacturers.
Ericsson announced low-cost mobile broadband for the world’s three billion GSM subscribers through a software upgrade. The EDGE evolution upgrade lets people enjoy the benefits of 3G performance – a great opportunity in countries where the mobile phone is the most affordable way to access the internet.
Swedish TV network TV4 outsourced the operation of its nationwide playout services. Addressing the broadcasting industry substantially expands Ericsson’s opportunities—not only for managed services, but also for the multimedia product portfolio.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
THIS IS ERICSSON
Founded in 1876, Ericsson is a leading provider of communications networks, related services and multimedia solutions. Through our joint ventures ST-Ericsson and Sony Ericsson, we are also a major provider of handsets. Our experience building networks in more than 175 countries gives us unique customer and consumer insights, and our extensive portfolio of telecommunications solutions and intellectual property (patents) offer a true business advantage. We are committed to working with our customers and partners to expand the borders of telecommunications for the benefit of people everywhere.
Our operations have been divided into segments that create competitive advantage and best meet the needs of our global customer base.
NETWORKS
Technology leadership, a broad product portfolio and scale enable Ericsson to excel in meeting the coverage, capacity and network evolution needs of fixed and mobile operators. We provide products for all major standards as well as all essential elements of a network on an end-to-end solutions basis.
SERVICES
Expertise in network design, rollout, integration, operation and customer support, combined with a global structure and robust local capabilities, enables us to understand and respond to the unique challenges of each customer. As a result we are able to capitalize on the trend for operators to outsource a broader range of activities.
MULTIMEDIA
Innovative application platforms, service delivery and revenue management solutions, combined with leading content developer and application provider relationships, enable Ericsson to help customers create exciting and differentiating multimedia services.
SONY ERICSSON
The complementary strength of Sony Ericsson further enhances our consumer perspective for superior end-to-end offerings. Sony Ericsson offers exciting consumer experience through phones, accessories, content and applications.
ST-ERICSSON
ST-Ericsson represents the link between infrastructure and handsets in Ericsson’s offering. They provide a market-leading portfolio of wireless platforms and semiconductors.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Performance
In a progressively more challenging environment during the year, Ericsson’s market shares were well maintained, adjusted operating margin1) was slightly improved, and cash conversion was well above target.
Grow faster than the market
In the economic slowdown, the market for GSM/WCDMA network equipment and related services is estimated to telecom operators, Ericsson has over 78,000 employees and customers inhave declined by more than 175 countries. Innovation, technology leadership and sustainable business solutions advance a vision10%. Ericsson’s sales for comparable units were down 9%, adjusted for currency effects2). A decline in Networks in line with the market was partly offset by an increase in Professional Services, driven by strong growth in managed services. Reported Multimedia sales increased by 5% for comparable units. The Multimedia market is still too fragmented to be the prime driver in an all-communicating world. Long-term relationships with all major operators result in Ericsson serving well over 40 percent of all mobile subscribers. Ericsson manages a number of operator-owned networks with, altogether, 250 million subscribers globally. The Sony Ericsson joint venture is a major supplier of feature-rich mobile phones.make relevant overall market growth estimates.
FINANCIAL RESULTS IN SHORTBest-in-class operating margins
Sales grew by 11 percent to SEK 209 billion
with global demand across the entire portfolio.
Operating margin, excluding JV results and restructuring, improved slightly to 12% (11%) despite lower volumes and remained the highest among major listed competitors. Multimedia showed the greatest improvement, up significantly from breakeven levels in 2008.
Cash conversion of more than 70%
Cash conversion was 11.4 (16.3) percent, excluding restructuring charges,
due to a gross margin decrease along with insignificant contribution from Sony Ericsson compared to 2007.
Earnings per share 49 percent lower, SEK 3.52,
negatively impacted by restructuring charges and Sony Ericsson.
Payment readiness improved from SEK 65 billion to SEK 85 billionwell above the target at year end,
with117% (92%), reflecting management’s ongoing focus on improving working capital efficiency improvements.as well as a lower level of turnkey projects.
KEY DEVELOPMENTS
650 million new mobile subscriptions added to reach the 4Two billion mark.subscribers supported by Ericsson 24 hours a day, 7 days a week.
Emerging markets fastest growing, with India and China now our largest markets.Ericsson provides managed services to network operators which together serve 370 million subscribers.
Record year for GSM network shipments.
Weaker demand for replacement phones affecting mobile phone market but usage grew.
Mobile broadband took off with more than doubled subscriptions and peak data rates of 21 Mbps.
Joint venture to build leading position in semiconductors and platforms for mobile devices.
Multimedia investments start to pay off with especially good progress in Revenue Management and Service Delivery & Provisioning.
LTE established as first true global mobile standard.
Introduced new multi-standard radio base station.
Expanded presence in Silicon Valley to strengthen our position in IP technologies.
1) | Excluding restructuring charges and share in earnings of JVs. |
2) | The impact of foreign currency is calculated based on exchange rate changes in 2009 compared to 2008. Releases under hedge accounting in 2008 and 2009 have also been excluded. |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
North America set to become Ericsson’s largest and fastest growing market.
Ericsson’s presence in North America elevated—Chief Technology Officer relocated to Silicon Valley.
Ericsson is the only supplier selected to participate in all major 4G/LTE projects.
A new brand launched with the value proposition: “Innovating to Empower”.
Both joint ventures make progress on returning to report profits.
FINANCIAL RESULTS IN SHORT | ||
NET SALES | NET CASH | |
SEK 206.5 billion | SEK 36.1 billion (Dec. 31, 2009) | |
OPERATING INCOME* | ||
SEK 24.6 billion | EARNINGS PER SHARE | |
OPERATING MARGIN* | SEK 1.14 | |
12 percent |
* | Excluding restructuring charges and share in earnings of JVs |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
DEAR FELLOW SHAREHOLDERS,LETTER FROM THE CEO
We may be living in uncertain times, but there’s one thing that gives me a strong belief inLOOKING BACK
Dear fellow shareholders,
While the future of our business: the majority of people worldwide appreciate the benefits that our products and services bring.
Mobile subscriptions have now reached the four billion mark, a remarkable achievement that reinforces our vision to be the prime driver in an all-communicating world. This was also the year that mobile broadband really took off and Ericsson was a key contributor to both of these milestones. As you can see from the results, our strategy and commitment to our vision are paying off.
Financially strong
We had a solid performance this year with robust sales growth and best-in-class margins. Ericsson’s strong financial position enables us to pursue strategic opportunities, such as quickly building a market-leading position in core mobile phone technologies from a joint venture with STMicroelectronics.
The turmoil within the financial markets is leading to a macroeconomic downturn that will eventually affectcurrent economic environment affects all parts of society. However,society the vast majority of our customers are financially strong. Their networks are well dimensioned, but traffic is growing rapidly which drives the needlonger-term fundamentals for continued spending to maintain quality of service.
So far, our network and services businesses have hardly been affected at all by the financial markets’ turmoil. This is not to say we take the macro-economic situation lightly, as it would be unreasonable to believe that we will not be affected in some way. We are therefore accelerating our move to all-IP technology to reduce our costs and prepare for tougher times. As the cost reductions largely come from more efficient ways of working, our strategy and unique capabilities should be unaffected.
Weakening demand for replacement phones is, however, impacting Sony Ericsson, especially in Western Europe. The JV is adjusting to the deteriorating market conditions with significant cost reduction activities which will restore its capability for profitable growth.
Benefiting from long-term trends
Despite the current macro-economic environment, the fundamentals of our industry are sound andremain solid. Over the underlying demand drivers remain intact. Today, mobile communication is just as essential to any nation’s infrastructure as water, transportation or electricity.
The socio-economic contributionspast decade the number of mobile communications are well demonstrated withsubscriptions in the importance of broadband increasing. The US Senate Appropriations Committee estimates that for every USD 1 invested in broadband networks, USD 10 are returnedworld has grown from some 700 million to society. The returns could be even higher withover 4.5 billion. Mobile telephony is reaching a penetration beyond all expectations. Ten years ago it was all 2G; today 3G is the prevailing technology, mobile broadband networks as they are cheaperis a reality and faster to build than fixed networks.telecom is literally changing the world.
Ericsson playshas played a vital role in bringing the benefits of mobile broadband to the majority of peoplethe world’s population. What we do greatly improves people’s lives and society at large—in short, what we do shapes people’s lives and the world around us. One of my strongest memories is from the world. Peopleday we launched the network in many partsDertu, one of the world will soon beMillennium Villages. Their chief, one of the camel drivers, came up to me and said, “Today our village is reborn”. People are now able to share ideas and information and accomplish things that were nevernot possible before—share ideas and information whenever and wherever they want, get medical advice and e-learning, stay in touch with family and friends and much more.before.
In the past ten years the telecom industry and Ericsson have transformed; from focus on voice to focus on internet, from hardware to software and from providing network equipment to providing solutions including services.
During the same period, many ways, 2008 wasof our competitors have been forced to leave the year of mobile broadband. Data traffic increased dramaticallyarena and new ones have entered. We work harder than ever to outperform them and match our customers’ needs.
We have extended our leadership in mobile broadbandcommunications by building a highly successful services business which today accounts for almost 40 percent of our total Group sales. With less hardware, increased network complexity, and the move to all-IP, today is very much about making it work and supporting our customers in running and maintaining networks built by Ericsson, particularly for operators using bundled tariffs or a flat fee structure. We delivered software enhancements that tripled peak data rates, enabling a user experience and cost similar to fixed broadband. Further enhancements arerealizing business models and rollout plans. During 2009 we captured additional strategic contracts in the works.services area and we now manage networks with 370 million subscribers.
The acquisition of Nortel’s CDMA business during 2009, on the heels of important breakthrough contract wins in North America, positioned Ericsson as the leading provider of telecoms technology and services in the United States and Canada. We have also firmly established ourselves in Silicon Valley where much of the internet development takes place.
We also gained strategic contracts for the radio standard LTE (Long-Term Evolution) which offers even greater network speeds and in December 2009 we passed another significant milestone with the worlds’ first commercial launch of an LTE network in Sweden.
“IN THE PAST TEN YEARS THE TELECOM INDUSTRY AND ERICSSON HAVE TRANSFORMED.”
The industry has changed and our ability to change with it, and indeed to lead the change, is perhaps our most important asset. New and compelling challenges lie ahead and as a company Ericsson must continue to drive the transformation of our industry.
My years as President and CEO of Ericsson have been the best of my professional career. Telecom is one of the most exciting industries to work in—so dynamic, challenging and competitive. I truly believe that telecom
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
A new radio standard, Long Term Evolution (LTE), which offers even greater speeds, is nowand the first truly global mobile standard. However, GSMentire Information and WCDMA systemsCommunication Technology (ICT) sector, particularly broadband networks, will coexist for some time and we have developed a new, more energy-efficient radio base station that also supports multiple standards.
What’s more, our services business gained market share and we now manage a variety of operator networks, serving some 250 million subscribers worldwide.
Trusted partner
Being a trusted partner means working closely with our customers to fully understand their strategic needs and intentions. Customers tell us that we earn our competitive advantage by actively listening, sharing and exploring ways to cooperatively developform the most efficient solutions. Our mobile communications infrastructure, technology leadership, and telecom services expertise are highly rated by our customers in independent studies. Trust in Ericsson helps us to outperform the market and places Ericsson well aheadbackbone of the competition.digital 21st century infrastructure, helping industries with the necessary reductions in their carbon footprint.
In closing, I will continue to follow and be involved in Ericsson’s development in my role as a Board member. I am very excitedproud and grateful to have had the opportunity to be at the helm of this great company and I will remember all the extraordinary people I have had the honor to work with, customers, partners and colleagues alike.
Carl-Henric Svanberg
Former President and CEO
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
“IN THIS SEA OF CONNECTIVITY WE TAKE THE ROLE OF NAVIGATOR.”
LOOKING FORWARD
Dear shareholders,
2009 was a year of mixed trends and with varied operator investment behavior. Some markets were impacted by the financial climate while others continued to show growth.
Our Group sales for the full year, however, were flat and the operating margin increased slightly. Despite the challenging economic environment we maintained market shares, cash flow was good and our financial position remained strong. During the year we undertook significant cost reduction activities. These, in combination with large losses in our joint ventures, affected our earnings negatively. However, cost reductions will result in reduced cost base going forward and our joint ventures remain on track to return to profit.
It is now 2010 and we have a new decade ahead of us. A decade of new opportunities and new challenges. Telecoms is no longer about voice only. We do not just connect places and people. We also connect machines and devices. We connect the potentialdeveloping world to the developed world, rural areas to urban areas. Telecoms is the nervous system of the telecommunications industryworld.
In Ericsson we have a vision for this new decade—that there will be 50 billion connected devices. We will connect people with for example heart problems to improveremote monitoring systems so they can stay in the qualitycomfort of lifetheir homes, and we will connect our cars and trucks to smart road systems for safer driving and better fuel economy. Broadband networks will be the backbone of our smart cities, where houses will be connected so we can monitor and manage power consumption.
In this world the challenge will lie in societies arounddealing with the world. complexity of connecting all these devices. And we cannot fail. Patients must be able to rely on their health monitoring services. Transport companies must be sure that they can minimize gas consumption by smart routing and up-to-date traffic information.
In this sea of connectivity we take the role of navigator. We must support our customers and show them the way. This will require us to always put our customers first. Always have the best competence and drive innovation throughout the customer relationship.
Our business is about both technology and services. We have to be consultants; we have to be able to develop complex network management systems, we have to be able to integrate systems and solutions from many different suppliers and vendors. In addition, we should be able to deliver the best revenue management solutions and multimedia applications the consumers have ever seen. Everything must be based on IP software.
This new decade requires a lot from us. We will have to change our ways of working. Our success will be determined by our ability to see beyond technology, stay ahead of our customers and solve problems before they even arise.
In preparing ourselves to be successful in this new decade, we will need to continuously adjust to changing economic and competitive conditions while staying the course to our longer-term objectives. We will continue to proactively take actions to safeguard our financial position, leading technology and customer relationships. In order to drive shareholder value we focus on four financial targets; we want to grow the Company faster than the market, maintain best-in-class operating margins, have a healthy cash generation and grow earnings in the JVs.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
We have exciting developments ahead. The future will require us to be agile, brave and focused on performance in all we do.
I take great pride in Ericsson’s role in making this happen.am proud and honored to lead Ericsson into a new decade where we will undoubtedly break new ground. Even more people and devices will share information across the world.
Carl-Henric SvanbergHans Vestberg
President and CEO
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
SEK million | 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||
Income statement items | |||||||||||||||
Net sales | 208,930 | 187,780 | 179,821 | 153,222 | 131,972 | ||||||||||
Operating income | 16,252 | 30,646 | 35,828 | 33,084 | 26,706 | ||||||||||
Financial net | 974 | 83 | 165 | 251 | -540 | ||||||||||
Net income | 11,667 | 22,135 | 26,436 | 24,460 | 17,836 | ||||||||||
YEAR-END POSITION | |||||||||||||||
Total assets | 285,684 | 245,117 | 214,940 | 209,336 | 186,186 | ||||||||||
Working capital | 99,951 | 86,327 | 82,926 | 86,184 | 69,268 | ||||||||||
Capital employed | 182,439 | 168,456 | 142,447 | 133,332 | 115,144 | ||||||||||
Net cash | 34,651 | 24,312 | 40,728 | 50,645 | 42,911 | ||||||||||
Property, plant and equipment | 9,995 | 9,304 | 7,881 | 6,966 | 5,845 | ||||||||||
Stockholders’ equity | 140,823 | 134,112 | 120,113 | 101,622 | 80,445 | ||||||||||
Minority interests | 1,261 | 940 | 782 | 850 | 1,057 | ||||||||||
Interest-bearing liabilities and post-employment benefits | 40,354 | 33,404 | 21,552 | 30,860 | 33,643 | ||||||||||
OTHER INFORMATION | |||||||||||||||
Earnings, per share, basic, SEK | 3.54 | 6.87 | 8.27 | 7.67 | 5.54 | ||||||||||
Earnings, per share, diluted, SEK | 3.52 | 6.84 | 8.23 | 7.64 | 5.54 | ||||||||||
Cash dividends per share, SEK | 1.85 | 1) | 2.50 | 2.50 | 2.25 | 1.25 | |||||||||
Stockholders’ equity per share, SEK | 44.21 | 42.17 | 37.82 | 32.03 | 25.40 | ||||||||||
Number of shares outstanding (in millions) | |||||||||||||||
—at end of period, basic | 3,185 | 3,180 | 3,176 | 3,173 | 3,167 | ||||||||||
—average, basic | 3,183 | 3,178 | 3,174 | 3,169 | 3,166 | ||||||||||
—average, diluted | 3,202 | 3,193 | 3,189 | 3,181 | 3,179 | ||||||||||
Additions to property, plant and equipment | 4,133 | 4,319 | 3,827 | 3,365 | 2,452 | ||||||||||
Depreciation of property, plant and equipment | 3,108 | 3,121 | 3,007 | 2,804 | 2,434 | ||||||||||
Acquisitions/capitalization of intangible assets | 1,287 | 29,838 | 18,319 | 2,250 | 1,950 | ||||||||||
Amortization of intangible assets | 5,006 | 5,433 | 4,237 | 3,269 | 4,452 | ||||||||||
Research and development expenses | 33,584 | 28,842 | 27,533 | 24,059 | 23,421 | ||||||||||
—as percentage of net sales | 16.1 | % | 15.4 | % | 15.3 | % | 15.7 | % | 17.7 | % | |||||
RATIOS | |||||||||||||||
Operating margin | 7.8 | % | 16.3 | % | 19.9 | % | 21.6 | % | 20.2 | % | |||||
Operating margin excluding Sony Ericsson | 8.0 | % | 12.5 | % | 16.7 | % | 20.1 | % | 18.6 | % | |||||
EBITDA margin | 11.9 | % | 20.8 | % | 24.1 | % | 25.4 | % | 25.5 | % | |||||
Cash conversion | 92 | % | 66 | % | 57 | % | 47 | % | 80 | % | |||||
Return on equity | 8.2 | % | 17.2 | % | 23.7 | % | 26.7 | % | 24.2 | % | |||||
Return on capital employed | 11.3 | % | 20.9 | % | 27.4 | % | 28.7 | % | 26.4 | % | |||||
Equity ratio | 49.7 | % | 55.1 | % | 56.2 | % | 49.0 | % | 43.8 | % | |||||
Capital turnover | 1.2 | 1.2 | 1.3 | 1.2 | 1.2 | ||||||||||
Inventory turnover | 5.4 | 5.2 | 5.2 | 5.1 | 5.7 | ||||||||||
Trade receivables turnover | 3.1 | 3.4 | 3.9 | 4.1 | 4.1 | ||||||||||
Payment readiness, SEK million | 84,917 | 64,678 | 67,454 | 78,647 | 81,447 | ||||||||||
—as percentage of net sales | 40.6 | % | 34.4 | % | 37.5 | % | 51.3 | % | 61.7 | % | |||||
STATISTICAL DATA, YEAR-END | |||||||||||||||
Number of employees | 78,740 | 74,011 | 63,781 | 56,055 | 50,534 | ||||||||||
—of which in Sweden | 20,155 | 19,781 | 19,094 | 21,178 | 21,296 | ||||||||||
Export sales from Sweden, SEK million | 109,254 | 102,486 | 98,694 | 93,879 | 86,510 |
For definitions of the financial terms used, see Glossary and Financial Terminology.Terminology on page 234.
SEK million | 2009 | Change | 2008 | 2007 | 2006 | 2005 | ||||||||||||
Income statement items | ||||||||||||||||||
Net sales | 206,477 | –1 | % | 208,930 | 187,780 | 179,821 | 153,222 | |||||||||||
Operating income | 5,918 | –64 | % | 16,252 | 30,646 | 35,828 | 33,084 | |||||||||||
Financial net | 325 | –67 | % | 974 | 83 | 165 | 251 | |||||||||||
Net income | 4,127 | –65 | % | 11,667 | 22,135 | 26,436 | 24,460 | |||||||||||
Year-end position | ||||||||||||||||||
Total assets | 269,809 | –6 | % | 285,684 | 245,117 | 214,940 | 209,336 | |||||||||||
Working capital | 99,079 | –1 | % | 99,951 | 86,327 | 82,926 | 86,184 | |||||||||||
Capital employed | 181,680 | — | 182,439 | 168,456 | 142,447 | 133,332 | ||||||||||||
Net cash | 36,071 | 4 | % | 34,651 | 24,312 | 40,728 | 50,645 | |||||||||||
Property, plant and equipment | 9,606 | –4 | % | 9,995 | 9,304 | 7,881 | 6,966 | |||||||||||
Stockholders’ equity | 139,870 | –1 | % | 140,823 | 134,112 | 120,113 | 101,622 | |||||||||||
Minority interests | 1,157 | –8 | % | 1,261 | 940 | 782 | 850 | |||||||||||
Interest-bearing liabilities and post-employment benefits | 40,653 | — | 40,354 | 33,404 | 21,552 | 30,860 | ||||||||||||
Other information | ||||||||||||||||||
Earnings, per share, basic, SEK | 1.15 | –68 | % | 3.54 | 6.87 | 8.27 | 7.67 | |||||||||||
Earnings, per share, diluted, SEK | 1.14 | –68 | % | 3.52 | 6.84 | 8.23 | 7.64 | |||||||||||
Cash dividends per share, SEK | 2.00 | 1) | 8 | % | 1.85 | 2.50 | 2.50 | 2.25 | ||||||||||
Stockholders’ equity per share, SEK | 43.79 | –1 | % | 44.21 | 42.17 | 37.82 | 32.03 | |||||||||||
Number of shares outstanding (in millions) | ||||||||||||||||||
—end of period, basic | 3,194 | — | 3,185 | 3,180 | 3,176 | 3,173 | ||||||||||||
—average, basic | 3,190 | — | 3,183 | 3,178 | 3,174 | 3,169 | ||||||||||||
—average, diluted | 3,212 | — | 3,202 | 3,193 | 3,189 | 3,181 | ||||||||||||
Additions to property, plant and equipment | 4,006 | –3 | % | 4,133 | 4,319 | 3,827 | 3,365 | |||||||||||
Depreciation and write-downs/impairments of property, plant and equipment | 3,502 | 13 | % | 3,105 | 2,914 | 3,038 | 2,438 | |||||||||||
Acquisitions/capitalization of intangible assets | 11,413 | — | 1,287 | 29,838 | 18,319 | 2,250 | ||||||||||||
Amortization and write-downs/impairments of intangible assets | 8,621 | 55 | % | 5,568 | 5,459 | 4,479 | 3,364 | |||||||||||
Research and development expenses | 33,055 | –2 | % | 33,584 | 28,842 | 27,533 | 24,059 | |||||||||||
—as percentage of net sales | 16.0 | % | — | 16.1 | % | 15.4 | % | 15.3 | % | 15.7 | % | |||||||
Ratios | ||||||||||||||||||
Operating margin excluding joint ventures | 6.5 | % | — | 8.0 | % | 12.5 | % | 16.7 | % | 20.1 | % | |||||||
Operating margin | 2.9 | % | — | 7.8 | % | 16.3 | % | 19.9 | % | 21.6 | % | |||||||
EBITDA margin | 8.7 | % | — | 11.9 | % | 20.8 | % | 24.1 | % | 25.4 | % | |||||||
Cash conversion | 117 | % | — | 92 | % | 66 | % | 57 | % | 47 | % | |||||||
Return on equity | 2.6 | % | — | 8.2 | % | 17.2 | % | 23.7 | % | 26.7 | % | |||||||
Return on capital employed | 4.3 | % | — | 11.3 | % | 20.9 | % | 27.4 | % | 28.7 | % | |||||||
Equity ratio | 52.3 | % | — | 49.7 | % | 55.1 | % | 56.2 | % | 49.0 | % | |||||||
Capital turnover | 1.1 | — | 1.2 | 1.2 | 1.3 | 1.2 | ||||||||||||
Inventory turnover days | 68 | — | 68 | 70 | 71 | 74 | ||||||||||||
Trade receivables turnover | 2.9 | — | 3.1 | 3.4 | 3.9 | 4.1 | ||||||||||||
Payment readiness, SEK million | 88,960 | 5 | % | 84,917 | 64,678 | 67,454 | 78,647 | |||||||||||
—as percentage of net sales | 43.1 | % | — | 40.6 | % | 34.4 | % | 37.5 | % | 51.3 | % | |||||||
Statistical data, year-end | ||||||||||||||||||
Number of employees | 82,493 | 5 | % | 78,740 | 74,011 | 63,781 | 56,055 | |||||||||||
—of which in Sweden | 18,217 | –10 | % | 20,155 | 19,781 | 19,094 | 21,178 | |||||||||||
Export sales from Sweden, SEK million | 94,829 | –13 | % | 109,254 | 102,486 | 98,694 | 93,879 |
1) | For 2009, as proposed by the Board of Directors. |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Dear shareholder,DEAR SHAREHOLDER,
This year was marked byAs we head into 2010 and a seriesnew decade, we should consider the phenomenal transformation of dramatic macro-economic events whichthe telecoms industry over the past decade, including the convergence of the telecom, IT and media industries. Through this and the explosive development in fixed and mobile internet usage, mobile communications has createdhad a difficultremarkable growth, with the number of subscribers increasing from 700 million in 2000 to more than 4.5 billion in 2009. Significant consolidation has occurred among operators as well as equipment suppliers.
I would like to express my sincere thanks to Carl-Henric Svanberg for his outstanding helmsmanship during his time forwith the world economy. However, Ericsson remains well positioned and strong relative to its peers and I can assure you that all Ericsson employees are working hard to bring value to customers—the ultimate pathCompany. Ericsson’s key to success for the Companyduring these years has been Carl-Henric Svanberg’s willingness to seek opportunity through change and proactively address challenges.
The Board’s work in turn for you.
Ericsson’s situation today is quite different from what it was during the market downturn earlier this decade. The Company now has2009 had a healthy balance sheet and strong cash position. In addition, Ericsson refinanced maturing loans and secured new loans before the financial market collapse—a decision that now offers benefits in terms of greater liquidity, making it possible to pursue opportunities created by the market situation.
significant focus on strategic matters. Ericsson’s strategy to leverage its leading position and technological prowess to invest in future growth areas remains unchanged. However, adjustments to
The key future opportunity for the global macro-economic environmentindustry and Ericsson will be necessarythe increased traffic generated by mobile broadband, driven by internet and social media, and a shift from connecting places and people to connecting devices and applications. Systems integration skills and application enablers will play an increasingly important role in the near term and the Company’s cost base will be reducedthis market development. The Company intends to maintain margins. Utmost care will be givenbuild a strong position in these areas to preserve Ericsson’s longer-term prospects and technology leadership.
The Board work in 2008 had a significant focus on strategic matters. A major decision was taken to form a joint venture, merging Ericsson’s mobile platform activities and STMicroelectronics’ NXP-Wireless unit, to create a world-leading company in semiconductors and platforms for mobile applications. The JV will build oncomplement the current relationshipleadership in network technologies and will have a strong combined offering and a broad customer base.operations.
Operator and consumer sensitivity to the macro-economy is an important factor for Ericsson, closely monitored by the Board. During 2009, Ericsson was affected in the second half by the economic downturn as many operators reduced their network investments. This was largely offset by good sales in the first half and by increasing sales of services and multimedia solutions. The main impact observed so far has been a weakening demand for new mobile phonesBoard also addressed the Company’s restructuring program, the Nortel acquisition, and the expanded presence in Silicon Valley to support acceleration of the move to all-IP technology. Through key contract wins and the acquisition of parts of Nortel, Ericsson became the largest supplier of network technology and services in North America.
Ericsson’s joint ventures Sony Ericsson management is aggressively addressing this development, with significant cost reductions underwayand ST-Ericsson were strongly affected by the market decline, and forceful actions have been taken to restore their profitability.
That said, I believe Ericsson remains well positioned in relation to its peers, with sustained revenues and margins and in certain areas increased market shares, a healthy balance sheet and a strong cash position. This enables the Company to pursue emerging opportunities created by the market situation.
The debate around executive compensation has recently intensified following the macro-economic developments.intensified. Benchmarking with similar global companies similar to Ericsson shows that we have a conservative but still competitive compensation schemestructure that rewards performance and effectively aligns employeeemployees’ longer-term interests with the intereststhose of shareholders.shareholders’.
Our principles for employee remuneration—performance, competitiveness, fairness—mirrors Ericsson’s core values of respect, professionalism and perseverance. I am confident that these principles areremain appropriate and reasonable even during these uncertain times.reasonable.
Looking to the future, I welcome Hans Vestberg as our new CEO and wish him all the best in his new role. The demandBoard and I are convinced that Hans has the qualities it takes to lead Ericsson, and we give him and his new team our full support.
Change and challenge seem to be the by-words for mobile communications should only increase with technological advancements lowering coststhe world today. If embracing change and proactively addressing challenges brings rewards, then the coming years certainly look exciting for affordability to more and more consumers. By making mobile communications available to everyone, Ericsson is fundamentally contributing to socio-economic development in emerging markets and to a better environment globally. I am particularly proud of this accomplishment and encourage the Company to continue on this path.Ericsson.
I sincerely appreciate your support during the year.
Michael Treschow
Chairman of the Board
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
BOARD OF DIRECTORS’ REPORT 2009
This Board of Directors’ Report is based on Ericsson’s consolidated financial statements, prepared in accordance with IFRS.IFRS as issued by the IASB. The application of reasonable but subjective judgments, estimates and assumptions to accounting policies and procedures affects the reported amounts of assets and liabilities and contingent assets and liabilities at the balance sheet date as well as the reported amounts of revenues and expenses during the reporting period. These amounts could differ materially under different judgments, assumptions and estimates. Please see Note C2—“Critical Accounting Estimates and Judgments” (p. 63)66).
Also non-IFRS measures are used to provide meaningful supplemental information to the IFRS results. Non-IFRS measures are meantdesigned to facilitate analysis by indicating Ericsson’s underlying performance, however, these measures should not be viewed in isolation or as substitutes to the IFRS measures. A reconciliation of non-IFRS measures with the IFRS results can be found on page 21.17.
This report includes forward lookingforward-looking statements subject to risks and uncertainties. Actual developments could differ materially from those described or implied. Please see “Forward-looking“Forward-Looking Statements” (p. 164),150) and “Risk Factors” (p. 135) and “Uncertainties in the future” (p. 215)142).
The external auditors review the quarterly interim reports, perform audits of the annual reportAnnual Report and report their findings to the Board and its Audit Committee.
The terms “Ericsson”, “the Group”, and unless the context reasonably requires otherwise, also “the Company”, and similar all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries. Unless otherwise noted, numbers in parentheses refer to the previous year (i.e. 2007)2008).
CONTENTS
14 | ||
23 | ||
25 | ||
32 | ||
33 | ||
33 | ||
35 | ||
42 |
Increased sales by 11 (4) percent despite financial turmoil
Operating margin was 11.4 (16.3) percent excluding restructuring charges and 7.8 (16.3) percent including restructuring charges.
Net income attributable to shareholders of the Parent Company was SEK 11.3 (21.8) billion, and earnings per share (diluted) were SEK 3.52 (6.84).
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Cash flow from operating activities was SEK 24.0 (19.2) billion. Cash flow before financing activities was SEK 15.4 (-8.3) billion including acquisitions/divestments (net) of SEK 0.6 (-26.2) billion (cash flow effect).
A cash conversion rate of 92 (66) percent was achieved, well above the target of at least 70 percent.
Strong performance in strategically important areasBUSINESS DRIVERS 2009
A significant number of new or expanded agreements to supply network equipment and/or related services to operators globally were announced. The aggregate value of these agreements was the highestFive major trends affected our markets and operations in five years.2009:
LeveragedAccelerated mobile systems scale advantages:data growth
The Company increased its mobile systems market share, especiallyData traffic in emerging markets.developed markets is increasing dramatically, generating sales for additional network capacity.
Strengthened position in fixed broadband accessNetwork modernization and IP routing:
The Company strengthened its position within the Networks segment with a newly formed product area headquartered in Silicon Valley.Many operators started migration to all-IP core networks.
Networks’ margins have started to improve:Technology shift—2G/3G/4G
A more favorable balance between new networks relative to expansions and upgrades.In 2009, Ericsson’s 3G sales surpassed 2G, however not yet offsetting the decline in GSM. The first commercial LTE (Long-Term Evolution) network was launched.
Higher proportion of software sales:Impact from economic conditions
Demand for telecom infrastructure started to decline mid-2009, affecting sales in Networks—particularly in some developing markets, where the general economic downturn was exacerbated by weak currencies.
Operator focus on efficiency
Sales of software and Intellectual Property Rights (IPR) continues to gain importance.
Increased market share in Professional Services:
Newservices increased, not only managed services but also consulting and systems integration, driven by higher network complexity and operator focus on cost reductions.
North America
During 2009, Ericsson significantly strengthened its position in North America. A number of key contracts in particular, contributed towere won: LTE with Verizon and Metro PCS, the increased market share.
Maintained top tier in mobile phones:
With challenging business conditions, Sony Ericsson achieved breakeven resultslargest managed services contract ever with Sprint and a domain supplier agreement with AT&T for the full year, excluding restructuring charges.
Good progress in Multimedia:
wireline access products. The Company continues to invest for a leading market positionalso acquired Nortel’s CDMA and LTE businesses in networked media and IP-based applications and services.
Divestments and new joint venture:
During the year, the PBX part of the Enterprise business was divested. Plans to form a joint venture for mobile platforms and semiconductors with STMicroelectronics were announced.
Solid financial position
Although Ericsson is well positioned and remains strong among its peers, there are several challenges to overcome in the near future. It is difficult to predict how consumer spending will change and the effect this may have on operator activities. The macro-economic development is negatively impacting Sony Ericsson but so far, Ericsson’s infrastructure-related business has hardly been affected. However, it is likely that in due course this business will also be affected. Cost adjustment plans have been decided and actions are already underway in preparation for such a development.North America.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Tough times for the JVs
Both Sony Ericsson and ST-Ericsson were impacted by the decline in handset demand in 2009. Sony Ericsson’s situation was worsened by an aging product portfolio. Both JVs reported losses and initiated aggressive cost restructuring programs and are on track to return to report profits. New CEOs and chairmen of the Boards were appointed in both JVs.
ICT and the climate
In 2009, climate change was on the agenda for governments. During the year, Carl-Henric Svanberg addressed the UN, promoting that a focused utilization of ICT solutions could reduce CO2 emissions by 15-20 percent. The ICT industry in itself contributes less than 2 percent to the emissions.
Telecom is a long-term growth industry
The Company is convinced that the factors driving industry growth are robust and should result in continued increased demand. The growth will be driven by the combined effects of the following:
Subscriber growth in emerging markets, supported by cheaper handsets.
Increased coverage and use.
Ever faster mobile broadband communications, improving user efficiency and experiences.
Data traffic driven by IP-based mobile broadband; in developed markets driven by the convenience of mobility, and in emerging markets by the lack of fixed broadband access.
New multimedia applications and communication between various new devices.
Competition
Competition remained intense. After the consolidation in recent years, there are fewer vendors—all with comprehensive product portfolios. Ericsson has maintained or increased its market shares during the year.
Ericsson aims to be the preferred business partner to its customers with an ultimate goal of sustainable long-term value creation. Faster than market sales growth, a best-in-class operating margin and a healthy cash conversion are key to the fulfillment of this goal.
As a market leader, Ericsson combines leading technology and services skills to develop superior solutions that deliver competitive advantage. Ericsson believes that highly satisfied customers and empowered and motivated employees are key to success. Several annual key performance indicators are used regarding shareholder value creation, customer satisfaction and employee engagement.
Shareholder value creation
Although margins in 2009 remained below historic levels, the Company strengthened its market position in strategically important areas, such as: LTE/4G technology and commercial contracts, market share in the US and managed services. This combined with a strong balance sheet, efficient and leaner processes after ambitious restructuring, and continued strong customer relations provided the means for value creation also in the macro-economic headwind. The share price increased during the year and a dividend was paid for a total shareholder return of 15 percent in 2009.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Management uses several metrics to monitor performance:
Faster than market sales growth
Ericsson’s sales for comparable units decreased by 9 percent, adjusted for currency and hedging effects. Due to the effects of the economic slowdown and to weaker demand for GSM equipment, the market for GSM/WCDMA equipment and related services is estimated to have declined by more than 10 percent in USD terms. Segment Networks’ sales for comparable units in constant currencies declined in line with the market. Based on external analyses and reported results by Ericsson and its main competitors, the Company believes its market shares were well maintained. A number of breakthrough contracts were signed which should enable the Company to grow faster than the market. Sales in Professional Services grew by 8 percent in local currencies. Sales for comparable parts of Multimedia grew by 5 percent. The overall market growth for Multimedia is difficult to assess, as the segment is very fragmented.
Best-in-class operating margin
Based on reported results for 2009, the operating margin for the Group, excluding joint ventures and restructuring charges, was 12 (11) percent and remains the highest among the Company’s main competitors that are publicly listed.
Cash conversion of over 70 percent
The cash conversion rate for 2009 was 117 (92) percent, reflecting a strong focus on cash flow with a significant reduction in operating assets.
Customer satisfaction and employee engagement
In the annual independent customer satisfaction survey, approximately 9,700 employees from 380 operators around the world were polled to assess their satisfaction with Ericsson compared to its main peers. In 2009, Ericsson maintained a level of excellence.
An employee survey is also independently conducted every year. In 2009, 91 percent of employees participated in the survey. The Human Capital Index, which measures employee contribution in adding value for customers and meeting business goals, remained at a high level.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Ericsson’s vision of an all-communicating world is rapidly becoming a reality as the convergence of telecommunications, Internetthe telecom, internet and media industriessectors gains momentum. Ericsson envisions continued evolution, from having connected some 1.5 billion places to connecting more than 5 billion people and 50 billion devices. The Company envisions that anything that can benefit from being connected will be connected, mainly via IP-based wireless communications.
By helping operators to developMobile broadband at the forefront
Following the unprecedented growth of mobile telephony is a rapidly expanding range of mobility-based devices and improve their networks to efficiently handleapplications. The accelerating penetration of smartphones and mobile broadband usage are early signs of this development. Extending network coverage and increasing data speeds, combined with devices that have large screens, intuitive user interfaces and multimedia capabilities, Ericssonenhances the user experience and stimulates demand for mobile-broadband services. Once areas have ubiquitous coverage, machine-to-machine communication enables a large variety of existing services to be enhanced, such as media, governmental, utilities, industry automation, banking and transport.
Spurring socio-economic development
Ericsson’s mission is creatingto empower people, business and society through innovation, industry leadership and a world in which any person can have affordable accesslong- term commitment to information, entertainment, social communities and more, whenever and wherever wanted.the vision of an all-communicating world. In the course of making people’s lives easier and more productive, Ericsson is spurring socio-economic development and a better environment which brings the Company’s vision ever closer to reality.
OurLeveraging the competitive dynamics
The Company’s strategy is driven by the competitive dynamics of the network equipmenttelecom market and Ericsson’s position, the combination of which gives rise to three strategic imperatives:
Economies of scale and scope are prerequisites for sustainable value creation. Industry standards govern product design and functionality, making it difficultchallenging for equipment suppliers to differentiate on product capabilities alone. Therefore, the Company strives to combine technology leadership with leadership in services.
The bargaining power of equipment suppliers depends primarily on their installed base. Operators not only look for the best products but also for long-term business partnerships that they can rely on to deliver end-to-end solutions for lower total cost of ownership, or the ability to minimize time-to-market, or the strength ofstrong professional services capabilities, orand access to world-class subject matter experts. If the incumbent supplier is performing well, operators are reluctant to seek alternatives.
Primary end-to-end suppliers with well-entrenched local presence, backed up by global resources and a proven track record, have a competitive advantage. The Company seeks to be a full systems solutions house with a broad but integrated product portfolio combined with superior technical competence, for example in systems integration.
AttainmentGuiding principles
The guiding principles for attainment of the Company’s strategic imperatives is essentialinclude:
customer intimacy; highly qualified employees working closely with the customer to create effective solutions
continuous process improvements and innovation
scale in delivery and technical solutions.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
FINANCIAL RESULTS OF OPERATIONS
SEK billion | Non-IFRS measures 2009 | Non-IFRS measures 2008 | Percent change | Restructuring charges 2009 | Restructuring charges 2008 | IFRS 2009 | IFRS 2008 | ||||||||||||
Net sales | 206.5 | 208.9 | –1 | % | 206.5 | 208.9 | |||||||||||||
Cost of sales | –132.1 | –132.1 | 0 | % | –4.2 | –2.5 | –136.3 | –134.6 | |||||||||||
Gross income | 74.4 | 76.8 | –3 | % | –4.2 | –2.5 | 70.2 | 74.3 | |||||||||||
Gross margin % | 36.0 | % | 36.8 | % | 34.0 | % | 35.5 | % | |||||||||||
Operating expenses | –52.9 | –56.4 | –6 | % | –7.1 | –4.2 | –60.0 | –60.6 | |||||||||||
Operating expenses as % of sales | 25.6 | % | 27.0 | % | 29.0 | % | 29.0 | % | |||||||||||
Other operating income and expenses | 3.1 | 3.0 | 4 | % | 3.1 | 3.0 | |||||||||||||
Operating income before share in earnings of JVs and associated companies | 24.6 | 23.4 | 5 | % | –11.3 | –6.7 | 13.3 | 16.7 | |||||||||||
Operating margin % before share in earnings of JVs and associated companies | 11.9 | % | 11.2 | % | 6.5 | % | 8.0 | % | |||||||||||
Share in earnings of JVs and associated companies | –6.1 | 0.4 | –1.3 | –0.9 | –7.4 | –0.4 | |||||||||||||
Operating income | 18.5 | 23.9 | –22 | % | –12.6 | –7.6 | 5.9 | 16.3 | |||||||||||
Operating margin % | 9.0 | % | 11.4 | % | 2.9 | % | 7.8 | % | |||||||||||
Financial income and expense, net | 0.3 | 1.0 | |||||||||||||||||
Taxes | –2.1 | –5.6 | |||||||||||||||||
Net income | 4.1 | 11.7 | |||||||||||||||||
EPS diluted (SEK) | 1.14 | 3.52 | |||||||||||||||||
Non-IFRS measures are used in the table above as supplemental information to the successIFRS results. Since there were significant restructuring costs during 2008 and 2009, but with relatively little benefit in 2008 and consequently significant impact on reported results and margins both years, non-IFRS measures excluding restructuring charges are presented to facilitate analysis by indicating Ericsson’s underlying performance. However, these measures should not be viewed in isolation or as substitutes to the IFRS measures. For more details on the restructuring activities and corresponding charges, please see Note C5—“Expenses by Nature”.
Sales sustained in weaker market
Increased sales in the first half of 2009 were offset in the second half by impact from the economic slowdown. Overall, sales declined marginally from last year to SEK 206.5 billion. Sales for comparable units were stable year over year, i.e. excluding SEK 2.7 billion of sales from the acquired Nortel business in North America in the fourth quarter and SEK 5.2 billion in 2008 from the divested PBX and mobile platform operations. Adjusted also for effects of exchange rates and hedging, sales declined 9 percent. Lower sales in Networks were largely offset by higher sales in Professional Services and Multimedia. The economic downturn coupled with tighter credit supply impacted operator spending, in particular in certain emerging markets.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The demand varied considerably between markets. Among our largest markets, the US, China, UK and Turkey had good sales increases. Australia, India and Japan were stable, whereas sales in Brazil, Indonesia, Italy, Pakistan and Spain declined. Several important contracts were won in 2009: four LTE contracts, the appointment as fixed access domain supplier to AT&T and a services contract with Sprint in the US.
Gross margin stable excluding restructuring charges
Gross margin declined only slightly as effects of price pressure, increased share of services sales, and the initial transition costs for the Sprint contract were largely offset by cost cutting and restructuring efforts.
Operating expenses excluding restructuring charges were reduced
Operating expenses declined year-over-year as a result of restructuring activities and the spin-off of mobile platforms. The Company continues to focus on innovations and R&D. however, spending as a percentage of sales was 13 percent compared to 15 percent in 2008 due to cost reductions and efficiency gains.
Operating margin excluding share in earnings of JVs and restructuring charges increased slightly
Restructuring and other cost reduction measures have lowered the breakeven point. The operating margin in Multimedia increased significantly, reflecting a more narrow business focus.
Share in earnings of JVs and associated companies declined SEK 6.5 billion year-over-year
Both Sony Ericsson butand ST-Ericsson were adversely affected by the business model creates high fixedlower handset sales during the economic downturn. Both companies have undertaken ambitious restructuring activities, and Sony Ericsson is improving its product portfolio focusing on mid- to high-end phones.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Under new management, both JVs are well on track to return to report profits.
Restructuring increased and will continue into 2010
In the beginning of the year, a program to reduce annual run rate of costs by SEK 10 billion was launched, following the 2008 program aiming at SEK 6–7 billion. In the third quarter, additional SEK 5–6 billion of savings were targeted with anticipated costs of the same magnitude. Full effects are expected to be achieved in the second half of 2010, assuming current level of operations. This year’s restructuring charges were SEK 11.3 (6.8) billion, relating to activities to reduce production costs, reduce product variants and platforms, increase the re-use of software, consolidate R&D activities, and improve administrative processes. This resulted in fewer platforms and solutions and was coupled with write-downs of capitalized development costs and requiresacquired IPR assets for affected products.
Earnings per share (EPS) diluted down 68 percent
EPS diluted declined from SEK 3.52 last year to SEK 1.14 this year, largely driven by the losses in our JVs and the restructuring program.
Employees increased by net 3,750 in 2009
Headcount increased to 82,500 (78,750), largely as a result of new managed services contracts. About 2,500 employees from the acquired Nortel CDMA and LTE operations will be included from 2010. The additions were partly offset by reductions due to restructuring and the transfer of mobile platforms to ST-Ericsson. The competence and capabilities of the workforce is increasingly service and software oriented.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
December 31, SEK billion | 2009 | 2008 | ||
ASSETS | ||||
Non-current assets, total | 87.4 | 87.2 | ||
—of which intangible assets | 48.2 | 48.2 | ||
—of which property, plant and equipment | 9.6 | 10.0 | ||
—of which financial assets | 15.3 | 14.1 | ||
—of which deferred tax assets | 14.3 | 14.9 | ||
Current assets, total | 182.4 | 198.5 | ||
—of which inventory | 22.7 | 27.8 | ||
—of which trade receivables | 66.4 | 75.9 | ||
—of which other receivables/financing | 16.6 | 19.8 | ||
—of which short-term investments, cash and cash equivalents | 76.7 | 75.0 | ||
Total assets | 269.8 | 285.7 | ||
EQUITY AND LIABILITIES | ||||
Equity | 141.0 | 142.1 | ||
Non-current liabilities | 43.3 | 39.5 | ||
—of which post-employment benefits | 8.5 | 9.9 | ||
—of which borrowings | 30.0 | 24.9 | ||
—of which other non-current liabilities | 4.8 | 4.7 | ||
Current liabilities | 85.5 | 104.1 | ||
—of which provisions | 12.0 | 14.0 | ||
—of which current borrowings | 2.1 | 5.5 | ||
—of which trade payables | 18.9 | 23.5 | ||
—of which other current liabilities | 52.5 | 61.0 | ||
Total equity and liabilities1) | 269.8 | 285.7 |
1) | Of which interest-bearing liabilities and post-employment benefits SEK 40.7 billion (SEK 40.4 billion in 2008). |
In 2009, despite the strategic investments in ST-Ericsson and the Nortel operations and a difficult macro-economic business environment, a healthy capital structure and equity ratio were maintained and the debt maturity profile was significantly highimproved.
Intangible assets flat with acquisitions offset by amortizations and write-downs
Added intangible assets from the Nortel acquisition of SEK 8.8 billion were offset by amortizations and impairment losses. Impairment losses on acquired intangibles were SEK 4.3 (0) billion in 2009, attributable to restructuring.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Property, plant and equipment slightly down
The Company’s assets are largely related to test equipment for in-house manufacturing, R&D and services, including our network operations centers. A large share of manufacturing and IT operations are outsourced and most properties are leased.
Financial assets up slightly
Financial assets increased slightly, with the investment in ST-Ericsson partially offset by the reduced value of investments in JVs, attributable to their reported losses.
Customer financing did not increase and deferred tax assets were slightly reduced with utilization of tax loss carryforwards.
Strong reductions in receivables and inventory
Considerable progress was made in the second half to achieve stable days sales outstanding (DSO) at 106 and inventory days at 68. However, targeted levels have not yet been reached and the improvement efforts will be continued.
Cash remained strong at SEK 77 (75) billion
Due to a strong cash flow, a good level of cash and short-term investments was maintained. A strong liquidity is deemed important to keep flexibility for volatility in sales and cash flows and to be able to take advantage of opportunities in the market.
Equity down SEK 1.1 billion
Stockholders’ equity decreased by SEK 1.1 billion. The net income of SEK 4.1 billion and a capital increase of SEK 0.7 billion, attributable to the employee stock purchase plan, were more than offset by the dividend of SEK 6.3 billion. However, the equity ratio was maintained at a healthy level of 52 (50) percent.
Return on equity 2.6 (8.2) percent
The decline in return on equity (ROE) was primarily a consequence of JV losses and the restructuring charges.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Return on capital employed 4.3 (11.3) percent
The return on capital employed (ROCE) declined to 4.3 percent. Excluding restructuring charges, ROCE would have been 11.2 (15.5) percent.
Pension liabilities down SEK 1.4 billion after employer contributions
Post-employment benefits related to defined benefit plans declined to SEK 8.5 (9.9) billion in 2009. A liability increase of SEK 1.2 billion, due to lower interest rates, was more than offset by higher values of plan assets of SEK 1.2 billion and employer contributions of SEK 2.1 billion to trust funds. The funded ratio (plan assets as percentage of defined benefit obligations) increased to 76 (68) percent.
Provisions declined due to larger cash outlays
The total amount for provisions declined to SEK 12.4 (14.4) billion, largely attributable to SEK 4.7 billion of larger cash outlays than last year, of which SEK 2.5 billion related to restructuring.
Trade payables declined by SEK 4.6 billion
The number of payable days improved some from 55 to 57 days, close to the target of 60 days or more, despite the macroeconomic conditions, where some suppliers have had to be supported with shorter payment terms in a tight credit market.
Debt maturity profile improved
During the year, the Company increased borrowings by SEK 1.7 billion and considerably improved the maturity profile. Debt maturing in 2009 of USD 0.5 billion and in 2010 of EUR 0.5 billion were replaced with a 7-year loan of USD 0.6 billion and a 4-year loan of EUR 0.6 billion. In addition to borrowings, the Company also has unutilized committed credit facilities of USD 2.0 billion available, maturing in 2014.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Credit Ratings
Credit ratings were unchanged during 2009, remaining at “solid investment grade”: Moody’s at Baa1 and Standard & Poor’s at BBB+.
Sony Ericsson borrowings guaranteed
Ericsson and SONY have on a 50/50 basis guaranteed EUR 350 million of borrowings for general business purposes, as improved liquidity was needed following Sony Ericsson’s weak results and the restructuring program. The amount guaranteed is not deemed significant, considering Ericsson’s financial position.
Off-balance sheet arrangements
There are currently no material off-balance sheet arrangements that have, or would be reasonably likely to have, a current or anticipated effect on the Company’s financial condition, revenues, expenses, result of operations, liquidity, capital expenditures or capital resources.
JANUARY–DECEMBER
SEK billion | 2009 | 2008 | ||||
Net income | 4.1 | 11.7 | ||||
Income reconciled to cash | 21.0 | 26.0 | ||||
Changes in operating net assets | 3.5 | –2.0 | ||||
Cash flow from operating activities | 24.5 | 24.0 | ||||
Cash flow from investing activities | –37.5 | –8.5 | ||||
—of which capital expenditures, sales of PP&E, product development | –4.9 | –4.1 | ||||
—of which acquisitions/divestments, net | –18.1 | 1.8 | ||||
—of which short-term investments for cash management purposes and other investing activities | –14.5 | –6.2 | ||||
Cash flow before financing activities | –13.0 | 15.5 | ||||
Cash flow from financing activities | –1.7 | –7.2 | ||||
Cash conversion (Cash flow from operating activities divided by income reconciled to cash) | 117 | % | 92 | % | ||
Gross cash (Cash, cash equivalents and short-term investments) | 76.7 | 75.0 | ||||
Net Cash (Gross cash less interest-bearing liabilities and post-employment benefits) | 36.1 | 34.7 | ||||
Cash flow from operations stable at SEK 24.5 billion
A lower net income was offset by non-cash items, such as the losses in JVs, depreciation, amortization of intangibles, largely related to restructuring, and strong working capital reductions, resulting in a similar cash flow from operations as in 2008.
Cash out from investing activities SEK –37.5 billion
Cash outlays for recurring investing activities increased slightly to sales. With this in mind alongSEK –4.9 billion.
Acquisitions/divestments during the year were net SEK –18.1 billion, with the major items being the formation of the ST-Ericsson joint venture, the minority stake in LHS and Nortel’s CDMA and LTE businesses.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Cash outflow for short-term investments for cash management purposes and other investing activities was net SEK –14.5 billion, largely attributable to SEK –17.1 billion of short-term investments driven by the strong cash flow from operations.
Cash flow from financing activities SEK –1.7 billion
Dividends paid of SEK –6.3 billion were partly offset by increased borrowings of SEK 4.3 billion and other financing activities of SEK 0.2 billion.
Strong cash conversion at 117 (92) percent
The cash conversion rate was 117 (92) percent, well above the target level of 70 percent. The percentage increase was largely attributable to the strong improvement in operating net assets and the lower income reconciled to cash.
Restricted cash
Cash balances in certain countries with restrictions on transfers of funds to the Parent Company as cash dividends, loans or advances amounted to SEK 8.9 (8.2) billion.
Capital expenditures
Amounts for annual capital expenditures are normally around two percent of sales. This level corresponds to the needs for keeping and maintaining the current capacity level, including the continuous introduction of new technology and methods. The expenditures are largely related to test equipment in R&D units and network operations centers and to production and test equipment in manufacturing and repair operations.
The Board reviews the Company’s ambitioninvestment plans and proposals.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CAPITAL EXPENDITURES 2005–2009
SEK billion | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||
Capital expenditures | 4.0 | 4.1 | 4.3 | 3.8 | 3.4 | ||||||||||
—of which in Sweden | 1.3 | 1.6 | 1.3 | 1.0 | 1.0 | ||||||||||
as percent of net sales | 1.9 | % | 2.0 | % | 2.3 | % | 2.2 | % | 2.2 | % |
Capital expenditures in relation to sales are expected to remain at about two percent. The Company has sufficient cash and cash generation capacity to fund expected capital expenditures as well as the acquisitions of the Nortel/GSM operations and Pride Spa and the contribution to the Swedish pension trust fund without external borrowings.
We believe that the Company’s property, plant and equipment and the facilities that the Company now occupies are suitable for its present needs in most locations. As of December 31, 2009, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.
Operator investments are increasing in mobile broadband, driven by a strong ramp up of data traffic. The broadband growth has not yet offset the decline in GSM sales, which in 2009 was accelerated due to the current economic climate. Operator investment patterns varied significantly between regions and countries. A number of developing markets became increasingly cautious, while others, including large markets such as China and the US, showed good growth. There was a continued strong demand for services targeting our customers’ operational efficiency.
Regional overview
SALES PER REGION AND SEGMENT 2009
SEK billion | Net- works | Prof. Services | Multi- media | Total | Percent change | ||||||||||
Western Europe | 23.8 | 18.3 | 2.4 | 44.6 | –14 | % | |||||||||
CEMA1) | 32.7 | 12.9 | 5.1 | 50.7 | –4 | % | |||||||||
Asia Pacific | 50.5 | 12.2 | 3.1 | 65.8 | 4 | % | |||||||||
Latin America | 13.0 | 5.9 | 1.1 | 20.1 | –13 | % | |||||||||
North America | 17.1 | 6.7 | 1.6 | 25.4 | 41 | % | |||||||||
Total | 137.1 | 56.1 | 13.3 | 206.5 | –1 | % | |||||||||
Share of total | 66.4 | % | 27.2 | % | 6.4 | % | 100 | % | |||||||
Percent Change | –3 | % | 15 | % | 5 | % | –1 | % | |||||||
1) | Central and Eastern Europe, Middle East and Africa. |
Sales in Western Europe decreased by –6 (–2) percent for comparable unitswith growth of professional services and broadband more than offset by lower GSM sales. The growing demand for mobile broadband and professional services is expected to continue, as is the decline for GSM. The macro-economic development led to a weaker demand for replacement handsets but mobile phone usage appeared to bethe prime driver in an all-communicating world, operations have been divided into segments that create competitive advantage largely unaffected and best meet the needs of Ericsson’s global customer base.mobile broadband traffic continued to show strong growth.
NetworksIn Central and Eastern Europe, Middle East and Africa (CEMA), sales decreased by –4 (+9) percent,—technology leadership, despite continued network buildouts in a broad product portfolionumber of markets, as the region has been more affected than most by the macroeconomic development. Many countries within the CEMA region have low penetration levels and scale enable Ericssonconsumer demand remains robust even if some operators are currently unable or unwilling to excelinvest at healthy levels. A similar situation is seen in meeting the coverage, capacityother emerging markets such as Latin America and network evolution needs of fixed and mobile operators.Asia Pacific.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
ServicesAsia Pacific remained Ericsson’s largest region with a sales increase of +4 (+16) percent,—expertisefuelled by continued good demand in China and India. The Company has a leading position in India, where subscribers are expected to ultimately exceed one billion from the current 496 million. Auctions for 3G licenses in India were postponed to 2010. Although Chinese suppliers have significantly increased their domestic market share, Ericsson maintains a strong market position in China. Political unrest and effects of the economic slowdown negatively affected sales growth in certain countries, such as Indonesia, Pakistan and Bangladesh.
Latin American sales decreased by –13 (+25) percent,reflecting lower demand across the region compared to strong growth over the last couple of years. Demand for mobile broadband continues to develop well, but delays in licensing of new spectrum are causing operators to hold back investments in new technologies and applications.
North American sales increased by +41 (+34) percent, mainly driven by demand for mobile broadband and professional services. With a number of breakthrough contracts for LTE, fixed access and services and the acquisition of Nortel’s CDMA and LTE businesses, the Company is well positioned for continued growth and is now the largest supplier of technology and services to network design, rollout, integration, operationoperators in the region.
Market shares were well maintained and customer support withinthe Company retains its ambition to grow faster than the market.
Networks
Overall operator demand for mobile GSM/WCDMA network equipment and related services is estimated to have declined by more than 10 percent in 2009. At the same time consumer demand continued to grow, the number of mobile subscriptions increased to a global structuretotal of almost 4.6 billion and data traffic accelerated.
Network sales were down by –3 (+10) percent to SEK 137.1 (142.0) billion. Sales for comparable units declined by 5 percent, i.e. excluding SEK 2.7 billion of sales from acquired Nortel operations. Adjusted also for currency and hedge effects, sales declined in line with robust local capabilities enable Ericsson to better understand and respondthe market. Lower GSM sales, particularly in high-growth markets such as China, contributed to the unique challengesdecline. Sales in WCDMA continued to show good growth driven by demand for mobile broadband.
GSM shipments reached their all-time-high volume in 2008. This year, Ericsson’s WCDMA sales surpassed that of each customer and capitalize onGSM for the trend to outsource a broader range of activities to network equipment suppliers.
Multimedia—innovative application platforms, service delivery and revenue management solutions combined with leading content developer and application provider relationships enable Ericsson to uniquely help customers create exciting new and differentiated multimedia services.
Phones—The complementary strength of Sony Ericsson further enhances Ericsson’s consumer perspective for superior end-to-end offerings.
The synergies generated byfirst time. WCDMA growth did not offset the combined strengths of the segments differentiate Ericsson through a continuous focus onoperational excellence to better leverage an economy of scale in technology development as well as in product and service delivery and customer support.
The three strategic imperatives show Ericsson’s business dynamics and their effects on results. With its scale advantage secured by being the primary supplier to more operators, the Company plans to balance growth with margins, focus on leveraging expanded primary supplier relationships and return to higher profitability levels.
Reaching more people
Ericsson helped to bring telecommunications to many consumers that previously could not afford service or lived outside the coverage area. The Company implemented alternative energy solutions for radio base stations in remote areas. Ericsson radio technology requires fewer cell sites for high-quality coverage. In these ways, Ericsson uses technology to reduce network operators’ total cost of ownership, which enables them to expand coverage and reach more consumers in new geographic areas.
Increasing speed and capacity
Ericsson is at the forefront of broadband technology development with solutions to meet the growing broadband traffic demand from business and residential customers. During the year, the Company introduced aGSM decline.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
100 GbE (gigabit Ethernet) transport enhancement to existing WDM (Wavelength Division Multiplexing) solutions and deployed a nationwide optical WDM network in Germany, that enables 40 Gbps (gigabit per second) connections. The first commercial 21 Mbps (Megabit per second) mobileMobile broadband services were launched and the Company demonstrated the world’s first end-to-end HSPA solution with speeds of up to 42 Mbps. The world’s first commercially available LTE-capable mobile platform was introduced, with peak data rates of up to 100 Mbps in the downlink and up to 50 Mbps in the uplink. With four times the bandwidth of existing systems, the world’s first 10 Gbps Gigabit Passive Optical Network (GPON) system for IPTV was demonstrated.
Expanding Ericsson’s role
Ericsson is to supply, build, integrate, operate and manage broadband communications infrastructure for Saudi Arabia’s high-tech flagship, King Abdullah Economic City. The sole-supplier agreement with Emaar, developer of the smart-city project, breaks new ground in Saudi Arabia as Ericsson’s first GPON-enabled IPTV contract; the first contract where Ericsson provides systems integration and network rollout services for fiber optic solutions and fixed-network IMS. The contract brings together products from Ericsson’s major acquisitions—Entrisphere, Marconi, Redback and Tandberg Television—and the Company’s telecom services portfolio.
Preparing for the future
Each year, Ericsson’s ConsumerLab conducts more than 40,000 interviews, representing opinions and behavior of over 1 billion people. This valuable insight on consumer trends is incorporated into product development, sales and marketing, and is provided to operators for them to better understand their customers’ needs. The Company also works with entrepreneurial developers to bring new multimedia services to the mobile environment. Internally, the Ericsson strategy function is working with scenarios for market and technology developments with a mid- term, i.e. five-year horizon, as well as a longer term, i.e. 10–15 year view.
Our ultimate goal is for the Company to generate growth and a competitive profit that is sustainable over the longer term. Ericsson aimscontinues to be the preferred business partner to its customers. As the market leader, the
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Company develops superior productsin focus as more and services that provide competitive advantages. In addition, when Ericsson’smore networks are being upgraded. Smartphones, netbooks and notebooks drive data traffic and revenues for operators, resulting in demand for network equipment and associated services are combined with multimedia solutions and mobile handsets from the Sony Ericsson joint venture, the scope of Ericsson’s operations extends to complete end-to-end telecommunication solutions.
The Company performance is monitored according to three fundamental metrics: value creation, customer satisfaction and employee satisfaction. We believe that highly satisfied customers along with empowered and motivated employees help to assure an enduring capability for competitive advantage and value creation. The Company’s objective is to have a faster than market sales growth, a best-in-class operating margin and a healthy cash conversion.
Shareholder value creation
Although margins remain below recent historic levels, the Company is strengthening its market position and continues to perform better than its peers. A strong balance sheet, flexible operational model and strengthened industry-leading position provide the means for handling any near-term macro-economic pressure. In the longer term, the increased market share and footprint enlarges the opportunity for future sales of expansions and upgrades.
Management has several metrics by which they measureThe global network coverage from WCDMA is still less than half of that of GSM. In China, the Company’s progress relative to its ambitions:
Increase sales at a rate faster than3G licenses were awarded early 2009. Ericsson participated in China Unicom’s WCDMA rollout, the market growth. Although the mobile systems market is likely to have exceeded the expectation of slight or no growth in USD terms, Ericsson’s networks’ sales grew much faster, at 10 percent. Ericsson’s Professional Services sales grew by 13 (19) percent in local currencies, compared with an estimated market growth of approximately 10 percent.
Deliver best-in-class operating margin, i.e. better than the main competitors. Operating margin for the Group, excluding Sony Ericssonlargest and excluding restructuring charges,fastest ever. Another achievement was the highest among its main publicly listed competitors, based on their reportedworld’s largest live network upgrade in record time for Vodafone Essar in India, reaching a peak replacement rate of one radio base station every minute. India is expected to award 3G licenses in 2010.
For the next generation wireless technology, 4G/LTE, Ericsson won key contracts with Verizon, Metro PCS, NTT DoCoMo and estimated results.
Generate cash conversion of over 70 percent.TeliaSonera. The cash conversionindustry support for 2008 was 92 (66) percent. ReflectingLTE is very strong and this technology is expected to play an increased focus on cash flow, this longer-term target (i.e. 3–5 years) was first communicated during 2007.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Customerimportant role in many markets with suitable spectrum. Ericsson is leading the transformation and employee satisfaction
Every year, a customer satisfaction survey is independently conducted in which approximately 9,300 (9,000) employees of some 380 (380) fixed and mobile operators around the world are polled to assess their satisfaction with Ericsson compared to its main peers. Ericsson maintained a level of excellence.
Every year, also an employee survey is independently conducted. In 2008, 90 percent of employees participated in the survey. The results show that Ericsson has maintained a level considered excellent by external benchmarking. The Human Capital Index, which measures employee contribution in adding value for customers and meeting business goals, was the same as for 2007. See graphs below.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Group sales grew 11 (4) percent, driven by higher Networks and Professional Services sales. Fluctuations in foreign exchange rates had a rather significant negative effect on reported sales during the first nine monthsconvergence of the year although the trend shifted in the fourth quarter, resulting in a limited effect for the full year.
GROUP SALES
SEK billion | 2008 | 2007 | Percent change | ||||
Sales | 208.9 | 187.8 | 11 | % | |||
of which Networks | 142.0 | 129.0 | 10 | % | |||
of which Professional Services | 49.0 | 42.9 | 14 | % | |||
of which Multimedia | 17.9 | 15.9 | 13 | % |
In an increasingly challenging macro-economic environment, the Company adjusts its cost base continuously. The cost reduction targets launched in 2008 were exceeded. In February 2008, a cost reduction plan of SEK 4 billion in annual savings was announced, including estimated charges of the same size. All activities with related charges were launched by the third quarter, and it was announced that further charges would be made in the fourth quarter. Charges for the full year 2008 amounted to SEK 6.7 billion In total. This has resulted in annual savings of approximately SEK 6.5 billion from year end. We will continue to reduce costs, across all parts of the company at the same pace as in 2008 with restructuring charges of SEK 6–7 billion, targeting annual savings of SEK 10 billion from the second half of 2010, with an equal split between cost of sales and operating expenses.
Our strategy for these further cost reductions is to leverage the synergies between different technologies, in-house and acquired, and take advantage of the opportunities from the transformation to all-IP. The number of software platforms will be reduced and the re-use of hardware increased. In addition, certain activities will be moved to low-cost countries. This will result in a reduction in the number of consultants and other temporary staff, consolidation of R&D sites and layoffs. As the savings are largely the result of more efficient ways of working, the Company’s strategy will remain intact and Ericsson’s unique capabilities should not be affected.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Networks
Segment Networks
SEK billion | 2008 | 2007 | Percent change | ||||||
Sales | 142.0 | 129.0 | 10 | % | |||||
of which network rollout | 21.5 | 18.5 | 16 | % | |||||
Operating income | 11.1 | 17.4 | –36 | % | |||||
Operating margin | 8 | % | 13 | % | — | ||||
Operating margin* | 11 | % | 13 | % | — |
Mobile network buildouts, especially in high-growth markets, continue to represent the majority of sales. Sales of mobile broadband solutions increased during the year, driven by consumer need for higher speeds and better coverage. WCDMA deployments have intensified in general, especially in certain regions like the Americas, which has affected the business in a favorable way. Ericsson’s market share, as a percentage of operator spending for GSM/WCDMA, remains in the mid-forties. GSM sales were flat and WCDMA sales increased.
Networks’ business continues to grow where network buildouts and break-in contracts are predominant and price competition is most intense.
Although margins have started to improve, the proportion of buildouts of new networks in high-growth markets, including accelerating volumes in India, remains high and continues to pressure Networks’ margins.
While some parts of the network equipment market declined this year, the mobile broadband equipment market continues to show good growth.
Mobile packet core, mobile softswitching and backhaul transmission also showed good growth, driven by the migration to all-IP.
With 3G subscribers providing significantly higher Average Revenue Per User (ARPU) than 2G, operators will most likely keep their mobile broadband plans and continue to invest.
The majority of circuit-switched core network sales are now from softswitch solutions with healthy and stable margins. Ericsson is established as a clear technology and industry leader in the global softswitch market. The Company has advanced its market position even further with the introduction of a new-generation softswitch, based on blade cluster technology. Ericsson has the largest installed base of softswitches, providing a solid business from telephony and multimedia communications. The future growth areas in coreall-IP networks will increasingly be the next-generation User and Service Managementbased on Softswitch and IP Multimedia SubsystemSystem (IMS) based applications.technology.
The LTE core network is all-IP. To meet the demand for this new all-IP core, Ericsson has introduced the industry’s most comprehensive Evolved Packet Core portfolio which will support LTE network introduction. The portfolio is built on Ericsson’s existing packet core products and new functionality will be introduced through software upgrades.
The increased data traffic driven by mobile broadband continues to create demand for transmission capacity for mobile backhaul. Ericsson offers a wide range of solutions to remove bottlenecks in the transport network. Successful mobile backhaul networks were completed in Turkey, Sweden, Canada and the US in 2009. Sales of optical and microwave transmission systemssolutions to fixed as well as mobile operators grewdeveloped in line with the market. The Company’s ambition to grow faster than
In the market remains. Thus Ericsson is investingfixed access area, the Company had break-in wins for fiber (GPON) connection in salesthe Americas and marketing to enable it to sell a broader portfolio.
Ericsson’s MINI-LINK micro-wave radio systems, complemented with the wireline access and optical portfolio, is an essential part of mobile broadband rollout, thus enabling increased sales of fixed network products by leveraging Ericsson’s strong mobile position.in China.
Operators are evolving from legacy circuit-switched networks to IP,all-IP, in both fixed and mobile networks, due to needand this creates opportunities for increased flexibility and cost savings. Ericsson’s routing technology and solutions from Redback enable operators to migrate toEricsson. A new Silicon Valley campus has been established with the intention of driving the convergence of IP allowing them to fully leverage investments in legacy technology.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Redback is the platform for Ericsson to combine and focus all of its IP efforts under one organization, headquartered in Silicon Valley. IP technology gives operators lower cost and is reinforced in all mobile and fixed standardization bodies. As a result, operators continue to evolve from legacy TDM and ATM networks to IP, in both fixed and mobile networks. Redback Networks returnednetworks and reaching out to growth, nownew partners in more diverse market segments mainly as a result of synergies with Ericsson’s sales and marketing organization. This indicates a growing acceptance of Redback technology in additional market segments, which expands the addressable market and creates an environment conducive to revenue acceleration.
We remainmobile broadband markets. The Company remains optimistic regarding growth opportunities for all-IP networks with IP routing, IMS broadband access and transmission.
With the acquisition of the Nortel assets for CDMA and LTE, the Company strengthened its ability to serve North America’s mobile operators. The Company continuesacquisition significantly expands Ericsson’s footprint in this market, particularly as operators in this region are emerging as early adopters of LTE technology. The agreement also includes certain patents and patent licenses relating to invest in these areas, with the ambitionCDMA and LTE. Going forward, R&D expenses are expected to be the first vendor to combine fixed and mobile networks on one platform—offering operators significant savings and new revenue opportunities.relatively low in CDMA compared with other technologies.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Professional ServicesCredit Ratings
Credit ratings were unchanged during 2009, remaining at “solid investment grade”: Moody’s at Baa1 and Standard & Poor’s at BBB+.
Sony Ericsson borrowings guaranteed
Ericsson and SONY have on a 50/50 basis guaranteed EUR 350 million of borrowings for general business purposes, as improved liquidity was needed following Sony Ericsson’s weak results and the restructuring program. The amount guaranteed is not deemed significant, considering Ericsson’s financial position.
Off-balance sheet arrangements
There are currently no material off-balance sheet arrangements that have, or would be reasonably likely to have, a current or anticipated effect on the Company’s financial condition, revenues, expenses, result of operations, liquidity, capital expenditures or capital resources.
Segment Professional ServicesJANUARY–DECEMBER
SEK billion | 2008 | 2007 | Percent change | ||||||
Sales | 49.0 | 42.9 | 14 | % | |||||
of which managed services | 14.3 | 12.2 | 17 | % | |||||
Operating income | 6.3 | 6.4 | — | ||||||
Operating margin | 13 | % | 15 | % | — | ||||
Operating margin* | 16 | % | 15 | % | — |
SEK billion | 2009 | 2008 | ||||
Net income | 4.1 | 11.7 | ||||
Income reconciled to cash | 21.0 | 26.0 | ||||
Changes in operating net assets | 3.5 | –2.0 | ||||
Cash flow from operating activities | 24.5 | 24.0 | ||||
Cash flow from investing activities | –37.5 | –8.5 | ||||
—of which capital expenditures, sales of PP&E, product development | –4.9 | –4.1 | ||||
—of which acquisitions/divestments, net | –18.1 | 1.8 | ||||
—of which short-term investments for cash management purposes and other investing activities | –14.5 | –6.2 | ||||
Cash flow before financing activities | –13.0 | 15.5 | ||||
Cash flow from financing activities | –1.7 | –7.2 | ||||
Cash conversion (Cash flow from operating activities divided by income reconciled to cash) | 117 | % | 92 | % | ||
Gross cash (Cash, cash equivalents and short-term investments) | 76.7 | 75.0 | ||||
Net Cash (Gross cash less interest-bearing liabilities and post-employment benefits) | 36.1 | 34.7 | ||||
Professional Services sales were particularly encouraging, growingCash flow from operations stable at 14 percentSEK 24.5 billion
A lower net income was offset by non-cash items, such as the losses in JVs, depreciation, amortization of intangibles, largely related to restructuring, and strong working capital reductions, resulting in a similar cash flow from operations as in 2008.
Cash out from investing activities SEK –37.5 billion
Cash outlays for recurring investing activities increased slightly to SEK 49.0–4.9 billion. Growth measured
Acquisitions/divestments during the year were net SEK –18.1 billion, with the major items being the formation of the ST-Ericsson joint venture, the minority stake in local currencies amounted to 13 percent compared with an estimated market growth of some 10 percent. Managed services sales grew by 17 percent to SEK 14.3 (12.2) billion, as the Company continued to win contracts for network operationsLHS and hosting services. Ericsson is a clear leader in Managed ServicesNortel’s CDMA and at year end 2008, Ericsson-managed network operations served approximately 250 (185) million users.LTE businesses.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Ericsson won several breakthrough managed services deals duringCash outflow for short-term investments for cash management purposes and other investing activities was net SEK –14.5 billion, largely attributable to SEK –17.1 billion of short-term investments driven by the year, including an agreement with Mobily in Saudi Arabia (onestrong cash flow from operations.
Cash flow from financing activities SEK –1.7 billion
Dividends paid of SEK –6.3 billion were partly offset by increased borrowings of SEK 4.3 billion and other financing activities of SEK 0.2 billion.
Strong cash conversion at 117 (92) percent
The cash conversion rate was 117 (92) percent, well above the largest managed services contracts in the Middle East), managed operations for TDC in Denmark (the largest Nordic full-scope managed services contract), and managed operations for the shared network between 3UK and T-Mobile (Mobile Broadband Network Limited, MBNL) in the UK. In addition, more than 1,000 systems integration projects were carried out during the year, including a prime integrator contract for Telefonica across Latin America for a revenue assurance solution, end-to-end IPTV integration for OTE, Greece, telecom management transformation consulting for T-Mobile, Germany, and a numbertarget level of IMS and softswitch integrations.
Operating margin is stable in the mid-teen range despite the higher proportion of managed services. This is mainly due to successful transformation of operations undertaken70 percent. The percentage increase was largely attributable to the Ericsson waysstrong improvement in operating net assets and the lower income reconciled to cash.
Restricted cash
Cash balances in certain countries with restrictions on transfers of workingfunds to the Parent Company as cash dividends, loans or advances amounted to SEK 8.9 (8.2) billion.
Capital expenditures
Amounts for annual capital expenditures are normally around two percent of sales. This level corresponds to the needs for keeping and maintaining the current capacity level, including the continuous cost optimization with a focus on operational excellence.
Common challenges faced by operators todayintroduction of new technology and methods. The expenditures are business growth, operational efficiencylargely related to test equipment in R&D units and network evolution towards IP. In a converging communications world, new complexityoperations centers and to production and test equipment in business models must also be added tomanufacturing and repair operations.
The Board reviews the challenges.
This creates services opportunities for Ericsson. Services expertiseCompany’s investment plans and experience, in combination with technology leadership and business understanding enable partnering with customers to take on a prime integrator role in complex deployment and transformation projects. The Company also support operators in creating an efficient environment for consumer service delivery through network and systems integration expertise. The largest opportunity in meeting operator challenges is in managed services, providing efficiency gains and cost control.
During the year, more than 60 percent of the Professional Services business was recurring. As the professional services market develops there are many opportunities for project business, but operators are also seeking longer-term partnerships to build competitive edge. Combined with an increasing managed services market, this will help sustain a healthy level of recurring business for Ericsson.
An overall enabler of growth and efficiency is our continuous work to improve processes, methods and tools. This, together with a strategically dimensioned and staffed services delivery organization, is what brings excellence to our operations. During the year, two new global service delivery centers were opened, another evolutionary step in Ericsson’s strategy for developing global and local service and delivery capabilities, ensuring business readiness for the global market with increasing focus on emerging markets.proposals.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Multimedia
Segment MultimediaCAPITAL EXPENDITURES 2005–2009
SEK billion | 2008 | 2007 | Percent change | ||||||
Sales | 17.9 | 15.9 | 13 | % | |||||
Operating income | -0.1 | -0.1 | 13 | % | |||||
Operating margin | -1 | % | -1 | % | — | ||||
Operating margin* | 1 | % | -1 | % | — |
SEK billion | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||
Capital expenditures | 4.0 | 4.1 | 4.3 | 3.8 | 3.4 | ||||||||||
—of which in Sweden | 1.3 | 1.6 | 1.3 | 1.0 | 1.0 | ||||||||||
as percent of net sales | 1.9 | % | 2.0 | % | 2.3 | % | 2.2 | % | 2.2 | % |
MultimediaCapital expenditures in relation to sales increased by 16 percent for comparable units, i.e. excluding divestment of the enterprise PBX operations. Revenue Managementare expected to remain at about two percent. The Company has sufficient cash and Service Delivery & Provisioning continuedcash generation capacity to show good growth while the mobile platform business was starting to experience effects of the weakening handset market. Operating income includes a SEK 0.8 billion gain from the divestment of shares in Symbian. The segment is operating on a breakeven level due to investments to build a leading position in IPTV, Consumer & Business Applications and Multimedia Brokering.
This was a year of consolidation and focusing the organization in a number of prioritized areas. As part of this effort, the PBX part of the enterprise offering was divested. The retained parts provide solutions to operators to address the enterprise segment. In addition, the Company announced plans to form a joint venture with STMicroelectronics, in order to establish a world leader in mobile platforms and wireless semiconductors. With these changes, the segment is now focusing exclusively on multimedia solutions for network operators and service providers.
TV Solutions made good progress with new business development, especially with the launch of the world’s first IMS-integrated IPTV middleware—an end-to-end IPTV solution that supports ease of integration and delivers vendor choice for operators. Ericsson was selected by Hellenic Telecommunications Organization (OTE SA) to act as the end-to-end IPTV systems integrator, solutions provider and business consultant.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
The multimedia market is quickly evolving with converging industries (telecom, media and Internet), technologies and payment options. End-to-end revenue management solutions must handle convergent technologies including IP-based broadband services, a variety of business models and partner relationships,fund expected capital expenditures as well as be payment-option agnostic. Ericsson acquired LHSthe acquisitions of the Nortel/GSM operations and Pride Spa and the contribution to formthe Swedish pension trust fund without external borrowings.
We believe that the Company’s property, plant and equipment and the facilities that the Company now occupies are suitable for its present needs in most locations. As of December 31, 2009, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.
Operator investments are increasing in mobile broadband, driven by a strong constellationramp up of prepaiddata traffic. The broadband growth has not yet offset the decline in GSM sales, which in 2009 was accelerated due to the current economic climate. Operator investment patterns varied significantly between regions and postpaid solutions to capture this opportunity. Ericsson’s solutions for real-time charging and mediation, and billing and customer care solutions, make it a leader in revenue management and significantly strengthen the overall multimedia offering.
Within segment Multimedia, Revenue Management (including LHS), Service Delivery & Provisioning and TV solutions account for the majoritycountries. A number of sales and generate good growth and margins. TV solutions (including Tandberg Television) have now established Ericsson in the TV space. The strategy is to leverage these leading positions and invest in new areas for future growth,developing markets became increasingly cautious, while others, including large markets such as IPTV, Consumer & Business ApplicationsChina and Multimedia Brokering.
Sales opportunitiesthe US, showed good growth. There was a continued strong demand for Multimedia show a positive trend and even though the segment is well established, Ericsson continues to invest in R&D in new business opportunities which affects profitability in the near term.
Phones
See Sony Ericsson Mobile Communications under Partnerships and joint ventures.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
services targeting our customers’ operational efficiency.
Regional overview
Sales Per Region and Segment 2008SALES PER REGION AND SEGMENT 2009
SEK billion | Net- works | Prof. Services | Multi- media | Total | Percent change | Net- works | Prof. Services | Multi- media | Total | Percent change | ||||||||||||||||||||
Western Europe | 25.6 | 18.6 | 7.4 | 51.6 | –2 | % | 23.8 | 18.3 | 2.4 | 44.6 | –14 | % | ||||||||||||||||||
CEMA1) | 38.4 | 9.8 | 4.9 | 53.1 | 9 | % | 32.7 | 12.9 | 5.1 | 50.7 | –4 | % | ||||||||||||||||||
Asia Pacific | 49.8 | 10.5 | 3.0 | 63.3 | 16 | % | 50.5 | 12.2 | 3.1 | 65.8 | 4 | % | ||||||||||||||||||
Latin America | 16.1 | 5.5 | 1.4 | 23.0 | 25 | % | 13.0 | 5.9 | 1.1 | 20.1 | –13 | % | ||||||||||||||||||
North America | 12.1 | 4.6 | 1.2 | 17.9 | 34 | % | 17.1 | 6.7 | 1.6 | 25.4 | 41 | % | ||||||||||||||||||
Total | 142.0 | 49.0 | 17.9 | 208.9 | 11 | % | 137.1 | 56.1 | 13.3 | 206.5 | –1 | % | ||||||||||||||||||
Share of total | 68 | % | 23 | % | 9 | % | 100 | % | 66.4 | % | 27.2 | % | 6.4 | % | 100 | % | ||||||||||||||
Percent Change | 10 | % | 14 | % | 13 | % | 11 | % | –3 | % | 15 | % | 5 | % | –1 | % | ||||||||||||||
1) | Central and Eastern Europe, Middle East and Africa. |
Sales in Western Europe sales decreased by 2 (1)–6 (–2) percent for comparable unitswith increased salesgrowth of professional services and mobile broadband network equipment still more than offset by lower sales of GSM.GSM sales. The highgrowing demand for mobile broadband and professional services is expected to continue, as is the decline for GSM. The macro-economic development is affecting consumer spending withled to a weakeningweaker demand for replacement handsets. Mobilehandsets but mobile phone usage appearsappeared to be largely unaffected requiring operator spendingand mobile broadband traffic continued to maintain network quality of service.show strong growth.
In Central and Eastern Europe, Middle East and Africa (CEMA), sales grewdecreased by 9 (5)–4 (+9) percent, driven bydespite continued 2Gnetwork buildouts in manya number of markets, while a strong growth in Russia was drivenas the region has been more affected than most by ongoing 3G rollouts.the macroeconomic development. Many countries within the CEMA region have low penetration levels and consumer demand remains robust even if some operators are currently unable or unwilling to invest at healthy levels. A similar to the rural areas ofsituation is seen in other emerging markets insuch as Latin America and Asia Pacific. Most of Central and Eastern Europe have GSM penetration levels on par with Western Europe. Although initial deployments of 3G are rapidly spreading throughout the region, GSM is expected to remain the predominant technology for the foreseeable future due to affordability of handsets.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Asia Pacific becameremained Ericsson’s largest region with a sales increase of 16 (14)+4 (+16) percent, even though political unrestfuelled by continued good demand in certain countries within the region negatively affected sales growth.China and India. The Company expanded itshas a leading position in India, which is now Ericsson’s largest and fastest growing market. The Chinese market rebounded afterwhere subscribers are expected to ultimately exceed one billion from the Olympic Games andcurrent 496 million. Auctions for 3G licenses arein India were postponed to be awarded in the beginning of 2009 with rollouts expected to start shortly thereafter.2010. Although Chinese suppliers have significantly increased their domestic market share, Ericsson has maintained itsmaintains a strong market position in China. JapanPolitical unrest and effects of the economic slowdown negatively affected sales growth in certain countries, such as Indonesia, also showed strong developmentPakistan and are now among Ericsson’s largest markets.Bangladesh.
Latin American sales increased 25 (12) percent. Growth was drivendecreased by a combination of GSM enhancements and 3G buildouts. Professional Services also contributed strongly–13 (+25) percent,reflecting lower demand across the region compared to the growth. Mexico and Brazil showed especially strong development with no signs of slow-down. The strong growth reported from the region over the last couple of years is not sustainable. Demand for mobile broadband continues to develop well, but delays in licensing of new spectrum are causing operators to hold back investments in new technologies and will eventually moderate to more normal levels.applications.
North American sales increased by 34 (–15)+41 (+34) percent, mainly driven by demand for mobile broadband and professional services. With a number of breakthrough contracts for LTE, fixed access and services and the acquisition of Nortel’s CDMA and LTE businesses, the Company is well positioned for continued growth and is now the largest supplier of technology and services to network operators in the region.
Market shares were well maintained and the Company retains its ambition to grow faster than the market.
Networks
Overall operator demand for mobile GSM/WCDMA network equipment and related services is estimated to have stabilized atdeclined by more than 10 percent in 2009. At the same time consumer demand continued to grow, the number of mobile subscriptions increased to a higher quarterly level followingtotal of almost 4.6 billion and data traffic accelerated.
Network sales were down by –3 (+10) percent to SEK 137.1 (142.0) billion. Sales for comparable units declined by 5 percent, i.e. excluding SEK 2.7 billion of sales from acquired Nortel operations. Adjusted also for currency and hedge effects, sales declined in line with the reductionmarket. Lower GSM sales, particularly in high-growth markets such as China, contributed to the decline. Sales in WCDMA continued to show good growth driven by demand for mobile broadband.
GSM shipments reached their all-time-high volume in 2008. This year, Ericsson’s WCDMA sales surpassed that of GSM spending in 2007. The recorded slowerfor the first time. WCDMA growth indid not offset the fourth quarter is mainly an effect of a tough year-over-year comparison despite positive effects of the increasing USD exchange rate. The full-year effects from changes in currency exchange rates were limited. Mobile broadband is now well established with good consumer take-up, which is driving continued rollouts as well as capacity enhancements.GSM decline.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Mobile broadband continues to be in focus as more and more networks are being upgraded. Smartphones, netbooks and notebooks drive data traffic and revenues for operators, resulting in demand for network expansions and upgrades.
FINANCIAL RESULTS OF OPERATIONSThe global network coverage from WCDMA is still less than half of that of GSM. In China, the 3G licenses were awarded early 2009. Ericsson participated in China Unicom’s WCDMA rollout, the largest and fastest ever. Another achievement was the world’s largest live network upgrade in record time for Vodafone Essar in India, reaching a peak replacement rate of one radio base station every minute. India is expected to award 3G licenses in 2010.
Abbreviated Income StatementFor the next generation wireless technology, 4G/LTE, Ericsson won key contracts with Reconciliation IFRS—Non-IFRS MeasuresVerizon, Metro PCS, NTT DoCoMo and TeliaSonera. The industry support for LTE is very strong and this technology is expected to play an important role in many markets with suitable spectrum. Ericsson is leading the transformation and convergence of the core network with the largest installed base of all-IP networks based on Softswitch and IP Multimedia System (IMS) technology.
The LTE core network is all-IP. To meet the demand for this new all-IP core, Ericsson has introduced the industry’s most comprehensive Evolved Packet Core portfolio which will support LTE network introduction. The portfolio is built on Ericsson’s existing packet core products and new functionality will be introduced through software upgrades.
Total SEK billion | IFRS 2008 | Restructuring charges | Non-IFRS measures 2008 | IFRS 2007 | |||||||
Net sales | 208.9 | — | 208.9 | 187.8 | |||||||
Cost of sales | -134.6 | 2.5 | -132.1 | -114.1 | |||||||
Gross income | 74.3 | 2.5 | 76.8 | 73.7 | |||||||
Gross margin % | 35.5 | % | 36.8 | % | 39.3 | % | |||||
Operating expenses | -60.6 | 4.2 | -56.4 | -52.0 | |||||||
Opex as % of sales | 29 | % | 27 | % | 28 | % | |||||
Other operating income and expenses | 3.0 | — | 3.0 | 1.7 | |||||||
Share in earnings of JV and associated companies | -0.4 | 0.9 | 0.5 | 7.2 | |||||||
Operating income | 16.3 | 7.6 | 23.9 | 30.6 | |||||||
Operating margin % | 7.8 | % | 11.4 | % | 16.3 | % | |||||
Less share in Sony Ericsson | -0.5 | 0.9 | 0.4 | 7.1 | |||||||
Operating income excl Sony Ericsson | 16.8 | 6.7 | 23.5 | 23.5 | |||||||
Operating margin % excl Sony Ericsson | 8.0 | % | 11.3 | % | 12.5 | % | |||||
Non-IFRS measures are usedThe increased data traffic driven by mobile broadband continues to create demand for transmission capacity for mobile backhaul. Ericsson offers a wide range of solutions to remove bottlenecks in the income statementtransport network. Successful mobile backhaul networks were completed in Turkey, Sweden, Canada and the US in 2009. Sales of optical and microwave transmission solutions to provide meaningful supplemental informationfixed as well as mobile operators developed in line with the market.
In the fixed access area, the Company had break-in wins for fiber (GPON) connection in the Americas and in China.
Operators are evolving from legacy circuit-switched networks to all-IP, in both fixed and mobile networks, and this creates opportunities for Ericsson. A new Silicon Valley campus has been established with the IFRS results. Since there were significant restructuring costs during 2008, butintention of driving the convergence of IP and mobile networks and reaching out to new partners in mobile broadband markets. The Company remains optimistic regarding growth opportunities for all-IP networks with IP routing, IMS and transmission.
With the acquisition of the Nortel assets for CDMA and LTE, the Company strengthened its ability to serve North America’s mobile operators. The acquisition significantly expands Ericsson’s footprint in this market, particularly as operators in this region are emerging as early adopters of LTE technology. The agreement also includes certain patents and patent licenses relating to CDMA and LTE. Going forward, R&D expenses are expected to be relatively little benefit and consequently a significant impact on reported results and margins, and as there were insignificant restructuring chargeslow in 2007, non-IFRS measures excluding restructuring charges are presented to facilitate analysis by indicating Ericsson’s underlying performance. However, these measures should not be viewed in isolation or as substitutes to the IFRS measures.CDMA compared with other technologies.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Sales grew 11 percent to SEK 208.9 (187.8) billion
The sales growth was driven by strong demand across the portfolio and across all regions, with the exception of Western Europe. Fluctuations in currency exchange rates had a limited effect on reported sales for the full year.
Gross margin decreased to 36.8 (39.3) percent, excluding restructuring charges
The decline is due to a business mix with high proportion of network rollout projects which often also include significant third party content. A higher proportion of managed services sales with lower than group average gross margins contributed to the decline.
Excluding restructuring charges, operating income declined by 22 percent to SEK 23.9 (30.6) billion with an operating margin of 11.4 (16.3) percent
The main reasons are the decline in gross income, and a negative contribution from Sony Ericsson of SEK –0.5 billion, compared with SEK 7.1 billion in 2007.
Excluding also the result in Sony Ericsson, operating margin decreased less, to 11.3 (12.5) percent, reflecting the significant difference in the Sony Ericsson contribution compared to 2007.
Earnings per share (EPS) diluted SEK 3.52 (6.84) down 49 percent
Earnings Per Share (EPS)
2008 | 2007 | ||||
EPS diluted | 3.52 | 6.84 | * |
EPS declined substantially as EPS includes restructuring charges. Based on Ericsson’s strengthened market position relative to its peers, the Board considers the underlying earnings capacity and the financial position to be strong and proposes a dividend also for 2008, however reduced to SEK 1.85 (2.50) per share.
Consolidated Balance Sheet (Abbreviated)
December 31, SEK billion | 2008 | 2007 | ||
ASSETS | ||||
Non-current assets, total | 87.2 | 87.0 | ||
Current assets, total | 198.5 | 158.1 | ||
—of which trade receivables | 75.9 | 60.5 | ||
—of which inventory | 27.8 | 22.5 | ||
Total assets | 285.7 | 245.1 | ||
EQUITY AND LIABILITIES | ||||
Equity | 142.1 | 135.0 | ||
Non-current liabilities, total | 39.5 | 32.4 | ||
Current liabilities, total | 104.1 | 77.7 | ||
—of which trade payables | 23.5 | 17.4 | ||
Total equity and liabilities1) | 285.7 | 245.1 |
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Net cash SEK 34.7 (24.3) billion
The improved net cash position is largely a result of the favorable cash flow from operations reflecting working capital efficiency improvements. Payment readiness was considerably strengthened from SEK 65 billion at the end of 2007 to SEK 85 billion at year end.
Working Capital SEK 100 (86) billion
Results of ongoing efforts to improve working capital efficiencies relating to receivables, inventories and payables have been partly offset by strong movements in currency translation effects. The improvement of cash contributed to the increase in working capital.
Days Sales Outstanding (DSO) 106 (102) days
High sales in the second half of the year as well as payment terms in network buildout contracts with retention of payments until provisional and final acceptance have led to an increase in DSO. The Company has initiated a number of actions to improve such terms. However, adjusted for currency effects, DSO showed a slight decrease compared to 2007.
Payable days 55 (57) days
The slight deterioration is mainly a reflection of the vendor mix, with shorter payment cycles related to subcontracted service providers for network rollout services, in combination with a higher proportion of such contracts.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Inventory Turnover (ITO) 5.4 (5.2) times
Overall inventory turnover was improved slightly, with faster turnover in both product supply and customer order work in process, partly offset by the higher proportion of work in progress inventory.
Return on Equity (ROE) 8.2 (17.2) percent
The return on equity, including restructuring charges, developed unfavorably. This development is a major reason for the continued efforts to improve profitability through continued focus on a more competitive product portfolio, harvesting of market share gains and of acquisitions made as well as continued cost reductions.
Return on Capital Employed (ROCE), excluding restructuring charges, 16 (21) percent
The decline is mainly a result of an increase in capital employed in combination with the reduced gross margin and the lower Sony Ericsson result which have reduced the operating income. ROCE improvements are being addressed in the Company’s restructuring and capital efficiency activities.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Debt maturity profile
Ericsson´s cash position of SEK 75 billion is currently deemed to be sufficient to cover any short- and medium-term cash needs including debt repayment of USD 483 million and EUR 471 million maturing in 2009 and 2010 respectively. During the year, maturing debt was refinanced with the European Investment Bank (EIB) with a SEK 4 billion loan maturing in 2015, to support R&D activities. In addition to cash in the balance sheet, there is an undrawn committed credit facility of USD 2 billion (maturing 2014) in place as a liquidity reserve.
Credit Ratings
The Company’s credit rating was maintainedCredit ratings were unchanged during 2009, remaining at “solid investment grade” by both: Moody’s at Baa1 and Standard & Poor’s.
On March 3, 2009, Standard & Poor’s changed outlook from negative to stable.at BBB+.
Off balanceSony Ericsson borrowings guaranteed
Ericsson and SONY have on a 50/50 basis guaranteed EUR 350 million of borrowings for general business purposes, as improved liquidity was needed following Sony Ericsson’s weak results and the restructuring program. The amount guaranteed is not deemed significant, considering Ericsson’s financial position.
Off-balance sheet arrangements
There are currently no material off-balance sheet arrangements that have, or would be reasonably likely to have, a current or anticipated effect on the Company’s financial condition, revenues, or expenses, resultsresult of operations, liquidity, capital expenditures or capital resources.
Cash Flow (Abbreviated) January–DecemberJANUARY–DECEMBER
SEK billion | 2008 | 2007 | ||||
Net income reconciled to cash | 26.0 | 29.3 | ||||
Changes in operating net assets | -2.0 | -10.1 | ||||
Cash flow from operating activities | 24.0 | 19.2 | ||||
Cash flow from investing activities | -8.5 | -27.5 | ||||
Cash flow before financing activities | 15.5 | -8.3 | ||||
Cash flow from financing activities | -7.2 | 6.3 | ||||
Cash conversion1) | 92 | % | 66 | % | ||
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
SEK billion | 2009 | 2008 | ||||
Net income | 4.1 | 11.7 | ||||
Income reconciled to cash | 21.0 | 26.0 | ||||
Changes in operating net assets | 3.5 | –2.0 | ||||
Cash flow from operating activities | 24.5 | 24.0 | ||||
Cash flow from investing activities | –37.5 | –8.5 | ||||
—of which capital expenditures, sales of PP&E, product development | –4.9 | –4.1 | ||||
—of which acquisitions/divestments, net | –18.1 | 1.8 | ||||
—of which short-term investments for cash management purposes and other investing activities | –14.5 | –6.2 | ||||
Cash flow before financing activities | –13.0 | 15.5 | ||||
Cash flow from financing activities | –1.7 | –7.2 | ||||
Cash conversion (Cash flow from operating activities divided by income reconciled to cash) | 117 | % | 92 | % | ||
Gross cash (Cash, cash equivalents and short-term investments) | 76.7 | 75.0 | ||||
Net Cash (Gross cash less interest-bearing liabilities and post-employment benefits) | 36.1 | 34.7 | ||||
Cash flow from operations stable at SEK 24.0 (19.2)24.5 billion
The improvement from last year isA lower net income was offset by non-cash items, such as the losses in JVs, depreciation, amortization of intangibles, largely attributablerelated to a more favorable development of net operating assets which grew substantially less than Net Sales, as a result of increased focus onrestructuring, and strong working capital management. In 2008 Ericsson received SEK 3.6 (3.9) billionreductions, resulting in dividendsa similar cash flow from Sony Ericsson.operations as in 2008.
Cash flowout from investing activities SEK –8.5 (–27.5)–37.5 billion
During 2008,Cash outlays for recurring investing activities increased slightly to SEK –4.9 billion.
Acquisitions/divestments during the Company divested/acquired operations with less thanyear were net SEK 1 (–26)–18.1 billion, net cash received. This is partly offset by short-term investments of SEK –7.2 (3.5) billion related to cash management.
Cash flow from financing activities SEK –7.2 (6.3) billion
The negative cash flow is largely attributable to the dividend paid to shareholders. Maturing borrowings were largely refinanced through a new loan with the European Investment Bank (EIB) to support R&D activities.
Cash conversion 92 (66) percent
The cash conversion rate relates income adjusted for non-cashmajor items to operating cash flow. The cash conversion rate was favorably impacted by non-cash items related to provisions in combination with a high cash flow from operations and a dividend payment from Sony Ericsson related to 2007.
Restricted cash
In certain countries, there are legal or economic restrictions onbeing the abilityformation of subsidiaries to transfer funds to the Parent Company in the form of cash dividends, loans or advances. Such restricted cash amounted to SEK 8.2 (5.8) billion.
Capital expenditures (capex)
We continuously monitor the Company’s capital expenditures and evaluate whether adjustments are necessary in light of market conditions and other economic factors. Capital expenditures are typically investments in test equipment used to develop, manufacture and deploy network equipment. However, capital expenditures in 2008 came mainly from investments needed to support the growing services business and establish stronger presence in certain markets.
The table summarizes annual capital expenditures during the five years ending December 31, 2008.
CAPITAL EXPENDITURES 2004–2008
SEK billion | 2008 | 2007 | 2006 | 2005 | 2004 | ||||||||||
Capital expenditures | 4.1 | 4.3 | 3.8 | 3.4 | 2.5 | ||||||||||
of which in Sweden | 1.6 | 1.3 | 1.0 | 1.0 | 1.1 | ||||||||||
as percent of net sales | 2.0 | % | 2.3 | % | 2.2 | % | 2.2 | % | 1.9 | % |
We do not expect capital expenditures in relation to sales to differ significantly in 2009, remaining at roughly 2 percent.
In addition to normal capital expenditures, there is a commitment to invest USD 1.1 billion to establish a newST-Ericsson joint venture, with STMicroelectronics.the minority stake in LHS and Nortel’s CDMA and LTE businesses.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Cash outflow for short-term investments for cash management purposes and other investing activities was net SEK –14.5 billion, largely attributable to SEK –17.1 billion of short-term investments driven by the strong cash flow from operations.
Cash flow from financing activities SEK –1.7 billion
Dividends paid of SEK –6.3 billion were partly offset by increased borrowings of SEK 4.3 billion and other financing activities of SEK 0.2 billion.
Strong cash conversion at 117 (92) percent
The cash conversion rate was 117 (92) percent, well above the target level of 70 percent. The percentage increase was largely attributable to the strong improvement in operating net assets and the lower income reconciled to cash.
Restricted cash
Cash balances in certain countries with restrictions on transfers of funds to the Parent Company as cash dividends, loans or advances amounted to SEK 8.9 (8.2) billion.
Capital expenditures
Amounts for annual capital expenditures are normally around two percent of sales. This level corresponds to the needs for keeping and maintaining the current capacity level, including the continuous introduction of new technology and methods. The expenditures are largely related to test equipment in R&D units and network operations centers and to production and test equipment in manufacturing and repair operations.
The Board reviews the Company’s investment plans and proposals.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CAPITAL EXPENDITURES 2005–2009
SEK billion | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||
Capital expenditures | 4.0 | 4.1 | 4.3 | 3.8 | 3.4 | ||||||||||
—of which in Sweden | 1.3 | 1.6 | 1.3 | 1.0 | 1.0 | ||||||||||
as percent of net sales | 1.9 | % | 2.0 | % | 2.3 | % | 2.2 | % | 2.2 | % |
Capital expenditures in relation to sales are expected to remain at about two percent. The Company has sufficient cash and cash generation capacity to fund expected capital expenditures as well as the acquisitions of the Nortel/GSM operations and Pride Spa and the contribution to the Swedish pension trust fund without external borrowings.
We believe that the Company’s property, plant and equipment and the facilities that the Company now occupies are suitable for its present needs in most locations. As of December 31, 2008,2009, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.
Operator investments are increasing in mobile broadband, driven by a net cash position at year-endstrong ramp up of SEK 34.7 (24.3) billion, we expectdata traffic. The broadband growth has not yet offset the Companydecline in GSM sales, which in 2009 was accelerated due to the current economic climate. Operator investment patterns varied significantly between regions and countries. A number of developing markets became increasingly cautious, while others, including large markets such as China and the US, showed good growth. There was a continued strong demand for services targeting our customers’ operational efficiency.
Regional overview
SALES PER REGION AND SEGMENT 2009
SEK billion | Net- works | Prof. Services | Multi- media | Total | Percent change | ||||||||||
Western Europe | 23.8 | 18.3 | 2.4 | 44.6 | –14 | % | |||||||||
CEMA1) | 32.7 | 12.9 | 5.1 | 50.7 | –4 | % | |||||||||
Asia Pacific | 50.5 | 12.2 | 3.1 | 65.8 | 4 | % | |||||||||
Latin America | 13.0 | 5.9 | 1.1 | 20.1 | –13 | % | |||||||||
North America | 17.1 | 6.7 | 1.6 | 25.4 | 41 | % | |||||||||
Total | 137.1 | 56.1 | 13.3 | 206.5 | –1 | % | |||||||||
Share of total | 66.4 | % | 27.2 | % | 6.4 | % | 100 | % | |||||||
Percent Change | –3 | % | 15 | % | 5 | % | –1 | % | |||||||
1) | Central and Eastern Europe, Middle East and Africa. |
Sales in Western Europe decreased by –6 (–2) percent for comparable unitswith growth of professional services and broadband more than offset by lower GSM sales. The growing demand for mobile broadband and professional services is expected to continue, as is the decline for GSM. The macro-economic development led to a weaker demand for replacement handsets but mobile phone usage appeared to be ablelargely unaffected and mobile broadband traffic continued to cover all capital expenditure plans and customer financing commitments for 2009 by using funds generated from operations with no additional borrowing required.show strong growth.
RISK MANAGEMENTIn Central and Eastern Europe, Middle East and Africa (CEMA), sales decreased by –4 (+9) percent,
The Board is actively engaged despite continued network buildouts in risk management in conjunction witha number of markets, as the annual strategy process, where risks related to set long-term objectives are discussed and strategies formally approvedregion has been more affected than most by the Board. Risks relatedmacroeconomic development. Many countries within the CEMA region have low penetration levels and consumer demand remains robust even if some operators are currently unable or unwilling to annual targets for the Company are also reviewed by the Boardinvest at healthy levels. A similar situation is seen in other emerging markets such as the targets are presented for approvalLatin America and then monitored continuously during the year. Certain transactional risks require specific Board approval, e.g. borrowing or customer finance in excess of pre-defined limits.
The general economic downturn during 2008 and the consequences for the business were assessed in both strategy and target setting. Due to the increased difficulties of forecasting customer demand, a continued focus on cost management and a strong liquidity were emphasized.
For Ericsson’s long-term performance, the following industry fundamentals were analyzed and risks and opportunities evaluated:
A rapid technological development.
Trends in subscriber and traffic growth, introduction and adoption of new types of services and devices, and effects of changes in tariffs and subscription plans.
A changing competitive landscape, with consolidation among customers and vendors and new suppliers becoming stronger.
Convergence of the telecom, datacom and media industries, resulting in new types of competition and customers.
Regulatory impact regarding e.g. radio frequencies, licenses, and roaming charges.
Activities that were in focus this year include:
To capitalize on the acquisitions made and the broader product portfolio created.
In partnership with leading customers move forward in network convergence and full service broadband.
To ensure competence in key technology areas and systems integration.
To safeguard continued technology leadership.
To improve margins by various actions.
To improve capital efficiency and ensure satisfactory cash flow.
Risks are categorized as operational risks or financial risks. The Company also manages risks related to financial reporting and to compliance with applicable laws and regulations. The approach to risk management reflects the scale and diversity of the Company’s business activities and balances central coordination and support with delegated risk management responsibilities.
For more information on risks related to our business, see also Risk Factors on page 135.Asia Pacific.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Operational risk managementAsia Pacific remained Ericsson’s largest region with a sales increase of +4 (+16) percent,fuelled by continued good demand in China and India. The Company has a leading position in India, where subscribers are expected to ultimately exceed one billion from the current 496 million. Auctions for 3G licenses in India were postponed to 2010. Although Chinese suppliers have significantly increased their domestic market share, Ericsson maintains a strong market position in China. Political unrest and effects of the economic slowdown negatively affected sales growth in certain countries, such as Indonesia, Pakistan and Bangladesh.
Risk managementLatin American sales decreased by –13 (+25) percent,reflecting lower demand across the region compared to strong growth over the last couple of years. Demand for mobile broadband continues to develop well, but delays in licensing of new spectrum are causing operators to hold back investments in new technologies and applications.
North American sales increased by +41 (+34) percent, mainly driven by demand for mobile broadband and professional services. With a number of breakthrough contracts for LTE, fixed access and services and the acquisition of Nortel’s CDMA and LTE businesses, the Company is integrated within the Ericsson Group Management Systemwell positioned for continued growth and is based onnow the following principles:
Risks are dealt with on three levelslargest supplier of technology and services to ensure operational effectiveness, efficiency and business continuity—network operators in the strategy process,region.
Market shares were well maintained and the Company retains its ambition to grow faster than the market.
Networks
Overall operator demand for mobile GSM/WCDMA network equipment and related services is estimated to have declined by more than 10 percent in annual target setting, within ongoing operations2009. At the same time consumer demand continued to grow, the number of mobile subscriptions increased to a total of almost 4.6 billion and data traffic accelerated.
Network sales were down by transaction (e.g. customer bids/contracts, acquisitions, investments, R&D projects).
Risks are subject–3 (+10) percent to various process controls,SEK 137.1 (142.0) billion. Sales for comparable units declined by 5 percent, i.e. excluding SEK 2.7 billion of sales from acquired Nortel operations. Adjusted also for currency and hedge effects, sales declined in line with the market. Lower GSM sales, particularly in high-growth markets such as decision tollgates and approvals.
InChina, contributed to the strategy and target setting processes, a balanced scorecard approach is useddecline. Sales in WCDMA continued to ensure a comprehensive assessmentshow good growth driven by demand for mobile broadband.
GSM shipments reached their all-time-high volume in 2008. This year, Ericsson’s WCDMA sales surpassed that of risks and opportunities across several perspectives: financial, customer/market, product/innovation, operational efficiency and employee empowerment.
In the strategy process, objectives are setGSM for the next five years. Risks are then assessed and strategies developed to achieve these objectives. To ensure that actions are taken to realizefirst time. WCDMA growth did not offset the strategies, focus areas are identified to be included in the near-term target setting and planning for the coming year.
Each risk is owned and managed by an operational unit that is held accountable and monitored through unit steering groups and Group Management.
Approval limits are clearly established with escalation according to defined delegations of authority. Certain types of risk, such as information security/IT, corporate responsibility, physical security, business continuity and insurable risks are centrally coordinated. A crisis management council is established to deal with ad hoc events of a serious nature, as necessary.
GSM decline.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Financial risk managementMobile broadband continues to be in focus as more and more networks are being upgraded. Smartphones, netbooks and notebooks drive data traffic and revenues for operators, resulting in demand for network expansions and upgrades.
The Company hasglobal network coverage from WCDMA is still less than half of that of GSM. In China, the 3G licenses were awarded early 2009. Ericsson participated in China Unicom’s WCDMA rollout, the largest and fastest ever. Another achievement was the world’s largest live network upgrade in record time for Vodafone Essar in India, reaching a peak replacement rate of one radio base station every minute. India is expected to award 3G licenses in 2010.
For the next generation wireless technology, 4G/LTE, Ericsson won key contracts with Verizon, Metro PCS, NTT DoCoMo and TeliaSonera. The industry support for LTE is very strong and this technology is expected to play an established policy governing its financial risk management. Thisimportant role in many markets with suitable spectrum. Ericsson is carried out byleading the Treasury function within the Parent Companytransformation and by a Customer Finance function. These are both supervised by the Finance Committeeconvergence of the Boardcore network with the largest installed base of Directors. all-IP networks based on Softswitch and IP Multimedia System (IMS) technology.
The policy governs identified financial risk exposures regarding:LTE core network is all-IP. To meet the demand for this new all-IP core, Ericsson has introduced the industry’s most comprehensive Evolved Packet Core portfolio which will support LTE network introduction. The portfolio is built on Ericsson’s existing packet core products and new functionality will be introduced through software upgrades.
Foreign exchange risks, asThe increased data traffic driven by mobile broadband continues to create demand for transmission capacity for mobile backhaul. Ericsson offers a wide range of solutions to remove bottlenecks in the Company has significant transaction volumestransport network. Successful mobile backhaul networks were completed in Turkey, Sweden, Canada and assetsthe US in 2009. Sales of optical and liabilities in currencies other than SEK. The largest foreign exchange exposure was towards the USD and related currencies, with approximately 43 percent of sales and approximately 32 percent of spending exposure in 2008. A variety of hedging activities are usedmicrowave transmission solutions to manage foreign exchange risks.
Interest rate risks, as the values of cash and bank deposits, borrowings and post-employment liabilitiesfixed as well as related interest incomemobile operators developed in line with the market.
In the fixed access area, the Company had break-in wins for fiber (GPON) connection in the Americas and in China.
Operators are evolving from legacy circuit-switched networks to all-IP, in both fixed and mobile networks, and this creates opportunities for Ericsson. A new Silicon Valley campus has been established with the intention of driving the convergence of IP and mobile networks and reaching out to new partners in mobile broadband markets. The Company remains optimistic regarding growth opportunities for all-IP networks with IP routing, IMS and transmission.
With the acquisition of the Nortel assets for CDMA and LTE, the Company strengthened its ability to serve North America’s mobile operators. The acquisition significantly expands Ericsson’s footprint in this market, particularly as operators in this region are emerging as early adopters of LTE technology. The agreement also includes certain patents and patent licenses relating to CDMA and LTE. Going forward, R&D expenses are exposedexpected to changesbe relatively low in interest rates.
Credit risks in trade and customer finance receivables, including credit risk exposures in identified high-risk countries, as well as credit risks regarding counterparties in financial transactions.
Market risks in securities included in pension plan assets.
Liquidity and financing risks, where the Company’s Treasury function manages the Company’s liquidity through monitoring of its payment readiness and refinancing needs and sources.
During 2008, there have not been any defaults in the payment of principal or interest, or anyCDMA compared with other material default relating to the indebtedness of Ericsson. For further information on financial risk management, see Notes to the Consolidated Financial Statements—Note C14, “Trade Receivables and Customer Finance”, Note C19, “Interest-Bearing Liabilities” and Note C20, “Financial Risk Management and Financial Instruments”.
Financial reporting risks
To ensure accurate and timely reporting that is compliant with financial reporting standards and stock market regulations, the Company has adopted accounting policies and implemented financial reporting and disclosure processes and controls. The Company must also comply with the Sarbanes-Oxley act.
Compliance risks
The Company has implemented a number of Group policies and directives to ensure compliance with applicable laws and regulations, including a Code of Business Ethics, covering among other areas: labor laws, trade embargoes, environmental regulations, corruption, fraud and insider trading. Regular training is conducted in this area in the form of seminars as well as e-learning on internal training web sites, where employees take courses and tests and get certificates for passed courses.
Internal audits are routinely conducted regarding compliance with policies, directives and processes as well as in the areas of trade compliance, fraud, IT, security, health and safety, environment and supply chain management.
Employees
Employee headcount at year end was 78,750 (74,011). Most of the additions were due to outsourcing agreements with operators as a result of the growing managed services business. During the year, 3,415 (6,657) employees left the Company while 8,144 (16,887) joined the Company. Please see Notes to the Consolidated Financial Statements—Note C29, “Information Regarding Employees, Members of the Board of Directors and Management”.technologies.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Credit ratingsProfessional Services
Both Moody’sProfessional Services sales continued to show good growth, increasing by 15 (14) percent to SEK 56.1 (49.0) billion. Growth measured in local currencies amounted to 8 (13) percent. However, sales were negatively affected by the reduced scope of a managed services agreement and Standard & Poor’s (S&P) credit rating agencies maintained Ericsson’s credit rating during 2008. At year end, ratingssomewhat lower sales of Ericsson’s creditworthiness were Baa1 for Moody’s and BBB+ for S&P, both of which are considered to be “Investment Grade.”
ERICSSON CREDIT RATINGS YEAR END 2006–2008
2008 | 2007 | 2006 | ||||
Moody’s | Baa1 | Baa1 | Baa2 | |||
Standard & Poor’s | BBB+ | BBB+ | BBB– |
RESEARCH AND DEVELOPMENT
A robust R&D program is essential to Ericsson’s competitiveness and future success. With most R&D investedproject-related services, reflecting the slowdown in mobile communications network infrastructure, Ericsson’s program issales. Managed services was one of the largestmain drivers for the sales increase, growing by 22 (17) percent to SEK 17.4 (14.3) billion, significantly outpacing the market. More than 60 percent of revenues in Professional Services are now of a recurring nature.
As the professional services market develops, there are many opportunities for project business, but operators are also seeking longer-term partnerships for a competitive edge. Combined with an expanding managed services market, this should help sustain a healthy level of recurring business for Ericsson.
Ericsson is the clear leader in managed services and at year end 2009 Ericsson-managed network operations served over 370 (250) million users. Despite a higher proportion of managed services sales from new contracts with associated start-up costs, Professional Services’ operating margin remained in the mid-teens at 15 (16) percent. This is due to increased efficiency in the delivery organization.
Ericsson won several milestone contracts for managed services during the year. These include Sprint and Zain, the first full-scope managed services contracts in North America and Africa—not only firsts for Ericsson but also for the industry. The acquisition of Nortel’s CDMA and LTE businesses creates opportunities for synergies in the services operations in North America.
Consulting and systems integration also had encouraging developments during the year, particularly in revenue assurance and support systems transformation, exemplified by a multi-country contract for revenue assurance with Mobilkom Group of Austria and a service assurance contract with Wataniya in Algeria. Operational consulting is also an area of growth, exemplified by a contract with Claro in Guatemala (fixed and wireless).
Common challenges faced by operators today are business growth, operational efficiency of the R&D activities has been improved, enablingand network evolution towards IP. In a faster time to market for products and increased investmentconverging communications world, new complexity in new areas such as multimedia solutions while decreasing R&D as a percentage of sales. A further reduction of approximately SEK 3–4 billion is planned for 2009, including the transfer of Ericsson’s mobile platforms operations into the new joint venture with STMicroelectronics.
RESEARCH AND DEVELOPMENT PROGRAM
2008 | 2007 | 2006 | |||||||
Expenses (SEK billion)1) | 30.9 | 28.8 | 27.5 | ||||||
As percent of sales | 14.8 | % | 15.4 | % | 15.3 | % | |||
Employees within R&D at December 312) | 19,800 | 19,300 | 17,000 | ||||||
Patents2) | 24,000 | 23,000 | 22,000 |
During 2009, R&D expenses, including the amortization of intangible assets from acquisitions but excluding Ericsson’s mobile platform activities and restructuring charges, are expected tobusiness models must also be approximately SEK 27–28 billion. Currency translation effects could affect the actual level of reported spending.
PARTNERSHIPS AND JOINT VENTURES
Sony Ericsson suffered from weakening demand for mid to high-end phones in markets where it has a higher than average market share, especially in Western Europe. Units shipped and ASP (Average Sales Price) decreased which caused sales to decline. Weaker exchange rates for certain currencies (e.g. SEK, GBP, BRL) relativeadded to the EUR also contributedchallenges. Services expertise and experience, in combination with technology leadership and business understanding, enable the Company to the lower sales.
The Sony Ericsson gross margin declined significantly reflecting lower volumestake on a prime integrator role in complex deployment and lower prices. Also the operating margin was impacted by this. Despite the breakeven results and necessary restructuring charges, Sony Ericsson has a healthy balance sheet with a strong net cash position of EUR 1,072 million.
Income before taxes was EUR 92 (1,574) million, excluding restructuring charges. A EUR 480 million operating expense reduction program has been initiated with full effect expected by the end of 2009. Restructuring charges are estimated to EUR 300 million of which EUR 175 million were taken during 2008.transformation projects.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Ericsson’s share
Multimedia
Multimedia sales increased 5 percent for comparable units with revenue management negatively affected during the second half of the year by lower network deployments. The segment continues to have attractive prospects for sales growth to network operators and service providers and the Company is well positioned to benefit from a market rebound.
Operating margin improved to 8 (0) percent while EBITDA margin doubled to 16 percent with stringent cost control and the operational benefits of a more concentrated business, i.e. excluding PBX systems and mobile platforms, focusing on TV solutions, business support systems and revenue management.
Solution area TV performed well during 2009 in Sony Ericsson’s income before tax was SEK –0.5 (7.1) billion. SEK 3.6 billion was contributedwhat proved to Ericsson’s cash flowbe a challenging market environment. The Company strengthened its position in the formIPTV market with a number of dividend payments relatedwins for its industry-leading IMS-enabled middleware, where full systems integration and solutions delivery is also provided. The product range in the Video on Demand and Content Management area was extended and a new generation of encoding platforms was introduced, redefining the achievable limits of compression performance. Industry recognition of market leadership was reinforced by three prestigious awards at IBC: Best IPTV solution, Best Content Management solution and Best Compression solution.
As operators modernize and transform their networks to 2007.all-IP, with more and more services added, the importance of business support systems increases. Ericsson’s business support systems enable management of subscribers, provisioning of services and subscriptions, collection of usage data, charging and invoicing for services used and settlements with business partners in the service value chain. Business support systems presence was increased by leveraging the strong market position in Networks and Professional Services, especially systems integration, with a broad solutions portfolio in revenue management, provisioning and service delivery.
The joint venture resultsMore than 800 million subscriptions have been activated through Ericsson’s provisioning and service delivery platforms and 1 billion subscribers are accounted for in accordance with the equity method.
SONY ERICSSON RESULTS 2006–2008
2008 | Percent change | 2007 | 2006 | ||||||
Units sold (millions) | 96.6 | -7 | % | 103.4 | 74.8 | ||||
Sales (EUR m.) | 11,244 | -13 | % | 12,916 | 10,959 | ||||
Income before tax (EUR m.) | -83 | — | 1,574 | 1,298 | |||||
Net income (EUR m.) | -73 | — | 1,114 | 997 | |||||
Ericsson’s share of income before tax (SEK billion) | -0.5 | — | 7.1 | 5.9 |
For more information on transactions with Sony Ericsson, please see also Notes to the Consolidated Financial Statements—Note C30, “Related Party Transactions”.
New joint venture. STMicroelectronicsnow charged and Ericsson agreed to establish a joint venture which will have one of the industry’s strongest product offering in semiconductors and platforms for mobile devices. The businesses being combined are already major suppliers to four of the industry’s top five handset manufacturers, who together represent almost 80 percent of handset shipments. The joint venture will have 8,000 employees with pro forma 2008 sales of USD 3.6 billion.
The 50/50 joint venture, to be called ST Ericsson, will be headquartered in Geneva, Switzerland. Of the almost 8,000 employees, some 5,000 will be from ST-NXP Wireless and approximately 3,000 will be frombilled through Ericsson’s mobile platforms operations.
The joint venture will acquire relevant assets from the owner companies. After these acquisitions, the joint venture will have a cash position of about USD 0.4 billion. Ericsson contributes USD 1.1 billion net to the joint venture, out of which USD 0.7 billion is paid to ST. The joint venture is expected to become operational duringRevenue Management solutions. A Dynamic Discount Solution (DDS), the first quartertelecom yield management system, was launched and deployed in a number of 2009.high-growth markets.
Ericsson advanced its leadership in mobile payment solutions and is first with a global solution to power application stores with mobile web payment capabilities. An Online Payment service was launched with great success through 60 operators in 15 markets. Ericsson was awarded the Best Transactions Provider Award—Mobile Entertainment 2009 and received a high ranking in the Forrester Messaging Wave Report.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
AcquisitionsThere are opportunities for network operators and divestmentsservice providers to increase the value of their offerings toward consumers by taking advantage of the transformation to all-IP. Ericsson’s introduction of the two IP-based applications Rich Communication Suite and Business Communication Suite has attracted significant market interest. They enable Ericsson’s customers to provide services regardless of handset model or operating system. Ericsson also reinforced its leading position in Location Based Services with a number of new contracts. In addition, a Real Time Traffic Information service was launched in Europe and Asia.
The Company is making good progress in building a strong portfolio of applications enabling network operators and service providers to grow revenues and expand into new value chains beyond traditional telecom services. Ericsson continues to invest in new multimedia opportunities which may affect profitability on occasion. Most earlier investments are starting to pay off.
Joint Ventures
In total,Sony Ericsson
The global handset market is believed to have declined by 10 percent in unit shipments, mainly due to weakening demand for mid- to high-end feature phones—an important segment for Sony Ericsson with its higher than average market share exposure. As a consequence, Sony Ericsson’s market share decreased from ~7 percent to less than 5 percent.
Units shipped declined by 41 percent to 57.1 (96.6) million while the Company has spent SEK 40.7average selling price increased by 3 percent to EUR 119 (116). Sales decreased by 40 percent from EUR 11.2 billion net in acquisitions/divestmentsto 6.8 billion. Gross margin declined significantly year-on-year but improved during the last three years (2006–2008).year as benefits of cost reductions and new products started to materialize.
Acquisitions were insignificant in 2008, SEK 26.3 billion in 2007 and SEK 18.1 billion in 2006. Divestments were made for SEK 0.6 billion in 2008, SEK 0.1 billion in 2007 and SEK 3.1 billion in 2006. For more information, please see Notes to the Consolidated Financial Statements—Note C26 “Business Combinations”.
Material contracts and contractual obligations
Material contractual obligations are outlined in the following table. Operating leases are mainly related to offices and production facilities. Purchase obligations are related mainly to outsourced manufacturing, R&D and IT operations and to components for our own manufacturing. Except for those transactions previously described in this report, Ericsson has not beenIncome before taxes, excluding restructuring charges, was a party to any material contracts over the past three years other than those entered intoloss of EUR 878 million. The income gradually improved during the ordinary course of business.
CONTRACTUAL OBLIGATIONS 20081)
Payment due by period | ||||||||||
(SEK billion) | Total | <1 year | 1–3 years | 3–5 years | >5 years | |||||
Long-term debt2)3) | 27.4 | 4.4 | 5.5 | 3.7 | 13.8 | |||||
Capital lease obligations4) | 2.2 | 0.2 | 0.4 | 0.3 | 1.3 | |||||
Operating leases4) | 13.9 | 3.4 | 4.9 | 2.7 | 2.9 | |||||
Other non-current liabilities | 1.6 | — | 0.1 | — | 1.5 | |||||
Purchase obligations5) | 13.1 | 13.1 | — | — | — | |||||
Trade Payables | 23.5 | 23.5 | — | — | — | |||||
Commitments for customer financing6) | 3.8 | 3.8 | — | — | — | |||||
Total | 85.5 | 48.4 | 10.9 | 6.7 | 19.5 | |||||
Ericsson is party to certain agreements which include provisions that may take effect, be altered or cease to be valid due to a changeyear from an improved gross margin and reduced operating expenses. Ericsson’s share in control of the Company, as a result of a public takeover offer. Such provisions are not unusual for certain types of agreements such as joint-venture agreements, financing agreements and certain license agreements. However, none of the agreements that Ericsson currently has in effect would entail any material consequences due to a change in control of the Company. With a net cash position at year end ofSony Ericsson’s income before taxes was SEK 34.7 (24.3) billion, we expect the Company to be able to cover all capital expenditure plans and other financing commitments for 2009 by using funds generated from operations with no additional borrowing required.–5.7 billion.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
In the second half of the year, borrowing facilities of EUR 455 million were secured to improve liquidity. The parent companies guaranteed EUR 350 million of these facilities on a 50/50 basis without joint responsibility. EUR 255 million were utilized and EUR 200 million remain available as a backup facility. The net cash position was EUR 620 million at year end.
Programs initiated 2008 to lower annual operating expenses by EUR 880 million will continue, with full benefits expected in the second half of 2010. Restructuring charges are estimated to be well within the previously announced EUR 500 million.
Sir Howard Stringer, Chairman, CEO and President of SONY Corporation succeeded Carl-Henric Svanberg as Chairman of the Board and Bert Nordberg, Executive Vice President and Head of Ericsson Silicon Valley, succeeded Dick Komiyama as President and CEO.
ST-Ericsson
Proforma sales declined 25 percent from USD 3.6 billion to 2.7 billion. Sales grew progressively during the year, mainly due to good performance in Asia. The joint venture remains a key supplier to four of the five largest mobile phone manufacturers in the world.
Adjusted operating losses for the full year amounted to USD 440 million but results improved progressively during the year. The first quarter saw a proforma loss of USD 149 million. This was followed by losses of USD 165 million in the second quarter, USD 77 million in the third quarter and USD 50 million in the fourth quarter. The improvements reflect a tight control of product costs and operating expenses as well as the positive effects of cost reduction activities.
ST-Ericsson is reporting in US-GAAP. Ericsson’s share in ST-Ericsson’s income before tax, adjusted to IFRS, was SEK –1.8 billion. Adjustments for IFRS-compliance mainly consist of capitalization of R&D expenses for hardware development.
The cost reduction programs are on schedule and target USD 595 million savings per year, of which USD 250 million were achieved by end of 2009. The full effects of the cost-reduction activities are expected in the second half of 2010.
A new product roadmap for market leadership has been established by combining the strengths of parent companies STMicroelectronics and Ericsson. ST-Ericsson’s market position was further enhanced by securing leadership in the fast growing TD-SCDMA technology for the Chinese market and the announcement of a close cooperation with Nokia to deliver platforms for new smartphones.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Wireless microelectronics industry veteran Gilles Delfassy succeeded Alain Dutheil as President and CEO after the successful integration of the JV operations. Hans Vestberg succeeded Carl-Henric Svanberg as Chairman of the Board.
In the fall of 2007, Ericsson was named as a defendant in three putative class action suits filed in the United States District Court for the Southern District of New York. The complaints allegealleged violations of the United StatesUS securities laws principally in connection with Ericsson’s October 2007 profit warning. In February 2008, the Courtcourt consolidated the three putative class actions into one. In June 2008, Ericsson filed a motion to dismiss the complaint. In December, the Courtcourt granted the defendant’s motion and dismissed the case in its entirety.case. In early January 2009, the plaintiffs appealed the Court’s decision to dismiss the case.
Following issuance of On October 8, 2009, the Second Circuit affirmed the district court and dismissed the case. Consequently, there are no pending legal actions that relate to Ericsson’s October 2007 third-quarter profit warning, the NASDAQ OMX Stockholm brought an inquiry to determine whether the Company appropriately issued the profit warning and made appropriate disclosure at the November 20, 2007, management briefing. The Financial Services Authority (FSA) in England initiated a similar inquiry. Ericsson has cooperated fully with the inquiries. In March 2008, the Disciplinary Committee of NASDAQ OMX Stockholm announced that Ericsson’s statements at the November 20, 2007, analyst meeting did not violate the exchange’s listing regulations. FSA has, in January 2009, informed Ericsson that they do not intend to take formal action in relation to the matters.warning.
In October 2005, Ericsson filed a complaint with the European Commission requesting that it investigate and stop US-based Qualcomm’s anti-competitive conduct in the licensing of essential patents for 3G mobile technology, claiming Qualcomm was violating EU competition lawtechnology. In November 2009, the complaints were withdrawn and failing to meet the commitments Qualcomm made to international standardization bodies that it would license its technology on fair, reasonable and non-discriminatory terms. At the same time, Broadcom, NEC, Nokia, Panasonic Mobile Communications and Texas Instruments each filed similar complaints. The European Commission opened a first-phase investigation in December of 2005 and in August 2007, it decided to conduct an in-depth investigation of the case as a matter of priority.closed.
Together with most of the mobile communications industry, Ericsson has been named as a defendant in two class action lawsuits in the United StatesUS, where plaintiffs allege that adverse health effects could be associated with the use of mobile phones.phone usage. The cases are currently pending in the federal court in Pennsylvania and the Superior Court of the District of Columbia. In September 2008, the federal court in Pennsylvania dismissed plaintiffs’ claims as preempted by federal law. Plaintiffs are appealing this decision to the Third Circuit Court of Appeals. The District of Columbia case is stayed pending the outcome of the appeal.
In January 2009, Ericsson settledan appeal in a patent infringement lawsuit brought by Freedom Wireless Inc. against Ericsson and its US-based customers of prepaid wireless products and services alleging that Ericsson’s pre-paid service and charging system products infringed the three patents-in-suit. The settlement was reflected in the accounts of December 31, 2008.related case.
In April 2007, an Australian company, QPSX Developments Pty Ltd., filed a patent infringement lawsuit against Ericsson Inc. and other defendants in the United States District Court for the Eastern District of TexasUS, alleging that Ericsson infringed a patent related to asynchronous transfer mode (ATM) technology. QPSX accused a number of Ericsson products of infringement, including its WCDMA Radio Network Controllers. A trial is scheduled for November 2010.
In July 2008, the Svea Court of Appeal upheld the December 2006 judgmentCurrently, all of the Stockholm City Courtasserted patent claims have been rejected as invalid by an examiner in the US Patent and Trademark Office in connection with a reexamination proceeding. QPSX is appealing that decision. On August 27, 2009, the court granted Ericsson’s motion to acquit all current or former employeesstay pending the outcome of the Parent Company who had been indicted by the Swedish National Economics Crimes Bureau for evasion of tax control. The Svea Court of Appeal’s judgment was not appealed and thus has become final and binding.reexamination proceeding.
For income tax purposes, Swedish fiscal authorities have disallowed deductions for sales commission payments via external service companies to sales agents in certain countries. Most of thesethe taxes have already
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
been paid. The decision covering the fiscal year 1999 was appealed. In December 2006, the County Administrative Court in Stockholm rendered a
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
judgment in favor of the fiscal authorities. Also thisThe Administrative Court of Appeal in Stockholm affirmed the County Administrative Court’s judgment. The judgment has been appealed.appealed to the Administrative Supreme Court.
For more information on risks related to litigations, see chapter Risk Factors.
Material contractual obligations are outlined in Note C33 “Contractual obligations”. These are primarily related to operating leases for office and production facilities, purchase contracts for outsourced manufacturing, R&D and IT operations, and the purchase of components for the Company’s own manufacturing.
Ericsson is party to certain agreements, which include provisions that may take effect or be altered or invalidated by a change in control of the Company as a result of a public takeover offer. However, none of the agreements currently in effect would entail any material consequence to Ericsson due to a change in control of the Company.
In accordance with the Swedish Code of Corporate Governance (the Code), a separate Corporate Governance Report including an Internal Control section has been prepared. The Company is committed to complying with best-practice corporate governance standards on a global level wherever possible. This includes continued compliance with the corporate governance provisions expressed by the Code.
An ethical business
Ericsson’s Code of Business Ethics summarizes the Group’s fundamental policies and directives governing its relationships internally, with its stakeholders and with others. It also sets out how the Group works to achieve and maintain its high standards. There have been no amendments or waivers to Ericsson’s Code of Business Ethics for any Director, member of management or other employee.
Board of Directors 2009/2010
The Annual General Meeting on April 22, 2009, re-elected Michael Treschow as Chairman of the Board and Roxanne S. Austin, Sir Peter L. Bonfield, Börje Ekholm, Ulf J. Johansson, Sverker Martin-Löf, Nancy McKinstry, Anders Nyrén, Carl-Henric Svanberg, and Marcus Wallenberg as Directors of the Board. Anna Guldstrand, Jan Hedlund and Karin Åberg were appointed as union representatives with Monica Bergström, Pehr Claesson and Kristina Davidsson as deputies.
Management
In 2009, Hans Vestberg was appointed new President and CEO, succeeding Carl-Henric Svanberg as of January 1, 2010. The President and CEO is supported by the Group Management Team which, in addition to the President and CEO, consists of heads of Group Functions and heads of business units.
A management system is implemented to ensure that the business is well managed and able to fulfill the objectives of major stakeholders within established risk limits. The system also monitors internal control and compliance with applicable laws, listing requirements and governance codes.
Remuneration
Fees to the members of the Board of Directors and the remuneration of management as well as the 2009 guidelines for remuneration to senior management are reported in Notes to the Consolidated Financial Statements—Note C29, “Information Regarding Members of the Board of Directors, the Management and Employees”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
As of December 31, 2009, there were no loans outstanding from and no guarantees issued to or assumed by Ericsson for the benefit of any member of the Board of Directors or senior management.
All relevant information regarding remuneration can be found in chapter Remuneration Report.
The Board of Directors’ proposal for guidelines for remuneration to senior management
The Board of Directors proposes the following guidelines for remuneration and other employment terms for the senior management for the period up to the 2011 Annual General Meeting. Compared to the guidelines resolved by the 2009 Annual General Meeting, these guidelines have been restructured and rephrased to better demonstrate the basic principles for remuneration within the Ericsson Group.
Details of how we deliver on our principles and policy, including information on previously decided long-term variable remuneration that has not yet become due for payment, can be found in the Remuneration Report and in Note C29, “Information regarding Members of the Board of Directors, the Management and Employees” in the Annual Report 2009.
2010 Remuneration Policy
Remuneration at Ericsson is based on the principles of performance, competitiveness and fairness. These principles and good practice in Sweden guide our policy to:
Attract and retain highly competent, performing and motivated people that have the ability, experience and skill to deliver on the Ericsson strategy.
Encourage behavior consistent with Ericsson’s culture and core values of professionalism, respect and perseverance.
Ensure fairness in reward by delivering total remuneration that is appropriate but not excessive.
Ensure a total compensation mix of fixed and variable remuneration and benefits that reflects the Company´s principles and is competitive where Ericsson competes for talent.
Encourage variable remuneration which, first, aligns employees with clear and relevant targets, second, reinforces performance and, third, enables flexible remuneration costs.
Ensure that all variable remuneration plans have maximum award and vesting limits.
Encourage employees to deliver sustained performance and build up a personal shareholding in Ericsson, aligning the interests of shareholders and employees.
Communicate clearly to both employees and shareholders how Ericsson translates remuneration principles and policy into practice.
Group Management
For senior management consisting of the Executive Leadership Team, including the President and CEO, in the following referred to as the “Group Management”, total remuneration consists of fixed salary, short- and long-term variable remuneration, pension and other benefits. Furthermore, the following guidelines apply for Group Management:
Variable remuneration is through cash and stock-based programs awarded against specific business targets derived from the long-term business plan approved by the Board of Directors. Targets may include financial targets at either corporate or unit level, operational targets, employee motivation targets and customer satisfaction targets.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
With the current composition of Group Management, the Company’s cost during 2010 for the variable remuneration of Group Management can, at a constant share price, amount to between 0 and 140 percent of the aggregate fixed salary cost, all excluding social security costs.
All benefits, including pension benefits, follow the competitive practice in the home country taking total compensation into account. The retirement age is normally 60 to 65 years of age.
By way of exception, additional arrangements can be made when deemed required. Such additional arrangement shall be limited in time and shall not exceed a period of 36 months and two times the remuneration that the individual concerned would have received had no additional arrangement been made.
The mutual notice period may be no more than six months. Upon termination of employment by the Company, severance pay amounting to a maximum of 18 months fixed salary is paid. Notice of termination given by the employee due to significant structural changes, or other events that in a determining manner affect the content of work or the condition for the position, is equated with notice of termination served by the Company.
SUSTAINABILITY AND CORPORATE RESPONSIBILITY
The Company’sCompany has implemented strong social, environmental and ethical standards helps to manage risks, createsupporting risk management and value and deliver a competitive advantage. Moreover, thecreation. This commitment generates positive business impacts that benefit society.
Ericsson’s approach to Sustainability and Corporate Responsibility (CR) and sustainability is integrated into its core business operations and in its relationships with stakeholders. Engagement starts at the top. The Board of Directors considers these aspects in governance decision-making, anddecision-making. Group level policies and directives ensure consistency across global operations.
Ericsson publishes a separate Corporate Responsibilityan annual Sustainability and CR Report which provides additional information about its approach, priorities and performance.
The following priority areas have been identified as being the most relevant to the business strategy and sustainability performance.information.
CR priority areasMinimizing risk
Responsible Business Practicesbusiness practices
Ericsson supports the UN Global Compact and endorses its ten principles regarding human and labor rights, anti-corruption and environmental protection. Through the UN Global Compact, the Company is publicly committed to supporting universal values for conducting business.
The Ericsson Group Management System (EGMS) includes policies and directives in this area:that cover responsible business practices, such as the Code of Business Ethics, the Code of Conduct (CoC), anti-corruption measures and the Group-wide certified Environmental Management System.
The EGMSenvironmental management. It is reinforced by training, workshops and monitoring. This includesmonitoring, including a global assessment program run by an external assurance provider. Assessments include CR-specific areas.provider in which CR criteria represent approximately 20 percent of the total areas assessed.
Supply Chainchain
All suppliersSuppliers must comply with the Code of Conduct to ensure the qualityEricsson’s CoC and integrity of the supply chain.Environmental Requirements. The Company performs regular audits and works with suppliers to instil changes when incidents of non-compliance arise, and is committed toensure measurable and continuous improvements. Priorities from a risk model include network roll- out, tower manufacturing and logistics. Findings are followed up to ensure that lasting improvements are made. One common finding is suppliers’ insufficient routines for ensuring compliance to the CoC requirements in their supply chain.
An incidentDesign for Environment
Controls are in Bangladesh highlightedplace to ensure compliance with environmental regulations, e.g. the complexitiesEU regulation for Registration, Evaluation, Authorization and restriction of meeting CodeChemicals (REACH). Ericsson’s List of Conduct standardsBanned and Restricted Substances was updated in a global supply chain2009. The Company has to date produced more than 10 million lead-free soldered printed board assemblies with tens of thousands of suppliers. In May 2008, substandard labor and environmental practices were revealed at a local radio tower supplier used by Ericsson in Bangladesh. Code of Conduct auditors were immediately sentreliability equal to investigate. Since then, the two main suppliers in Bangladesh have shown good progress in meeting our standards. Another supplier was put on hold until sufficient improvements were made.
During 2008, Ericsson significantly increased the number of audits and assessments globally, trained more auditors, and strengthened the focus on local sourcing activities.lead-soldered boards.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Climate ChangeTake-back
Ericsson Ecology Management and Product Take-back is a global initiative to take responsibility of products at the Environmentend of their life. Close to 100 percent of decommissioned equipment is recycled, exceeding the Waste from Electronic and Electrical Equipment Directive (WEEE) stipulation of 75 percent. During 2009 more than 5,300 tons were collected.
Radio waves and health
Ericsson provides public information on radio waves and health, and supports independent research to further increase knowledge in this area. Ericsson currently co-sponsors about 40 ongoing research projects related to electromagnetic fields, radio waves and health; over 90 studies have been supported since 1996. Independent expert groups and public health authorities, including the World Health Organization, have reviewed the total amount of research and consistently concluded that the balance of evidence does not demonstrate any health effects associated with radio wave exposure from either mobile phones or radio base stations.
Creating value
The environmental opportunity
Ericsson’s most material environmental impact is energy consumption by its products in operation. The Company develops energy-efficient productsInformation and services, and green site solutions, which run onCommunication Technology (ICT) represents about two percent of global CO2 emissions, but can potentially offset a variety of renewable power sources. In 2008, a radio base station power-saving feature was deployed, which can put partssignificant portion of the networkremaining 98 percent from other sectors. Ericsson takes active measures to ensure that its own carbon footprint will be reduced. A carbon footprint reduction target was set in “sleep mode” during low traffic periods. The Ericsson Tower Tube, an energy-efficient site concept, was the winner in the Technology Design category of the 2008Wall Street JournalTechnology Innovation Awards.
In 2008, Ericsson set a new group-level target to reduce its life-cycle carbon footprintemissions relative to products sold by 40 percent over the next five years, starting with afrom in-house activities and the life-cycle impacts of products. In 2009, Ericsson exceeded the annual 10 percent reduction target by:
• | A 20 percent reduction in direct emissions from Ericsson activities, through reducing product weight, increasing the share of surface mode transports to 60 percent, and by reducing business travel by approximately 10 percent globally. This led to a 200,000 ton CO2 reduction. |
• | A 15 percent reduction in indirect emissions from products in operation was achieved. Reducing the energy consumption of products sold will lead to a 3.5 million ton CO2 reduction over the product lifetime. |
In addition, part of Ericsson’s sustainability strategy is to focus on the role that broadband can play in 2009. The footprint will include totalhelping to offset global CO2 emission from:emissions. In 2009, Ericsson focused on sustainable city solutions, and partnered with WWF Sweden to assess the positive impact that ICT has in the creation of low-carbon economies, co-publishing recommendations for policy makers.
Sony Ericsson in-house activities, such as production, transports, siteslaunched its Greenheart phone, with an in-phone manual, recycled plastics, energy efficient display and business travel by air.
The lifetime usewaterbased paints decreasing the overall CO2 emissions of the products soldphone by Ericsson during the year (portfolio energy-efficiency improvement).
Ericsson ranked second on the Carbon Disclosure Project (CDP) Swedish Index.
We believe that the Company is in compliance with all material environmental, health and safety laws and regulations which pertain to its operations and business activities. For electronic waste, Ericsson has set even more ambitious targets on a global level than required by the EU Directive on Waste Electrical and Electronic Equipment (WEEE).
Ericsson is also in compliance with the EU Directive on Restriction of Hazardous Substances (RoHS) and the EU regulation Registration, Evaluation, Authorization and limitation of Chemicals (REACH).15 percent.
Meeting the Millennium Development Goals
ConnectivityMobile connectivity fuels economic growth, which is particularly vital for the billions of people living at the base of the economic pyramid—the markets of the future. To further this end, Ericsson is committed to helpingusing its technology and competence to help achieve the UN Millennium Development Goals (MDGs), eight goalsand customer engagement is part of its strategy to eliminate extreme poverty by 2015. As an example, Ericsson is engagedmeet this aim.
In 2009, a monitoring and evaluation study, conducted in a public-private partnershipcooperation with pan-AfricanColumbia University, revealed that access to mobile operators MTNcommunications in the Millennium Villages has concretely contributed to the achievement of the MDGs. It also showed that mobile applications are especially well suited for collecting information and monitoring critical areas such as health, education, security and small business development.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Zain and Columbia University’s Earth Institute to deliver voice and Internet communications to more than 500,000 people in 10 countries in rural sub-Saharan Africa as part of the Millennium Villages Project.
Employees
In 2008, 90 percent of employees took part in the annual employee opinion survey. By understanding how employees perceive their work environment, the workforce satisfaction and performance can be further developed. During 2008, Ericsson established a group-level program for improved reporting on health and safety issues and performance. Employees periodically acknowledge that they understand the Code of Business Ethics.
Radio waves and health
Ericsson provides public information on radio waves and health and supports independent research to further increase knowledge in this area. Ericsson currently co-sponsors about 40 different ongoing research projects related to electromagnetic fields, radio waves and health; it has supported over 90 studies since 1996. Independent expert groups and public health authorities, including the World Health Organization (WHO), have reviewed the total amount of research and consistently concluded that the balance of evidence does not demonstrate any health effects associated with radio wave exposure from either mobile phones or radio base stations.
Ericsson Response
Ericsson Response is a global employee volunteer initiative to rapidly roll-outroll out communication solutions and provide telecommunicationstelecoms experts to assist disaster relief operations. Efforts are coordinated throughEricsson Response cooperates with the UN Office for the Coordination of Humanitarian Affairs, the UN World Food Programme and the International Federation of Red Cross and Red Crescent Societies (IFRC).
In 2008, Ericsson Response provided support to Save the Children in Southern Sudan. After heavy flooding in Panama, communication2009, support was provided to relief workers through IFRCin saving children in Southern Sudan and the Panamanian Red Cross. Ericsson Response continuedafter heavy flooding in Panama. Continued support was given to support the UN in establishing operations in the Central African Republic.Republic and in the Democratic Republic of Congo.
Sam’s Corporate Sustainability AssessmentIn recognition of performance
The Millennium Villages Project received a Global Telecoms Business Innovation Award.
Ericsson is actively involved withChina was named the “China Green Benchmark Company” for the second year in a number of organizations that sharerow. Ericsson was also recognized as the sustainability goals which gives“Green Pioneer” at the Company a deepened understanding of our markets. These include:
The Business Leaders’ Initiative on Human Rights (BLIHR) which seeks to find practical applications2009 “Korea-EU Industrial Cooperation Day”. In the UK Brand Emissions Leaders survey, Ericsson was named one of the Universal Declarationbrand leaders in reducing its carbon emissions.
Ericsson’s Board of Human Rights within a business context.
The UN Global Compact. A signatory since its inception, Ericsson also supports its Caring for Climate Initiative.
The Global e-Sustainability Initiative (GeSI), a multi-stakeholder ICT industry initiative to find ways to apply technologies to more sustainable development.
The Prince of Wales’s Corporate Leaders’ Group on Climate Change, working toward an international framework to tackle climate change.
EricssonDirectors is also actively engaged in the Company’s risk management. Risks related standardization activities.
CORPORATE GOVERNANCEto set long-term objectives are discussed and strategies formally approved by the Board as part of the annual strategy process. Risks related to annual targets for the Company are also reviewed by the Board and then monitored continuously during the year.
In accordanceOperational risk management is integrated within the Ericsson Group Management System to ensure effectiveness, efficiency, business continuity and compliance with the Swedish Codecorporate governance, legal and other requirements. Certain transactional risks require specific Board approval, e.g. material acquisitions, management remuneration, borrowing or customer finance in excess of Corporate Governance, a separate Corporate Governance Report including an Internal Control section has been prepared. There have been no amendments or waiverspre-defined limits.
For more information on risks related to Ericsson’s Code of Business Ethics for any Director, member of management or any other employee.business, see chapter Risk Factors.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
The corporate bodies involvedStrategic and tactical risks
In the annual strategy and target setting process, objectives are set for the next five years, risks and opportunities are assessed and strategies are developed to achieve the objectives. To ensure that actions are taken to realize the strategies, focus areas are identified in target setting and planning for the coming year.
In 2009, the general economic downturn in 2008–2009 and the consequences for the business were assessed in relation to both strategy and target setting. For the setting of long-term objectives, important industry and market fundamentals were analyzed and risks and opportunities evaluated. Near-term, a continued focus on cost management and a strong liquidity were emphasized due to the increased difficulties of forecasting customer demand.
Risks and opportunities were identified and analyzed in the governance of Ericsson are: The shareholders, the Board of Directors, the President and CEO, the Group Management and the external auditors. The Board of Directors works according to a work procedure that outlines rules regarding the distribution of tasks between the Board and its Committees and between the Board, its Committees and the President and CEO. The external auditors examine the financial reports and certain aspects of the internal controls over financial reporting.following balanced scorecard perspectives:
Ericsson’s operations are governed by the Ericsson Group Management System, consisting of:Financial perspective
ManagementTop line growth: the decline caused by reduction in 2G spend has yet to be offset by growth in 3G and control elements, i.e. objective settingLTE driven by data traffic in mobile broadband networks. Ericsson will focus on converged solutions, IMS, multi-standard radios and strategy formulation, Group policiesservices plus opportunities in transmission and other steering documents.evolved EDGE.
Group-wide standard business processes, including operational processesMargin improvement: addressed by platform consolidation, software reuse, reduced number of sites and IT tools.rapid transformation of transferred managed services operations and integration of acquired Nortel units.
OrganizationCash flow: continued focus on working capital improvements. A strong cash position is deemed important for flexibility to execute on potential market opportunities.
JVs: continued cooperation with JVs and corporate culture.co-owners needed to make them profitable again as soon as possible.
ChangesCustomer perspective
Convergence of the telecom, datacom and media industries results in new forms of competition and customers. Ericsson will focus on competitive offerings for mobile broadband, converged core solutions, network management systems and systems integration.
The competitive landscape is constantly changing, as consolidation continues among customers and vendors. Continued investments in R&D for premium, cost-effective and future-proof solutions are essential. Customer intimacy for network planning and migration is key for forging customer partnerships.
Ericsson’s installed base is an important asset for sales of upgrades, network convergence and systems integration. Now also Nortel’s US customer base is added, providing additional opportunities in CDMA and LTE.
Continuous follow-up of quality of delivered products and services to the Board membershipbe maintained to ensure customer satisfaction.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Market position perspective
Continued strong competition in the market is addressed through cost reductions and premium end-to-end solutions, based on continued leadership in R&D and services.
Market leadership is being safeguarded through rapid technological development and establishment of a key player position in network transformation—IP, mobile broadband, multimedia and consulting.
Backhaul demand is growing, driven by strong data traffic. Ericsson will seize this opportunity by harvesting its leading microwave position.
The BoardCompany will also leverage the broader product portfolio created through acquisitions, promote OneVoice and IMS for LTE networks, and continue its strong Design for Environment program to lower operators’ cost of Directorsownership and drive a positive environmental impact.
The Company will capitalize on the dramatic improvement of its US footprint and its Silicon Valley presence.
The joint ventures will need to execute their restructuring programs and also address multiple operating systems and new market players, e.g. Google/Android. Sony Ericsson will focus its product portfolio more on high-end handsets.
Operations and people perspectives
Restructuring and other activities have been defined for margin protection, including industrialization of managed services.
Continued focus in R&D on shortened lead times for product/solution development.
Increased flexibility and responsiveness will be achieved through efforts to shorten lead times also for delivery of hardware and software.
The Company must ensure it has top competence in key technology areas and systems integration.
Empowerment and remuneration are important aspects to continue to be a competitive and attractive employer.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operational and financial risks
Operational risks are owned and managed by operational units. Risk management is elected each year at the Annual General Meeting (AGM) for the period until the next AGM. Three employee representativesembedded in various process controls, such as decision tollgates and approvals. Certain cross-process risks, such as information security/IT, corporate responsibility and business continuity as well as insurable risks are appointedcentrally coordinated. Financial risk management is governed by a Group policy and carried out by the trade unions forTreasury and Customer Finance functions, both supervised by the same period of time. At the AGM on April 9, 2008, all board members were re-elected except for Katherine M. Hudson who had declined re-election. Roxanne S. Austin was elected as new memberFinance Committee of the Board of Directors.
Board remuneration
Members of the Board who are not employees of the Company have not received any compensation other than the fees paid for Board duties as outlined The policy governs risk exposures related to foreign exchange, liquidity/ financing, interest rates, credit risk and market price risk in equity instruments. For further information on financial risk management, see Notes to the Consolidated Financial Statements—Statements – Note C29, “Information Regarding Employees, MembersC14, “Trade Receivables and Customer Finance”, Note C19, “Interest-Bearing Liabilities” and Note C20, “Financial Risk Management and Financial Instruments”.
Compliance risks
Ericsson has implemented Group policies and directives to ensure compliance with applicable laws and regulations, including a Code of the Board of Directors and Management”. The 2008 AGM resolved that Board members may choose to receive part of their fees, exclusive of committee work,Business Ethics. Risk management is integrated in the form of synthetic shares, as further described in Note C29. MembersCompany’s business processes. Policies and Deputy Members ofcontrols are implemented to ensure compliance with financial reporting standards and stock market regulations, e.g. the Board whoUS Sarbanes-Oxley Act.
Monitoring and audits
Company management monitors the compliance with policies, directives and processes through internal self-assessment within all units. This is complemented by internal and external audits. External financial audits are employees (i.e. the CEOperformed by PricewaterhouseCoopers, and the employee representatives) have not received any remuneration or benefits other than their normal employee entitlements, with the exception of a small fee paid to the employee representatives for each Board meeting attended.
Executive remuneration
Principles for remuneration and other employment terms for top executives were approvedISO/management system audits by the 2008 AGM. The proposed remuneration policy for Group Management for 2009 remains materially the same as for 2008. See Note C29, “Information Regarding Employees, Members of the Board of Directors and Management”.
As of December 31, 2008, there were no loans outstanding from, and no guarantees issued to or assumed by Ericsson for the benefit of any member of the Board of Directors or senior management.
Long-Term Variable Compensation program
The Board of Directors’ proposal for implementation of a Long-Term Variable Compensation (LTV) program for 2008 and transfer of shares in connection therewith was approved by the AGM.Det Norske Veritas, DNV.
The Parent Company business consists mainly of corporate management, holding company functions and internal banking activities. The Parent Company business also includesactivities as well as customer credit management, performed on a commission basis by Ericsson Credit AB.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
The Parent Company is the owner of the majoritya substantial part of Ericsson’s intellectual property rights. It manages the patent portfolio, including patent applications, licensing and cross-licensing of patents and defending of patents in litigations.
The Parent Company has 76 (7) branch offices. In total, the Group has 62 (55)65 (62) branch and representative offices.
Financial information
Net sales for the year amounted to SEK 5.1 (3.2)0.3 (5.1) billion and income after financial items was SEK 19.4 (14.7)8.1 (19.4) billion. During
Effective January 1, 2009, the fourth quarter, sharesright to all license revenues from third parties related to patent licenses was transferred to Ericsson AB, a wholly owned subsidiary, and consequently net sales in Symbian Ltd.2009 were sold.insignificant compared to 2008. TEMS SWEDEN AB was sold during the year.
Exports accounted for 70 (59)100 (70) percent of net sales. No consolidated companies were customers of theThe Parent Company’sCompany had no sales in 2009 or 2008 or 2007,to subsidiaries, while 4645 (46) percent of the Parent Company’s total purchases of goods and services were from such companies.
Major changes in the Parent Company’s financial position for the year include decreased investmentsinclude:
Investments in subsidiariesthe joint venture ST-Ericsson of SEK 6.8 billion, mostly attributable to write-downs of investments caused by payment of dividends of approximately the same amount; decreased8.6 billion.
Decreased current and non-current receivables from subsidiaries of SEK 3.1 billion; increased10.1 billion.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Decreased other current receivables of SEK 1.5 billion; increased2.0 billion.
Increased cash, and bankcash equivalents and short-term investments of SEK 13.63.2 billion. Current
Increased current and non-current liabilities to subsidiaries decreased byof SEK 9.2 billion and5.0 billion.
Decreased other current liabilities increased byof SEK 5.67.4 billion.
At year end, cash, and bankcash equivalents and short-term investments amounted to SEK 59.2 (45.6)62.4 (59.2) billion.
Ericsson’s Annual General Meeting 2008 resolved on a 1:5 reverse split of the Company’s shares in which five shares of the company’s A and B shares, respectively, were consolidated into one share of Class A and one share of Class B, respectively. Share information
In the thirdsecond quarter, as decided atby the Board of Directors with authorization from the Annual General Meeting, a stock issue and a subsequent stock repurchase was carried out. 19.9made for the share-based employee remuneration program. 27 million of Ericsson Class C shares were issued and later repurchased as treasury stock. TheseThe shares have beenwere converted into Ericsson Class B shares. The quotient value of the repurchased shares was SEK 135.0 million, representing less than 1 percent of capital stock, and the acquisition cost was SEK 135.1 million.
As per December 31, 2008, Ericsson had 3,246,351,735 shares. The2009, the total number of shares were divided intowas 3,273,351,735, of which 261,755,983 Class A shares, each carrying one vote, and 2,984,595,7523,011,595,752 Class B shares, each carrying one-tenth of one vote. The two largest shareholders at year end were Investor and Industrivärden holding 19.42 percent19.33 and 13.2813.62 percent respectively of the voting rights in the Parent Company.
In accordance with the conditions of the Stock Purchase Plans and Option PlansLong-Term Variable Remuneration Program (LTV) for Ericsson employees, 5,232,2119,087,564 treasury shares from treasury stock were sold or distributed to employees during the year.in 2009. The quotient value of these shares was SEK 26.245.4 million, representing less than 1 percent of capital stock, and compensation received amounted to SEK 83.4213.2 million. The holding of treasury stock at December 31, 2008,2009, was 61,066,09778,978,533 Class B shares. The quotient value of these shares is SEK 305.3394.9 million, representing 2 percent of capital stock, and the related acquisition cost amounts to SEK 589.8672.4 million.
Proposed disposition of earnings
The Board of Directors proposes that a dividend of SEK 1.85 (2.502.00 (1.85 in 2007, adjusted for the reverse split)2008) per share be paid to shareholders duly registered on the record date April 27, 2009,16, 2010, and that the Parent Company shall retain the remaining part of non-restricted equity. The Class B treasury shares held by the Parent Company are not entitled to receive a dividend.
Assuming that no treasury shares remain within the Parent Company on the record date, the Board of Directors proposes that earnings be distributed as follows:
Amount to be paid to the shareholders | SEK | |
Amount to be retained by the Parent Company | SEK | |
Total non-restricted equity of the Parent Company | SEK | |
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
As a basis for its dividend proposal, for a dividend, the Board of Directors has made an assessment in accordance with Chapter 18, Section 4 of the Swedish Companies Act of the Parent Company’s and the Group’s need for financial resources as well as the Parent Company’s and the Group’s liquidity, financial position in other respects and long-term ability to meet their commitments. The Group reports an equity ratio of 50 (55)52 (50) percent and a net cash amount of SEK 34.7 (24.3)36.1 (34.7) billion.
The Board of Directors has also considered the Parent Company’s result and financial position and the Group’s position in general. In this respect, the Board of Directors has taken into account known commitments that may have an impact on the financial positions of the Parent Company and its subsidiaries.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The proposed dividend does not limit the Group’s ability to make investments or raise funds, and it is our assessment that the proposed dividend is well-balanced considering the nature, scope and risks of the business activities as well as the capital requirements for the Parent Company and the Group.
In an auction on November 25, 2009, Ericsson acquired certain assets relating to Nortel’s GSM business in North America for a cash purchase price of USD 70 million. Closing is expected by March 31, 2010, subject to approval by US and STMicroelectronics completedCanadian bankruptcy courts and satisfying normal regulatory conditions.
On January 12, 2010, Ericsson announced an agreement to acquire Pride Spa, an Italian systems integration company with approximately 1,000 employees.
On January 18, 2010, the JV dealCompany appointed Rima Qureshi and Magnus Mandersson as heads of business unit CDMA and Global Services respectively. Both are members of the Executive Leadership Team.
In January 2010, as per the trust’s funding requirements, the Company made an employer contribution payment of SEK 730 million to the Swedish pension trust fund.
On February 3, 2009, Ericsson and STMicroelectronics8, 2010, the Company announced the closingappointment of their agreement merging Ericsson’s mobile platform operationsMats H. Olsson and STMicroelectronics’ unit ST-NXP Wireless unitAngel Ruiz as members of the Executive Leadership Team as well as a reorganization of its 23 market units into a 50/50 joint venture, to be called ST Ericsson. The deal was completed on the terms originally announced on August 20, 2008.
ST Ericsson will be accounted for according to the equity method. Ericsson’s share of income before tax will be reported in item “Share in earnings of joint ventures and associated companies” included in Operating income.
Ericsson to divest its TEMS-branded business to Ascomten regions.
On March 23, 2009,31, 2010, Ericsson announced that it hasMarita Hellberg, Senior Vice President and Head of Group Function Human Resources and Organization will take over as Head of Human Resources of Ericsson’s new region China and North East Asia from July 1st.
On April 1, 2010 Ericsson announced that the acquisition of substantially all the assets of Nortel’s GSM business had been completed, effective March 31. The closing follows the announcement on November 25, 2009, that Ericsson had entered into an asset purchase agreement for the assets of Nortel’s GSM business in North America.
On April 21, 2010, the Company announced that it had entered into a share purchase agreement to divestacquire Nortel’s majority shareholding (50%+1 share) in LG-Nortel, the TEMS-branded product business, tools for air interface monitoringjoint venture of LG Electronics and radio network planning, to Ascom. The purchaseNortel Networks. Purchase price is CHF 190USD 242 million excluding neton a cash and debt free basis. The transaction is subject to customary regulatory approvals.
The Board of assetsDirectors and liablilities.the President declare that the consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB, and give a fair view of the Group’s financial position and results of operations. The financial statements of the Parent Company have been prepared in accordance with generally accepted accounting principles in Sweden and give a fair view of the Parent Company’s financial position and results of operations.
The Board of Directors’ Report for the Ericsson Group and the Parent Company provides a fair view of the development of the Group’s and the Parent Company’s operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholdersshareholders of Telefonaktiebolaget LM Ericsson (publ)
In our opinion, the accompanying consolidated balance sheets and the related consolidated income statements, statements of recognized income, and expensecomprehensive income, shareholders equity and cash flow statementsflows present fairly, in all material respects, the financial position of Telefonaktiebolaget LM Ericsson and its subsidiaries at December 31, 20082009 and December 31, 2007,2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008,2009, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008,2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in item 15(b) of the Annual Report on Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integratedaudits.integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control Over Financial Reporting included in Item 15 (b), management has excluded Nortel from its assessment of internal control over financial reporting as of December 31, 2009 because it was acquired by the Company in a purchase business combination on November 13, 2009. We have also excluded Nortel from our audit of internal control over financial reporting.
The Nortel operation is part of the Network segment whose total assets and total revenues represent 0,6% and 1,3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2009.
Stockholm, April 28, 200921, 2010
PricewaterhouseCoopers ABEARNINGS PER SHARE
OPERATING MARGIN*
ERICSSON ANNUAL REPORT ON FORM 20-F 200812 percent
Years ended December 31, SEK million | Notes | 2008 | 2007 | 20061) | |||||||
Net sales | C3, C4 | 208,930 | 187,780 | 179,821 | |||||||
Cost of sales | -134,661 | -114,059 | -104,875 | ||||||||
Gross income | 74,269 | 73,721 | 74,946 | ||||||||
Gross margin % | 35.5 | % | 39.3 | % | 41.7 | % | |||||
Research and development expenses | -33,584 | –28,842 | –27,533 | ||||||||
Selling and administrative expenses | -26,974 | –23,199 | –21,422 | ||||||||
Operating expenses | -60,558 | –52,041 | –48,955 | ||||||||
Other operating income and expenses | C6 | 2,977 | 1,734 | 3,903 | |||||||
Share in earnings of joint ventures and associated companies | C12 | -436 | 7,232 | 5,934 | |||||||
Operating income | 16,252 | 30,646 | 35,828 | ||||||||
Operating margin % | 7.8 | % | 16.3 | % | 19.9 | % | |||||
Financial income | C7 | 3,458 | 1,778 | 1,954 | |||||||
Financial expenses | C7 | -2,484 | –1,695 | –1,789 | |||||||
Income after financial items | 17,226 | 30,729 | 35,993 | ||||||||
Taxes | C8 | -5,559 | –8,594 | –9,557 | |||||||
Net income | 11,667 | 22,135 | 26,436 | ||||||||
Net income attributable to: | |||||||||||
Stockholders of the Parent Company | 11,273 | 21,836 | 26,251 | ||||||||
Minority interest | 394 | 299 | 185 | ||||||||
Other information | |||||||||||
Average number of shares, basic (million)2) | C9 | 3,183 | 3,178 | 3,174 | |||||||
Earnings per share attributable to stockholders of the Parent Company, basic (SEK)2) | C9 | 3.54 | 6.87 | 8.27 | |||||||
Earnings per share attributable to stockholders of the Parent Company, diluted (SEK)2) | C9 | 3.52 | 6.84 | 8.23 | |||||||
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
ERICSSON ANNUAL REPORT ON FORM 20-F 2009 DEAR SHAREHOLDER, As we head into 2010 and a new decade, we should consider the phenomenal transformation of the telecoms industry over the past decade, including the convergence of the telecom, IT and media industries. Through this and the explosive development in fixed and mobile internet usage, mobile communications has had a remarkable growth, with the number of subscribers increasing from 700 million in 2000 to more than 4.5 billion in 2009. Significant consolidation has occurred among operators as well as equipment suppliers. I would like to express my sincere thanks to Carl-Henric Svanberg for his outstanding helmsmanship during his time with the Company. Ericsson’s key to success during these years has been Carl-Henric Svanberg’s willingness to seek opportunity through change and proactively address challenges. The Board’s work in 2009 had a significant focus on strategic matters. Ericsson’s strategy to leverage its leading position and technological prowess to invest in future growth areas remains unchanged. The key future opportunity for the industry and Ericsson will be the increased traffic generated by mobile broadband, driven by internet and social media, and a shift from connecting places and people to connecting devices and applications. Systems integration skills and application enablers will play an increasingly important role in this market development. The Company intends to build a strong position in these areas to complement the current leadership in network technologies and operations. Operator and consumer sensitivity to the macro-economy is an important factor closely monitored by the Board. During 2009, Ericsson was affected in the second half by the economic downturn as many operators reduced their network investments. This was largely offset by good sales in the first half and by increasing sales of services and multimedia solutions. The Board also addressed the Company’s restructuring program, the Nortel acquisition, and the expanded presence in Silicon Valley to support acceleration of the move to all-IP technology. Through key contract wins and the acquisition of parts of Nortel, Ericsson became the largest supplier of network technology and services in North America. Ericsson’s joint ventures Sony Ericsson and ST-Ericsson were strongly affected by the market decline, and forceful actions have been taken to restore their profitability. That said, I believe Ericsson remains well positioned in relation to its peers, with sustained revenues and margins and in certain areas increased market shares, a healthy balance sheet and a strong cash position. This enables the Company to pursue emerging opportunities created by the market situation. The debate around executive compensation has intensified. Benchmarking with global companies similar to Ericsson shows that we have a conservative but competitive compensation structure that rewards performance and effectively aligns employees’ longer-term interests with those of shareholders’. I am confident that these principles remain appropriate and reasonable. Looking to the future, I welcome Hans Vestberg as our new CEO and wish him all the best in his new role. The Board and I are convinced that Hans has the qualities it takes to lead Ericsson, and we give him and his new team our full support. Change and challenge seem to be the by-words for the world today. If embracing change and proactively addressing challenges brings rewards, then the coming years certainly look exciting for Ericsson. I sincerely appreciate your support during the year. Michael Treschow Chairman of the Board ERICSSON ANNUAL REPORT ON FORM 20-F 2009 BOARD OF DIRECTORS’ REPORT 2009 This Board of Directors’ Report is based on Ericsson’s consolidated financial statements, prepared in accordance with IFRS as issued by the IASB. The application of reasonable but subjective judgments, estimates and assumptions to accounting policies and procedures affects the reported amounts of assets and liabilities and contingent assets and liabilities at the balance sheet date as well as the reported amounts of revenues and expenses during the reporting period. These amounts could differ materially under different judgments, assumptions and estimates. Please see Note C2—“Critical Accounting Estimates and Judgments” (p. 66). Also non-IFRS measures are used to provide meaningful supplemental information to the IFRS results. Non-IFRS measures are designed to facilitate analysis by indicating Ericsson’s underlying performance, however, these measures should not be viewed in isolation or as substitutes to the IFRS measures. A reconciliation of non-IFRS measures with the IFRS results can be found on page 17. This report includes forward-looking statements subject to risks and uncertainties. Actual developments could differ materially from those described or implied. Please see “Forward-Looking Statements” (p. 150) and “Risk Factors” (p. 142). The external auditors review the quarterly interim reports, perform audits of the Annual Report and report their findings to the Board and its Audit Committee. The terms “Ericsson”, “the Group”, and unless the context reasonably requires otherwise, also “the Company”, all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries. Unless otherwise noted, numbers in parentheses refer to the previous year (i.e. 2008). CONTENTS
ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Five major trends affected our markets and operations in 2009: Accelerated mobile data growth Data traffic in developed markets is increasing dramatically, generating sales for additional network capacity. Network modernization and IP Many operators started migration to all-IP core networks. Technology shift—2G/3G/4G In 2009, Ericsson’s 3G sales surpassed 2G, however not yet offsetting the decline in GSM. The first commercial LTE (Long-Term Evolution) network was launched. Impact from economic conditions Demand for telecom infrastructure started to decline mid-2009, affecting sales in Networks—particularly in some developing markets, where the general economic downturn was exacerbated by weak currencies. Operator focus on efficiency Sales of services increased, not only managed services but also consulting and systems integration, driven by higher network complexity and operator focus on cost reductions. North America During 2009, Ericsson significantly strengthened its position in North America. A number of key contracts were won: LTE with Verizon and Metro PCS, the largest managed services contract ever with Sprint and a domain supplier agreement with AT&T for wireline access products. The Company also acquired Nortel’s CDMA and LTE businesses in North America. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Tough times for the JVs Both Sony Ericsson and ST-Ericsson were impacted by the decline in handset demand in 2009. Sony Ericsson’s situation was worsened by an aging product portfolio. Both JVs reported losses and initiated aggressive cost restructuring programs and are on track to return to report profits. New CEOs and chairmen of the Boards were appointed in both JVs. ICT and the climate In 2009, climate change was on the agenda for governments. During the year, Carl-Henric Svanberg addressed the UN, promoting that a focused utilization of ICT solutions could reduce CO2 emissions by 15-20 percent. The ICT industry in itself contributes less than 2 percent to the emissions. Telecom is a long-term growth industry The Company is convinced that the factors driving industry growth are robust and should result in continued increased demand. The growth will be driven by the combined effects of the following: Subscriber growth in emerging markets, supported by cheaper handsets. Increased coverage and use. Ever faster mobile broadband communications, improving user efficiency and experiences. Data traffic driven by IP-based mobile broadband; in developed markets driven by the convenience of mobility, and in emerging markets by the lack of fixed broadband access. New multimedia applications and communication between various new devices. Competition Competition remained intense. After the consolidation in recent years, there are fewer vendors—all with comprehensive product portfolios. Ericsson has maintained or increased its market shares during the year. Ericsson aims to be the preferred business partner to its customers with an ultimate goal of sustainable long-term value creation. Faster than market sales growth, a best-in-class operating margin and a healthy cash conversion are key to the fulfillment of this goal. As a market leader, Ericsson combines leading technology and services skills to develop superior solutions that deliver competitive advantage. Ericsson believes that highly satisfied customers and empowered and motivated employees are key to success. Several annual key performance indicators are used regarding shareholder value creation, customer satisfaction and employee engagement. Shareholder value creation Although margins in 2009 remained below historic levels, the Company strengthened its market position in strategically important areas, such as: LTE/4G technology and commercial contracts, market share in the US and managed services. This combined with a strong balance sheet, efficient and leaner processes after ambitious restructuring, and continued strong customer relations provided the means for value creation also in the macro-economic headwind. The share price increased during the year and a dividend was paid for a total shareholder return of 15 percent in 2009. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Management uses several metrics to monitor performance: Faster than market sales growth Ericsson’s sales for comparable units decreased by 9 percent, adjusted for currency and hedging effects. Due to the effects of the economic slowdown and to weaker demand for GSM equipment, the market for GSM/WCDMA equipment and related services is estimated to have declined by more than 10 percent in USD terms. Segment Networks’ sales for comparable units in constant currencies declined in line with the market. Based on external analyses and reported results by Ericsson and its main competitors, the Company believes its market shares were well maintained. A number of breakthrough contracts were signed which should enable the Company to grow faster than the market. Sales in Professional Services grew by 8 percent in local currencies. Sales for comparable parts of Multimedia grew by 5 percent. The overall market growth for Multimedia is difficult to assess, as the segment is very fragmented. Best-in-class operating margin Based on reported results for 2009, the operating margin for the Group, excluding joint ventures and restructuring charges, was 12 (11) percent and remains the highest among the Company’s main competitors that are publicly listed. Cash conversion of over 70 percent The cash conversion rate for 2009 was 117 (92) percent, reflecting a strong focus on cash flow with a significant reduction in operating assets. Customer satisfaction and employee engagement In the annual independent customer satisfaction survey, approximately 9,700 employees from 380 operators around the world were polled to assess their satisfaction with Ericsson compared to its main peers. In 2009, Ericsson maintained a level of excellence. An employee survey is also independently conducted every year. In 2009, 91 percent of employees participated in the survey. The Human Capital Index, which measures employee contribution in adding value for customers and meeting business goals, remained at a high level. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Ericsson’s vision of an all-communicating world is rapidly becoming a reality as the convergence of the telecom, internet and media sectors gains momentum. Ericsson envisions continued evolution, from having connected some 1.5 billion places to connecting more than 5 billion people and 50 billion devices. The Company envisions that anything that can benefit from being connected will be connected, mainly via IP-based wireless communications. Mobile broadband at the forefront Following the unprecedented growth of mobile telephony is a rapidly expanding range of mobility-based devices and applications. The accelerating penetration of smartphones and mobile broadband usage are early signs of this development. Extending network coverage and increasing data speeds, combined with devices that have large screens, intuitive user interfaces and multimedia capabilities, enhances the user experience and stimulates demand for mobile-broadband services. Once areas have ubiquitous coverage, machine-to-machine communication enables a large variety of existing services to be enhanced, such as media, governmental, utilities, industry automation, banking and transport. Spurring socio-economic development Ericsson’s mission is to empower people, business and society through innovation, industry leadership and a long- term commitment to the vision of an all-communicating world. In the course of making people’s lives easier and more productive, Ericsson is spurring socio-economic development and a better environment which brings the Company’s vision ever closer to reality. Leveraging the competitive dynamics The Company’s strategy is driven by the competitive dynamics of the telecom market and Ericsson’s position, the combination of which gives rise to three strategic imperatives: Economies of scale and scope are prerequisites for sustainable value creation. Industry standards govern product design and functionality, making it challenging for equipment suppliers to differentiate on product capabilities alone. Therefore, the Company strives to combine technology leadership with leadership in services. The bargaining power of equipment suppliers depends primarily on their installed base. Operators not only look for the best products but also for long-term business partnerships that they can rely on to deliver end-to-end solutions for lower total cost of ownership, the ability to minimize time-to-market, strong professional services capabilities, and access to world-class subject matter experts. Primary end-to-end suppliers with well-entrenched local presence, backed up by global resources and a proven track record, have a competitive advantage. The Company seeks to be a full systems solutions house with a broad but integrated product portfolio combined with superior technical competence, for example in systems integration. Guiding principles The guiding principles for attainment of the Company’s strategic imperatives include: customer intimacy; highly qualified employees working closely with the customer to create effective solutions continuous process improvements and innovation scale in delivery and technical solutions. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 FINANCIAL RESULTS OF OPERATIONS
Non-IFRS measures are used in the table above as supplemental information to the IFRS results. Since there were significant restructuring costs during 2008 and 2009, but with relatively little benefit in 2008 and consequently significant impact on reported results and margins both years, non-IFRS measures excluding restructuring charges are presented to facilitate analysis by indicating Ericsson’s underlying performance. However, these measures should not be viewed in isolation or as substitutes to the IFRS measures. For more details on the restructuring activities and corresponding charges, please see Note C5—“Expenses by Nature”. Sales sustained in weaker market Increased sales in the first half of 2009 were offset in the second half by impact from the economic slowdown. Overall, sales declined marginally from last year to SEK 206.5 billion. Sales for comparable units were stable year over year, i.e. excluding SEK 2.7 billion of sales from the acquired Nortel business in North America in the fourth quarter and SEK 5.2 billion in 2008 from the divested PBX and mobile platform operations. Adjusted also for effects of exchange rates and hedging, sales declined 9 percent. Lower sales in Networks were largely offset by higher sales in Professional Services and Multimedia. The economic downturn coupled with tighter credit supply impacted operator spending, in particular in certain emerging markets. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 The demand varied considerably between markets. Among our largest markets, the US, China, UK and Turkey had good sales increases. Australia, India and Japan were stable, whereas sales in Brazil, Indonesia, Italy, Pakistan and Spain declined. Several important contracts were won in 2009: four LTE contracts, the appointment as fixed access domain supplier to AT&T and a services contract with Sprint in the US. Gross margin stable excluding restructuring charges Gross margin declined only slightly as effects of price pressure, increased share of services sales, and the initial transition costs for the Sprint contract were largely offset by cost cutting and restructuring efforts. Operating expenses excluding restructuring charges were reduced Operating expenses declined year-over-year as a result of restructuring activities and the spin-off of mobile platforms. The Company continues to focus on innovations and R&D. however, spending as a percentage of sales was 13 percent compared to 15 percent in 2008 due to cost reductions and efficiency gains. Operating margin excluding share in earnings of JVs and restructuring charges increased slightly Restructuring and other cost reduction measures have lowered the breakeven point. The operating margin in Multimedia increased significantly, reflecting a more narrow business focus. Share in earnings of JVs and associated companies declined SEK 6.5 billion year-over-year Both Sony Ericsson and ST-Ericsson were adversely affected by the lower handset sales during the economic downturn. Both companies have undertaken ambitious restructuring activities, and Sony Ericsson is improving its product portfolio focusing on mid- to high-end phones. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Under new management, both JVs are well on track to return to report profits. Restructuring increased and will continue into 2010 In the beginning of the year, a program to reduce annual run rate of costs by SEK 10 billion was launched, following the 2008 program aiming at SEK 6–7 billion. In the third quarter, additional SEK 5–6 billion of savings were targeted with anticipated costs of the same magnitude. Full effects are expected to be achieved in the second half of 2010, assuming current level of operations. This year’s restructuring charges were SEK 11.3 (6.8) billion, relating to activities to reduce production costs, reduce product variants and platforms, increase the re-use of software, consolidate R&D activities, and improve administrative processes. This resulted in fewer platforms and solutions and was coupled with write-downs of capitalized development costs and acquired IPR assets for affected products. Earnings per share (EPS) diluted down 68 percent EPS diluted declined from SEK 3.52 last year to SEK 1.14 this year, largely driven by the losses in our JVs and the restructuring program. Employees increased by net 3,750 in 2009 Headcount increased to 82,500 (78,750), largely as a result of new managed services contracts. About 2,500 employees from the acquired Nortel CDMA and LTE operations will be included from 2010. The additions were partly offset by reductions due to restructuring and the transfer of mobile platforms to ST-Ericsson. The competence and capabilities of the workforce is increasingly service and software oriented. ERICSSON ANNUAL REPORT ON FORM 20-F 2009
In 2009, despite the strategic investments in ST-Ericsson and the Nortel operations and a difficult macro-economic business environment, a healthy capital structure and equity ratio were maintained and the debt maturity profile was significantly improved. Intangible assets flat with acquisitions offset by amortizations and write-downs Added intangible assets from the Nortel acquisition of SEK 8.8 billion were offset by amortizations and impairment losses. Impairment losses on acquired intangibles were SEK 4.3 (0) billion in 2009, attributable to restructuring. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Property, plant and equipment slightly down The Company’s assets are largely related to test equipment for in-house manufacturing, R&D and services, including our network operations centers. A large share of manufacturing and IT operations are outsourced and most properties are leased. Financial assets up slightly Financial assets increased slightly, with the investment in ST-Ericsson partially offset by the reduced value of investments in JVs, attributable to their reported losses. Customer financing did not increase and deferred tax assets were slightly reduced with utilization of tax loss carryforwards. Strong reductions in receivables and inventory Considerable progress was made in the second half to achieve stable days sales outstanding (DSO) at 106 and inventory days at 68. However, targeted levels have not yet been reached and the improvement efforts will be continued. Cash remained strong at SEK 77 (75) billion Due to a strong cash flow, a good level of cash and short-term investments was maintained. A strong liquidity is deemed important to keep flexibility for volatility in sales and cash flows and to be able to take advantage of opportunities in the market. Equity down SEK 1.1 billion Stockholders’ equity decreased by SEK 1.1 billion. The net income of SEK 4.1 billion and a capital increase of SEK 0.7 billion, attributable to the employee stock purchase plan, were more than offset by the dividend of SEK 6.3 billion. However, the equity ratio was maintained at a healthy level of 52 (50) percent. Return on equity 2.6 (8.2) percent The decline in return on equity (ROE) was primarily a consequence of JV losses and the restructuring charges. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Return on capital employed 4.3 (11.3) percent The return on capital employed (ROCE) declined to 4.3 percent. Excluding restructuring charges, ROCE would have been 11.2 (15.5) percent. Pension liabilities down SEK 1.4 billion after employer contributions Post-employment benefits related to defined benefit plans declined to SEK 8.5 (9.9) billion in 2009. A liability increase of SEK 1.2 billion, due to lower interest rates, was more than offset by higher values of plan assets of SEK 1.2 billion and employer contributions of SEK 2.1 billion to trust funds. The funded ratio (plan assets as percentage of defined benefit obligations) increased to 76 (68) percent. Provisions declined due to larger cash outlays The total amount for provisions declined to SEK 12.4 (14.4) billion, largely attributable to SEK 4.7 billion of larger cash outlays than last year, of which SEK 2.5 billion related to restructuring. Trade payables declined by SEK 4.6 billion The number of payable days improved some from 55 to 57 days, close to the target of 60 days or more, despite the macroeconomic conditions, where some suppliers have had to be supported with shorter payment terms in a tight credit market. Debt maturity profile improved During the year, the Company increased borrowings by SEK 1.7 billion and considerably improved the maturity profile. Debt maturing in 2009 of USD 0.5 billion and in 2010 of EUR 0.5 billion were replaced with a 7-year loan of USD 0.6 billion and a 4-year loan of EUR 0.6 billion. In addition to borrowings, the Company also has unutilized committed credit facilities of USD 2.0 billion available, maturing in 2014. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Credit Ratings Credit ratings were unchanged during 2009, remaining at “solid investment grade”: Moody’s at Baa1 and Standard & Poor’s at BBB+. Sony Ericsson borrowings guaranteed Ericsson and SONY have on a 50/50 basis guaranteed EUR 350 million of borrowings for general business purposes, as improved liquidity was needed following Sony Ericsson’s weak results and the restructuring program. The amount guaranteed is not deemed significant, considering Ericsson’s financial position. Off-balance sheet arrangements There are currently no material off-balance sheet arrangements that have, or would be reasonably likely to have, a current or anticipated effect on the Company’s financial condition, revenues, expenses, result of operations, liquidity, capital expenditures or capital resources. JANUARY–DECEMBER
Cash flow from operations stable at SEK 24.5 billion A lower net income was offset by non-cash items, such as the losses in JVs, depreciation, amortization of intangibles, largely related to restructuring, and strong working capital reductions, resulting in a similar cash flow from operations as in 2008. Cash out from investing activities SEK –37.5 billion Cash outlays for recurring investing activities increased slightly to SEK –4.9 billion. Acquisitions/divestments during the year were net SEK –18.1 billion, with the major items being the formation of the ST-Ericsson joint venture, the minority stake in LHS and Nortel’s CDMA and LTE businesses. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Cash outflow for short-term investments for cash management purposes and other investing activities was net SEK –14.5 billion, largely attributable to SEK –17.1 billion of short-term investments driven by the strong cash flow from operations. Cash flow from financing activities SEK –1.7 billion Dividends paid of SEK –6.3 billion were partly offset by increased borrowings of SEK 4.3 billion and other financing activities of SEK 0.2 billion. Strong cash conversion at 117 (92) percent The cash conversion rate was 117 (92) percent, well above the target level of 70 percent. The percentage increase was largely attributable to the strong improvement in operating net assets and the lower income reconciled to cash. Restricted cash Cash balances in certain countries with restrictions on transfers of funds to the Parent Company as cash dividends, loans or advances amounted to SEK 8.9 (8.2) billion. Capital expenditures Amounts for annual capital expenditures are normally around two percent of sales. This level corresponds to the needs for keeping and maintaining the current capacity level, including the continuous introduction of new technology and methods. The expenditures are largely related to test equipment in R&D units and network operations centers and to production and test equipment in manufacturing and repair operations. The Board reviews the Company’s investment plans and proposals. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 CAPITAL EXPENDITURES 2005–2009
Capital expenditures in relation to sales are expected to remain at about two percent. The Company has sufficient cash and cash generation capacity to fund expected capital expenditures as well as the acquisitions of the Nortel/GSM operations and Pride Spa and the contribution to the Swedish pension trust fund without external borrowings. We believe that the Company’s property, plant and equipment and the facilities that the Company now occupies are suitable for its present needs in most locations. As of December 31, 2009, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness. Operator investments are increasing in mobile broadband, driven by a strong ramp up of data traffic. The broadband growth has not yet offset the decline in GSM sales, which in 2009 was accelerated due to the current economic climate. Operator investment patterns varied significantly between regions and countries. A number of developing markets became increasingly cautious, while others, including large markets such as China and the US, showed good growth. There was a continued strong demand for services targeting our customers’ operational efficiency. Regional overview SALES PER REGION AND SEGMENT 2009
Sales in Western Europe decreased by –6 (–2) percent for comparable unitswith growth of professional services and broadband more than offset by lower GSM sales. The growing demand for mobile broadband and professional services is expected to continue, as is the decline for GSM. The macro-economic development led to a weaker demand for replacement handsets but mobile phone usage appeared to be largely unaffected and mobile broadband traffic continued to show strong growth. In Central and Eastern Europe, Middle East and Africa (CEMA), sales decreased by –4 (+9) percent, despite continued network buildouts in a number of markets, as the region has been more affected than most by the macroeconomic development. Many countries within the CEMA region have low penetration levels and consumer demand remains robust even if some operators are currently unable or unwilling to invest at healthy levels. A similar situation is seen in other emerging markets such as Latin America and Asia Pacific. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Asia Pacific remained Ericsson’s largest region with a sales increase of +4 (+16) percent,fuelled by continued good demand in China and India. The Company has a leading position in India, where subscribers are expected to ultimately exceed one billion from the current 496 million. Auctions for 3G licenses in India were postponed to 2010. Although Chinese suppliers have significantly increased their domestic market share, Ericsson maintains a strong market position in China. Political unrest and effects of the economic slowdown negatively affected sales growth in certain countries, such as Indonesia, Pakistan and Bangladesh. Latin American sales decreased by –13 (+25) percent,reflecting lower demand across the region compared to strong growth over the last couple of years. Demand for mobile broadband continues to develop well, but delays in licensing of new spectrum are causing operators to hold back investments in new technologies and applications. North American sales increased by +41 (+34) percent, mainly driven by demand for mobile broadband and professional services. With a number of breakthrough contracts for LTE, fixed access and services and the acquisition of Nortel’s CDMA and LTE businesses, the Company is well positioned for continued growth and is now the largest supplier of technology and services to network operators in the region. Market shares were well maintained and the Company retains its ambition to grow faster than the market. Networks Overall operator demand for mobile GSM/WCDMA network equipment and related services is estimated to have declined by more than 10 percent in 2009. At the same time consumer demand continued to grow, the number of mobile subscriptions increased to a total of almost 4.6 billion and data traffic accelerated. Network sales were down by –3 (+10) percent to SEK 137.1 (142.0) billion. Sales for comparable units declined by 5 percent, i.e. excluding SEK 2.7 billion of sales from acquired Nortel operations. Adjusted also for currency and hedge effects, sales declined in line with the market. Lower GSM sales, particularly in high-growth markets such as China, contributed to the decline. Sales in WCDMA continued to show good growth driven by demand for mobile broadband. GSM shipments reached their all-time-high volume in 2008. This year, Ericsson’s WCDMA sales surpassed that of GSM for the first time. WCDMA growth did not offset the GSM decline. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Mobile broadband continues to be in focus as more and more networks are being upgraded. Smartphones, netbooks and notebooks drive data traffic and revenues for operators, resulting in demand for network expansions and upgrades. The global network coverage from WCDMA is still less than half of that of GSM. In China, the 3G licenses were awarded early 2009. Ericsson participated in China Unicom’s WCDMA rollout, the largest and fastest ever. Another achievement was the world’s largest live network upgrade in record time for Vodafone Essar in India, reaching a peak replacement rate of one radio base station every minute. India is expected to award 3G licenses in 2010. For the next generation wireless technology, 4G/LTE, Ericsson won key contracts with Verizon, Metro PCS, NTT DoCoMo and TeliaSonera. The industry support for LTE is very strong and this technology is expected to play an important role in many markets with suitable spectrum. Ericsson is leading the transformation and convergence of the core network with the largest installed base of all-IP networks based on Softswitch and IP Multimedia System (IMS) technology. The LTE core network is all-IP. To meet the demand for this new all-IP core, Ericsson has introduced the industry’s most comprehensive Evolved Packet Core portfolio which will support LTE network introduction. The portfolio is built on Ericsson’s existing packet core products and new functionality will be introduced through software upgrades. The increased data traffic driven by mobile broadband continues to create demand for transmission capacity for mobile backhaul. Ericsson offers a wide range of solutions to remove bottlenecks in the transport network. Successful mobile backhaul networks were completed in Turkey, Sweden, Canada and the US in 2009. Sales of optical and microwave transmission solutions to fixed as well as mobile operators developed in line with the market. In the fixed access area, the Company had break-in wins for fiber (GPON) connection in the Americas and in China. Operators are evolving from legacy circuit-switched networks to all-IP, in both fixed and mobile networks, and this creates opportunities for Ericsson. A new Silicon Valley campus has been established with the intention of driving the convergence of IP and mobile networks and reaching out to new partners in mobile broadband markets. The Company remains optimistic regarding growth opportunities for all-IP networks with IP routing, IMS and transmission. With the acquisition of the Nortel assets for CDMA and LTE, the Company strengthened its ability to serve North America’s mobile operators. The acquisition significantly expands Ericsson’s footprint in this market, particularly as operators in this region are emerging as early adopters of LTE technology. The agreement also includes certain patents and patent licenses relating to CDMA and LTE. Going forward, R&D expenses are expected to be relatively low in CDMA compared with other technologies. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Professional Services Professional Services sales continued to show good growth, increasing by 15 (14) percent to SEK 56.1 (49.0) billion. Growth measured in local currencies amounted to 8 (13) percent. However, sales were negatively affected by the reduced scope of a managed services agreement and somewhat lower sales of project-related services, reflecting the slowdown in network sales. Managed services was one of the main drivers for the sales increase, growing by 22 (17) percent to SEK 17.4 (14.3) billion, significantly outpacing the market. More than 60 percent of revenues in Professional Services are now of a recurring nature. As the professional services market develops, there are many opportunities for project business, but operators are also seeking longer-term partnerships for a competitive edge. Combined with an expanding managed services market, this should help sustain a healthy level of recurring business for Ericsson. Ericsson is the clear leader in managed services and at year end 2009 Ericsson-managed network operations served over 370 (250) million users. Despite a higher proportion of managed services sales from new contracts with associated start-up costs, Professional Services’ operating margin remained in the mid-teens at 15 (16) percent. This is due to increased efficiency in the delivery organization. Ericsson won several milestone contracts for managed services during the year. These include Sprint and Zain, the first full-scope managed services contracts in North America and Africa—not only firsts for Ericsson but also for the industry. The acquisition of Nortel’s CDMA and LTE businesses creates opportunities for synergies in the services operations in North America. Consulting and systems integration also had encouraging developments during the year, particularly in revenue assurance and support systems transformation, exemplified by a multi-country contract for revenue assurance with Mobilkom Group of Austria and a service assurance contract with Wataniya in Algeria. Operational consulting is also an area of growth, exemplified by a contract with Claro in Guatemala (fixed and wireless). Common challenges faced by operators today are business growth, operational efficiency and network evolution towards IP. In a converging communications world, new complexity in business models must also be added to the challenges. Services expertise and experience, in combination with technology leadership and business understanding, enable the Company to take on a prime integrator role in complex deployment and transformation projects. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Multimedia Multimedia sales increased 5 percent for comparable units with revenue management negatively affected during the second half of the year by lower network deployments. The segment continues to have attractive prospects for sales growth to network operators and service providers and the Company is well positioned to benefit from a market rebound. Operating margin improved to 8 (0) percent while EBITDA margin doubled to 16 percent with stringent cost control and the operational benefits of a more concentrated business, i.e. excluding PBX systems and mobile platforms, focusing on TV solutions, business support systems and revenue management. Solution area TV performed well during 2009 in what proved to be a challenging market environment. The Company strengthened its position in the IPTV market with a number of wins for its industry-leading IMS-enabled middleware, where full systems integration and solutions delivery is also provided. The product range in the Video on Demand and Content Management area was extended and a new generation of encoding platforms was introduced, redefining the achievable limits of compression performance. Industry recognition of market leadership was reinforced by three prestigious awards at IBC: Best IPTV solution, Best Content Management solution and Best Compression solution. As operators modernize and transform their networks to all-IP, with more and more services added, the importance of business support systems increases. Ericsson’s business support systems enable management of subscribers, provisioning of services and subscriptions, collection of usage data, charging and invoicing for services used and settlements with business partners in the service value chain. Business support systems presence was increased by leveraging the strong market position in Networks and Professional Services, especially systems integration, with a broad solutions portfolio in revenue management, provisioning and service delivery. More than 800 million subscriptions have been activated through Ericsson’s provisioning and service delivery platforms and 1 billion subscribers are now charged and billed through Ericsson’s Revenue Management solutions. A Dynamic Discount Solution (DDS), the first telecom yield management system, was launched and deployed in a number of high-growth markets. Ericsson advanced its leadership in mobile payment solutions and is first with a global solution to power application stores with mobile web payment capabilities. An Online Payment service was launched with great success through 60 operators in 15 markets. Ericsson was awarded the Best Transactions Provider Award—Mobile Entertainment 2009 and received a high ranking in the Forrester Messaging Wave Report. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 There are opportunities for network operators and service providers to increase the value of their offerings toward consumers by taking advantage of the transformation to all-IP. Ericsson’s introduction of the two IP-based applications Rich Communication Suite and Business Communication Suite has attracted significant market interest. They enable Ericsson’s customers to provide services regardless of handset model or operating system. Ericsson also reinforced its leading position in Location Based Services with a number of new contracts. In addition, a Real Time Traffic Information service was launched in Europe and Asia. The Company is making good progress in building a strong portfolio of applications enabling network operators and service providers to grow revenues and expand into new value chains beyond traditional telecom services. Ericsson continues to invest in new multimedia opportunities which may affect profitability on occasion. Most earlier investments are starting to pay off. Joint Ventures Sony Ericsson The global handset market is believed to have declined by 10 percent in unit shipments, mainly due to weakening demand for mid- to high-end feature phones—an important segment for Sony Ericsson with its higher than average market share exposure. As a consequence, Sony Ericsson’s market share decreased from ~7 percent to less than 5 percent. Units shipped declined by 41 percent to 57.1 (96.6) million while the average selling price increased by 3 percent to EUR 119 (116). Sales decreased by 40 percent from EUR 11.2 billion to 6.8 billion. Gross margin declined significantly year-on-year but improved during the year as benefits of cost reductions and new products started to materialize. Income before taxes, excluding restructuring charges, was a loss of EUR 878 million. The income gradually improved during the year from an improved gross margin and reduced operating expenses. Ericsson’s share in Sony Ericsson’s income before taxes was SEK –5.7 billion. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 In the second half of the year, borrowing facilities of EUR 455 million were secured to improve liquidity. The parent companies guaranteed EUR 350 million of these facilities on a 50/50 basis without joint responsibility. EUR 255 million were utilized and EUR 200 million remain available as a backup facility. The net cash position was EUR 620 million at year end. Programs initiated 2008 to lower annual operating expenses by EUR 880 million will continue, with full benefits expected in the second half of 2010. Restructuring charges are estimated to be well within the previously announced EUR 500 million. Sir Howard Stringer, Chairman, CEO and President of SONY Corporation succeeded Carl-Henric Svanberg as Chairman of the Board and Bert Nordberg, Executive Vice President and Head of Ericsson Silicon Valley, succeeded Dick Komiyama as President and CEO. ST-Ericsson Proforma sales declined 25 percent from USD 3.6 billion to 2.7 billion. Sales grew progressively during the year, mainly due to good performance in Asia. The joint venture remains a key supplier to four of the five largest mobile phone manufacturers in the world. Adjusted operating losses for the full year amounted to USD 440 million but results improved progressively during the year. The first quarter saw a proforma loss of USD 149 million. This was followed by losses of USD 165 million in the second quarter, USD 77 million in the third quarter and USD 50 million in the fourth quarter. The improvements reflect a tight control of product costs and operating expenses as well as the positive effects of cost reduction activities. ST-Ericsson is reporting in US-GAAP. Ericsson’s share in ST-Ericsson’s income before tax, adjusted to IFRS, was SEK –1.8 billion. Adjustments for IFRS-compliance mainly consist of capitalization of R&D expenses for hardware development. The cost reduction programs are on schedule and target USD 595 million savings per year, of which USD 250 million were achieved by end of 2009. The full effects of the cost-reduction activities are expected in the second half of 2010. A new product roadmap for market leadership has been established by combining the strengths of parent companies STMicroelectronics and Ericsson. ST-Ericsson’s market position was further enhanced by securing leadership in the fast growing TD-SCDMA technology for the Chinese market and the announcement of a close cooperation with Nokia to deliver platforms for new smartphones. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Wireless microelectronics industry veteran Gilles Delfassy succeeded Alain Dutheil as President and CEO after the successful integration of the JV operations. Hans Vestberg succeeded Carl-Henric Svanberg as Chairman of the Board. In the fall of 2007, Ericsson was named a defendant in three putative class action suits filed in the United States District Court for the Southern District of New York. The complaints alleged violations of US securities laws in connection with Ericsson’s October 2007 profit warning. In February 2008, the court consolidated the three class actions into one. In June 2008, Ericsson filed a motion to dismiss the complaint. In December, the court granted the motion and dismissed the case. In early January 2009, the plaintiffs appealed the decision to dismiss the case. On October 8, 2009, the Second Circuit affirmed the district court and dismissed the case. Consequently, there are no pending legal actions that relate to Ericsson’s October 2007 profit warning. In October 2005, Ericsson filed a complaint with the European Commission requesting that it investigate and stop US-based Qualcomm’s anti-competitive conduct in the licensing of essential patents for 3G mobile technology. In November 2009, the complaints were withdrawn and the investigation closed. Together with most of the mobile communications industry, Ericsson has been named a defendant in two class action lawsuits in the US, where plaintiffs allege that adverse health effects could be associated with mobile phone usage. The cases are currently pending in the federal court in Pennsylvania and the Superior Court of the District of Columbia. In September 2008, the federal court in Pennsylvania dismissed plaintiffs’ claims as preempted by federal law. Plaintiffs are appealing this decision to the Third Circuit Court of Appeals. The District of Columbia case is stayed pending the outcome of an appeal in a related case. In April 2007, an Australian company, QPSX Developments Pty Ltd., filed a patent infringement lawsuit against Ericsson and other defendants in the US, alleging that Ericsson infringed a patent related to asynchronous transfer mode (ATM) technology. Currently, all of the asserted patent claims have been rejected as invalid by an examiner in the US Patent and Trademark Office in connection with a reexamination proceeding. QPSX is appealing that decision. On August 27, 2009, the court granted Ericsson’s motion to stay pending the outcome of the reexamination proceeding. Swedish fiscal authorities have disallowed deductions for sales commission payments via external service companies to sales agents in certain countries. Most of the taxes have already been paid. The decision covering the fiscal year 1999 was appealed. In December 2006, the County Administrative Court in Stockholm rendered a ERICSSON ANNUAL REPORT ON FORM 20-F 2009 judgment in favor of the fiscal authorities. The Administrative Court of Appeal in Stockholm affirmed the County Administrative Court’s judgment. The judgment has been appealed to the Administrative Supreme Court. For more information on risks related to litigations, see chapter Risk Factors. Material contractual obligations are outlined in Note C33 “Contractual obligations”. These are primarily related to operating leases for office and production facilities, purchase contracts for outsourced manufacturing, R&D and IT operations, and the purchase of components for the Company’s own manufacturing. Ericsson is party to certain agreements, which include provisions that may take effect or be altered or invalidated by a change in control of the Company as a result of a public takeover offer. However, none of the agreements currently in effect would entail any material consequence to Ericsson due to a change in control of the Company. In accordance with the Swedish Code of Corporate Governance (the Code), a separate Corporate Governance Report including an Internal Control section has been prepared. The Company is committed to complying with best-practice corporate governance standards on a global level wherever possible. This includes continued compliance with the corporate governance provisions expressed by the Code. An ethical business Ericsson’s Code of Business Ethics summarizes the Group’s fundamental policies and directives governing its relationships internally, with its stakeholders and with others. It also sets out how the Group works to achieve and maintain its high standards. There have been no amendments or waivers to Ericsson’s Code of Business Ethics for any Director, member of management or other employee. Board of Directors 2009/2010 The Annual General Meeting on April 22, 2009, re-elected Michael Treschow as Chairman of the Board and Roxanne S. Austin, Sir Peter L. Bonfield, Börje Ekholm, Ulf J. Johansson, Sverker Martin-Löf, Nancy McKinstry, Anders Nyrén, Carl-Henric Svanberg, and Marcus Wallenberg as Directors of the Board. Anna Guldstrand, Jan Hedlund and Karin Åberg were appointed as union representatives with Monica Bergström, Pehr Claesson and Kristina Davidsson as deputies. Management In 2009, Hans Vestberg was appointed new President and CEO, succeeding Carl-Henric Svanberg as of January 1, 2010. The President and CEO is supported by the Group Management Team which, in addition to the President and CEO, consists of heads of Group Functions and heads of business units. A management system is implemented to ensure that the business is well managed and able to fulfill the objectives of major stakeholders within established risk limits. The system also monitors internal control and compliance with applicable laws, listing requirements and governance codes. Remuneration Fees to the members of the Board of Directors and the remuneration of management as well as the 2009 guidelines for remuneration to senior management are reported in Notes to the Consolidated Financial Statements—Note C29, “Information Regarding Members of the Board of Directors, the Management and Employees”. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 As of December 31, 2009, there were no loans outstanding from and no guarantees issued to or assumed by Ericsson for the benefit of any member of the Board of Directors or senior management. All relevant information regarding remuneration can be found in chapter Remuneration Report. The Board of Directors’ proposal for guidelines for remuneration to senior management The Board of Directors proposes the following guidelines for remuneration and other employment terms for the senior management for the period up to the 2011 Annual General Meeting. Compared to the guidelines resolved by the 2009 Annual General Meeting, these guidelines have been restructured and rephrased to better demonstrate the basic principles for remuneration within the Ericsson Group. Details of how we deliver on our principles and policy, including information on previously decided long-term variable remuneration that has not yet become due for payment, can be found in the Remuneration Report and in Note C29, “Information regarding Members of the Board of Directors, the Management and Employees” in the Annual Report 2009. 2010 Remuneration Policy Remuneration at Ericsson is based on the principles of performance, competitiveness and fairness. These principles and good practice in Sweden guide our policy to: Attract and retain highly competent, performing and motivated people that have the ability, experience and skill to deliver on the Ericsson strategy. Encourage behavior consistent with Ericsson’s culture and core values of professionalism, respect and perseverance. Ensure fairness in reward by delivering total remuneration that is appropriate but not excessive. Ensure a total compensation mix of fixed and variable remuneration and benefits that reflects the Company´s principles and is competitive where Ericsson competes for talent. Encourage variable remuneration which, first, aligns employees with clear and relevant targets, second, reinforces performance and, third, enables flexible remuneration costs. Ensure that all variable remuneration plans have maximum award and vesting limits. Encourage employees to deliver sustained performance and build up a personal shareholding in Ericsson, aligning the interests of shareholders and employees. Communicate clearly to both employees and shareholders how Ericsson translates remuneration principles and policy into practice. Group Management For senior management consisting of the Executive Leadership Team, including the President and CEO, in the following referred to as the “Group Management”, total remuneration consists of fixed salary, short- and long-term variable remuneration, pension and other benefits. Furthermore, the following guidelines apply for Group Management: Variable remuneration is through cash and stock-based programs awarded against specific business targets derived from the long-term business plan approved by the Board of Directors. Targets may include financial targets at either corporate or unit level, operational targets, employee motivation targets and customer satisfaction targets. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 With the current composition of Group Management, the Company’s cost during 2010 for the variable remuneration of Group Management can, at a constant share price, amount to between 0 and 140 percent of the aggregate fixed salary cost, all excluding social security costs. All benefits, including pension benefits, follow the competitive practice in the home country taking total compensation into account. The retirement age is normally 60 to 65 years of age. By way of exception, additional arrangements can be made when deemed required. Such additional arrangement shall be limited in time and shall not exceed a period of 36 months and two times the remuneration that the individual concerned would have received had no additional arrangement been made. The mutual notice period may be no more than six months. Upon termination of employment by the Company, severance pay amounting to a maximum of 18 months fixed salary is paid. Notice of termination given by the employee due to significant structural changes, or other events that in a determining manner affect the content of work or the condition for the position, is equated with notice of termination served by the Company. SUSTAINABILITY AND CORPORATE RESPONSIBILITY The Company has implemented strong social, environmental and ethical standards supporting risk management and value creation. This commitment generates positive business impacts that benefit society. Ericsson’s approach to Sustainability and Corporate Responsibility (CR) is integrated into its core business operations and in its relationships with stakeholders. The Board of Directors considers these aspects in governance decision-making. Group level policies and directives ensure consistency across global operations. Ericsson publishes an annual Sustainability and CR Report which provides additional information. Minimizing risk Responsible business practices Ericsson supports the UN Global Compact and endorses its ten principles regarding human and labor rights, anti-corruption and environmental protection. The Ericsson Group Management System includes policies and directives that cover responsible business practices, such as the Code of Business Ethics, Code of Conduct (CoC), anti-corruption and environmental management. It is reinforced by training, workshops and monitoring, including a global assessment program run by an external assurance provider in which CR criteria represent approximately 20 percent of the total areas assessed. Supply chain Suppliers must comply with Ericsson’s CoC and Environmental Requirements. The Company performs regular audits and works with suppliers to ensure measurable and continuous improvements. Priorities from a risk model include network roll- out, tower manufacturing and logistics. Findings are followed up to ensure that lasting improvements are made. One common finding is suppliers’ insufficient routines for ensuring compliance to the CoC requirements in their supply chain. Design for Environment Controls are in place to ensure compliance with environmental regulations, e.g. the EU regulation for Registration, Evaluation, Authorization and restriction of Chemicals (REACH). Ericsson’s List of Banned and Restricted Substances was updated in 2009. The Company has to date produced more than 10 million lead-free soldered printed board assemblies with reliability equal to lead-soldered boards. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Take-back Ericsson Ecology Management and Product Take-back is a global initiative to take responsibility of products at the end of their life. Close to 100 percent of decommissioned equipment is recycled, exceeding the Waste from Electronic and Electrical Equipment Directive (WEEE) stipulation of 75 percent. During 2009 more than 5,300 tons were collected. Radio waves and health Ericsson provides public information on radio waves and health, and supports independent research to further increase knowledge in this area. Ericsson currently co-sponsors about 40 ongoing research projects related to electromagnetic fields, radio waves and health; over 90 studies have been supported since 1996. Independent expert groups and public health authorities, including the World Health Organization, have reviewed the total amount of research and consistently concluded that the balance of evidence does not demonstrate any health effects associated with radio wave exposure from either mobile phones or radio base stations. Creating value The environmental opportunity Information and Communication Technology (ICT) represents about two percent of global CO2 emissions, but can potentially offset a significant portion of the remaining 98 percent from other sectors. Ericsson takes active measures to ensure that its own carbon footprint will be reduced. A carbon footprint reduction target was set in 2008 to reduce emissions relative to products sold by 40 percent over five years, from in-house activities and the life-cycle impacts of products. In 2009, Ericsson exceeded the annual 10 percent reduction target by:
In addition, part of Ericsson’s sustainability strategy is to focus on the role that broadband can play in helping to offset global CO2 emissions. In 2009, Ericsson focused on sustainable city solutions, and partnered with WWF Sweden to assess the positive impact that ICT has in the creation of low-carbon economies, co-publishing recommendations for policy makers. Sony Ericsson launched its Greenheart phone, with an in-phone manual, recycled plastics, energy efficient display and waterbased paints decreasing the overall CO2 emissions of the phone by 15 percent. Meeting the Millennium Development Goals Mobile connectivity fuels economic growth, which is particularly vital for the billions of people living at the base of the economic pyramid—the markets of the future. Ericsson is committed to using its technology and competence to help achieve the UN Millennium Development Goals (MDGs), and customer engagement is part of its strategy to meet this aim. In 2009, a monitoring and evaluation study, conducted in cooperation with Columbia University, revealed that access to mobile communications in the Millennium Villages has concretely contributed to the achievement of the MDGs. It also showed that mobile applications are especially well suited for collecting information and monitoring critical areas such as health, education, security and small business development. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Ericsson Response Ericsson Response is a global employee volunteer initiative to rapidly roll out communication solutions and provide telecoms experts to assist disaster relief operations. Ericsson Response cooperates with the UN Office for the Coordination of Humanitarian Affairs, the UN World Food Programme and the International Federation of Red Cross and Red Crescent Societies (IFRC). In 2009, support was provided to relief workers in saving children in Southern Sudan and after heavy flooding in Panama. Continued support was given to the UN in establishing operations in the Central African Republic and in the Democratic Republic of Congo. In recognition of performance The Millennium Villages Project received a Global Telecoms Business Innovation Award. Ericsson China was named the “China Green Benchmark Company” for the second year in a row. Ericsson was also recognized as the “Green Pioneer” at the 2009 “Korea-EU Industrial Cooperation Day”. In the UK Brand Emissions Leaders survey, Ericsson was named one of the brand leaders in reducing its carbon emissions. Ericsson’s Board of Directors is actively engaged in the Company’s risk management. Risks related to set long-term objectives are discussed and strategies formally approved by the Board as part of the annual strategy process. Risks related to annual targets for the Company are also reviewed by the Board and then monitored continuously during the year. Operational risk management is integrated within the Ericsson Group Management System to ensure effectiveness, efficiency, business continuity and compliance with corporate governance, legal and other requirements. Certain transactional risks require specific Board approval, e.g. material acquisitions, management remuneration, borrowing or customer finance in excess of pre-defined limits. For more information on risks related to Ericsson’s business, see chapter Risk Factors. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Strategic and tactical risks In the annual strategy and target setting process, objectives are set for the next five years, risks and opportunities are assessed and strategies are developed to achieve the objectives. To ensure that actions are taken to realize the strategies, focus areas are identified in target setting and planning for the coming year. In 2009, the general economic downturn in 2008–2009 and the consequences for the business were assessed in relation to both strategy and target setting. For the setting of long-term objectives, important industry and market fundamentals were analyzed and risks and opportunities evaluated. Near-term, a continued focus on cost management and a strong liquidity were emphasized due to the increased difficulties of forecasting customer demand. Risks and opportunities were identified and analyzed in the following balanced scorecard perspectives: Financial perspective Top line growth: the decline caused by reduction in 2G spend has yet to be offset by growth in 3G and LTE driven by data traffic in mobile broadband networks. Ericsson will focus on converged solutions, IMS, multi-standard radios and services plus opportunities in transmission and evolved EDGE. Margin improvement: addressed by platform consolidation, software reuse, reduced number of sites and rapid transformation of transferred managed services operations and integration of acquired Nortel units. Cash flow: continued focus on working capital improvements. A strong cash position is deemed important for flexibility to execute on potential market opportunities. JVs: continued cooperation with JVs and co-owners needed to make them profitable again as soon as possible. Customer perspective Convergence of the telecom, datacom and media industries results in new forms of competition and customers. Ericsson will focus on competitive offerings for mobile broadband, converged core solutions, network management systems and systems integration. The competitive landscape is constantly changing, as consolidation continues among customers and vendors. Continued investments in R&D for premium, cost-effective and future-proof solutions are essential. Customer intimacy for network planning and migration is key for forging customer partnerships. Ericsson’s installed base is an important asset for sales of upgrades, network convergence and systems integration. Now also Nortel’s US customer base is added, providing additional opportunities in CDMA and LTE. Continuous follow-up of quality of delivered products and services to be maintained to ensure customer satisfaction. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Market position perspective Continued strong competition in the market is addressed through cost reductions and premium end-to-end solutions, based on continued leadership in R&D and services. Market leadership is being safeguarded through rapid technological development and establishment of a key player position in network transformation—IP, mobile broadband, multimedia and consulting. Backhaul demand is growing, driven by strong data traffic. Ericsson will seize this opportunity by harvesting its leading microwave position. The Company will also leverage the broader product portfolio created through acquisitions, promote OneVoice and IMS for LTE networks, and continue its strong Design for Environment program to lower operators’ cost of ownership and drive a positive environmental impact. The Company will capitalize on the dramatic improvement of its US footprint and its Silicon Valley presence. The joint ventures will need to execute their restructuring programs and also address multiple operating systems and new market players, e.g. Google/Android. Sony Ericsson will focus its product portfolio more on high-end handsets. Operations and people perspectives Restructuring and other activities have been defined for margin protection, including industrialization of managed services. Continued focus in R&D on shortened lead times for product/solution development. Increased flexibility and responsiveness will be achieved through efforts to shorten lead times also for delivery of hardware and software. The Company must ensure it has top competence in key technology areas and systems integration. Empowerment and remuneration are important aspects to continue to be a competitive and attractive employer. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Operational and financial risks Operational risks are owned and managed by operational units. Risk management is embedded in various process controls, such as decision tollgates and approvals. Certain cross-process risks, such as information security/IT, corporate responsibility and business continuity as well as insurable risks are centrally coordinated. Financial risk management is governed by a Group policy and carried out by the Treasury and Customer Finance functions, both supervised by the Finance Committee of the Board of Directors. The policy governs risk exposures related to foreign exchange, liquidity/ financing, interest rates, credit risk and market price risk in equity instruments. For further information on financial risk management, see Notes to the Consolidated Financial Statements – Note C14, “Trade Receivables and Customer Finance”, Note C19, “Interest-Bearing Liabilities” and Note C20, “Financial Risk Management and Financial Instruments”. Compliance risks Ericsson has implemented Group policies and directives to ensure compliance with applicable laws and regulations, including a Code of Business Ethics. Risk management is integrated in the Company’s business processes. Policies and controls are implemented to ensure compliance with financial reporting standards and stock market regulations, e.g. the US Sarbanes-Oxley Act. Monitoring and audits Company management monitors the compliance with policies, directives and processes through internal self-assessment within all units. This is complemented by internal and external audits. External financial audits are performed by PricewaterhouseCoopers, and ISO/management system audits by Det Norske Veritas, DNV. The Parent Company business consists mainly of corporate management, holding company functions and internal banking activities as well as customer credit management, performed on a commission basis by Ericsson Credit AB. The Parent Company is the owner of a substantial part of Ericsson’s intellectual property rights. It manages the patent portfolio, including patent applications, licensing and cross-licensing of patents and defending of patents in litigations. The Parent Company has 6 (7) branch offices. In total, the Group has 65 (62) branch and representative offices. Financial information Net sales for the year amounted to SEK 0.3 (5.1) billion and income after financial items was SEK 8.1 (19.4) billion. Effective January 1, 2009, the right to all license revenues from third parties related to patent licenses was transferred to Ericsson AB, a wholly owned subsidiary, and consequently net sales in 2009 were insignificant compared to 2008. TEMS SWEDEN AB was sold during the year. Exports accounted for 100 (70) percent of net sales. The Parent Company had no sales in 2009 or 2008 to subsidiaries, while 45 (46) percent of total purchases of goods and services were from such companies. Major changes in the Parent Company’s financial position for the year include: Investments in the joint venture ST-Ericsson of SEK 8.6 billion. Decreased current and non-current receivables from subsidiaries of SEK 10.1 billion. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 Decreased other current receivables of SEK 2.0 billion. Increased cash, cash equivalents and short-term investments of SEK 3.2 billion. Increased current and non-current liabilities to subsidiaries of SEK 5.0 billion. Decreased other current liabilities of SEK 7.4 billion. At year end, cash, cash equivalents and short-term investments amounted to SEK 62.4 (59.2) billion. Share information In the second quarter, as decided by the Board of Directors with authorization from the Annual General Meeting, a stock issue and a subsequent repurchase was made for the share-based employee remuneration program. 27 million Class C shares were issued and later repurchased as treasury stock. The shares were converted into Class B shares. The quotient value of the repurchased shares was SEK 135.0 million, representing less than 1 percent of capital stock, and the acquisition cost was SEK 135.1 million. As per December 31, 2009, the total number of shares was 3,273,351,735, of which 261,755,983 Class A shares, each carrying one vote, and 3,011,595,752 Class B shares, each carrying one-tenth of one vote. The two largest shareholders at year end were Investor and Industrivärden holding 19.33 and 13.62 percent respectively of the voting rights in the Parent Company. In accordance with the conditions of the Long-Term Variable Remuneration Program (LTV) for Ericsson employees, 9,087,564 treasury shares were sold or distributed to employees in 2009. The quotient value of these shares was SEK 45.4 million, representing less than 1 percent of capital stock, and compensation received amounted to SEK 213.2 million. The holding of treasury stock at December 31, 2009, was 78,978,533 Class B shares. The quotient value of these shares is SEK 394.9 million, representing 2 percent of capital stock, and the related acquisition cost amounts to SEK 672.4 million. Proposed disposition of earnings The Board of Directors proposes that a dividend of SEK 2.00 (1.85 in 2008) per share be paid to shareholders duly registered on the record date April 16, 2010, and that the Parent Company shall retain the remaining part of non-restricted equity. The Class B treasury shares held by the Parent Company are not entitled to receive a dividend. Assuming that no treasury shares remain on the record date, the Board of Directors proposes that earnings be distributed as follows:
As a basis for its dividend proposal, the Board of Directors has made an assessment in accordance with Chapter 18, Section 4 of the Swedish Companies Act of the Parent Company’s and the Group’s need for financial resources as well as the Parent Company’s and the Group’s liquidity, financial position in other respects and long-term ability to meet their commitments. The Group reports an equity ratio of 52 (50) percent and a net cash amount of SEK 36.1 (34.7) billion. The Board of Directors has also considered the Parent Company’s result and financial position and the Group’s position in general. In this respect, the Board of Directors has taken into account known commitments that may have an impact on the financial positions of the Parent Company and its subsidiaries. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 The proposed dividend does not limit the Group’s ability to make investments or raise funds, and it is our assessment that the proposed dividend is well-balanced considering the nature, scope and risks of the business activities as well as the capital requirements for the Parent Company and the Group. In an auction on November 25, 2009, Ericsson acquired certain assets relating to Nortel’s GSM business in North America for a cash purchase price of USD 70 million. Closing is expected by March 31, 2010, subject to approval by US and Canadian bankruptcy courts and satisfying normal regulatory conditions. On January 12, 2010, Ericsson announced an agreement to acquire Pride Spa, an Italian systems integration company with approximately 1,000 employees. On January 18, 2010, the Company appointed Rima Qureshi and Magnus Mandersson as heads of business unit CDMA and Global Services respectively. Both are members of the Executive Leadership Team. In January 2010, as per the trust’s funding requirements, the Company made an employer contribution payment of SEK 730 million to the Swedish pension trust fund. On February 8, 2010, the Company announced the appointment of Mats H. Olsson and Angel Ruiz as members of the Executive Leadership Team as well as a reorganization of its 23 market units into ten regions. On March 31, 2010, Ericsson announced that Marita Hellberg, Senior Vice President and Head of Group Function Human Resources and Organization will take over as Head of Human Resources of Ericsson’s new region China and North East Asia from July 1st. On April 1, 2010 Ericsson announced that the acquisition of substantially all the assets of Nortel’s GSM business had been completed, effective March 31. The closing follows the announcement on November 25, 2009, that Ericsson had entered into an asset purchase agreement for the assets of Nortel’s GSM business in North America. On April 21, 2010, the Company announced that it had entered into a share purchase agreement to acquire Nortel’s majority shareholding (50%+1 share) in LG-Nortel, the joint venture of LG Electronics and Nortel Networks. Purchase price is USD 242 million on a cash and debt free basis. The transaction is subject to customary regulatory approvals. The Board of Directors and the President declare that the consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB, and give a fair view of the Group’s financial position and results of operations. The financial statements of the Parent Company have been prepared in accordance with generally accepted accounting principles in Sweden and give a fair view of the Parent Company’s financial position and results of operations. The Board of Directors’ Report for the Ericsson Group and the Parent Company provides a fair view of the development of the Group’s and the Parent Company’s operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group. ERICSSON ANNUAL REPORT ON FORM 20-F 2009 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders of Telefonaktiebolaget LM Ericsson (publ) In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, shareholders equity and cash flows present fairly, in all material respects, the financial position of Telefonaktiebolaget LM Ericsson and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in item 15(b) of the Annual Report on Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. As described in Management’s Report on Internal Control Over Financial Reporting included in Item 15 (b), management has excluded Nortel from its assessment of internal control over financial reporting as of December 31, 2009 because it was acquired by the Company in a purchase business combination on November 13, 2009. We have also excluded Nortel from our audit of internal control over financial reporting. The Nortel operation is part of the Network segment whose total assets and total revenues represent 0,6% and 1,3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2009. Stockholm, April 21, 2010
EARNINGS PER SHARE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SEK 1.14 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
12 percent |
* | Excluding restructuring charges and share in earnings of JVs |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
LOOKING BACK
Dear fellow shareholders,
While the current economic environment affects all parts of society the longer-term fundamentals for our industry remain solid. Over the past decade the number of mobile subscriptions in the world has grown from some 700 million to over 4.5 billion. Mobile telephony is reaching a penetration beyond all expectations. Ten years ago it was all 2G; today 3G is the prevailing technology, mobile broadband is a reality and telecom is literally changing the world.
Ericsson has played a vital role in bringing the benefits of mobile broadband to the majority of the world’s population. What we do greatly improves people’s lives and society at large—in short, what we do shapes people’s lives and the world around us. One of my strongest memories is from the day we launched the network in Dertu, one of the Millennium Villages. Their chief, one of the camel drivers, came up to me and said, “Today our village is reborn”. People are now able to share ideas and information and accomplish things that were not possible before.
In the past ten years the telecom industry and Ericsson have transformed; from focus on voice to focus on internet, from hardware to software and from providing network equipment to providing solutions including services.
During the same period, many of our competitors have been forced to leave the arena and new ones have entered. We work harder than ever to outperform them and match our customers’ needs.
We have extended our leadership in mobile communications by building a highly successful services business which today accounts for almost 40 percent of our total Group sales. With less hardware, increased network complexity, and the move to all-IP, today is very much about making it work and supporting our customers in running and maintaining networks and realizing business models and rollout plans. During 2009 we captured additional strategic contracts in the services area and we now manage networks with 370 million subscribers.
The acquisition of Nortel’s CDMA business during 2009, on the heels of important breakthrough contract wins in North America, positioned Ericsson as the leading provider of telecoms technology and services in the United States and Canada. We have also firmly established ourselves in Silicon Valley where much of the internet development takes place.
We also gained strategic contracts for the radio standard LTE (Long-Term Evolution) which offers even greater network speeds and in December 2009 we passed another significant milestone with the worlds’ first commercial launch of an LTE network in Sweden.
“IN THE PAST TEN YEARS THE TELECOM INDUSTRY AND ERICSSON HAVE TRANSFORMED.”
The industry has changed and our ability to change with it, and indeed to lead the change, is perhaps our most important asset. New and compelling challenges lie ahead and as a company Ericsson must continue to drive the transformation of our industry.
My years as President and CEO of Ericsson have been the best of my professional career. Telecom is one of the most exciting industries to work in—so dynamic, challenging and competitive. I truly believe that telecom
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
and the entire Information and Communication Technology (ICT) sector, particularly broadband networks, will form the backbone of the digital 21st century infrastructure, helping industries with the necessary reductions in their carbon footprint.
In closing, I will continue to follow and be involved in Ericsson’s development in my role as a Board member. I am proud and grateful to have had the opportunity to be at the helm of this great company and I will remember all the extraordinary people I have had the honor to work with, customers, partners and colleagues alike.
Carl-Henric Svanberg
Former President and CEO
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
“IN THIS SEA OF CONNECTIVITY WE TAKE THE ROLE OF NAVIGATOR.”
LOOKING FORWARD
Dear shareholders,
2009 was a year of mixed trends and with varied operator investment behavior. Some markets were impacted by the financial climate while others continued to show growth.
Our Group sales for the full year, however, were flat and the operating margin increased slightly. Despite the challenging economic environment we maintained market shares, cash flow was good and our financial position remained strong. During the year we undertook significant cost reduction activities. These, in combination with large losses in our joint ventures, affected our earnings negatively. However, cost reductions will result in reduced cost base going forward and our joint ventures remain on track to return to profit.
It is now 2010 and we have a new decade ahead of us. A decade of new opportunities and new challenges. Telecoms is no longer about voice only. We do not just connect places and people. We also connect machines and devices. We connect the developing world to the developed world, rural areas to urban areas. Telecoms is the nervous system of the world.
In Ericsson we have a vision for this new decade—that there will be 50 billion connected devices. We will connect people with for example heart problems to remote monitoring systems so they can stay in the comfort of their homes, and we will connect our cars and trucks to smart road systems for safer driving and better fuel economy. Broadband networks will be the backbone of our smart cities, where houses will be connected so we can monitor and manage power consumption.
In this world the challenge will lie in dealing with the complexity of connecting all these devices. And we cannot fail. Patients must be able to rely on their health monitoring services. Transport companies must be sure that they can minimize gas consumption by smart routing and up-to-date traffic information.
In this sea of connectivity we take the role of navigator. We must support our customers and show them the way. This will require us to always put our customers first. Always have the best competence and drive innovation throughout the customer relationship.
Our business is about both technology and services. We have to be consultants; we have to be able to develop complex network management systems, we have to be able to integrate systems and solutions from many different suppliers and vendors. In addition, we should be able to deliver the best revenue management solutions and multimedia applications the consumers have ever seen. Everything must be based on IP software.
This new decade requires a lot from us. We will have to change our ways of working. Our success will be determined by our ability to see beyond technology, stay ahead of our customers and solve problems before they even arise.
In preparing ourselves to be successful in this new decade, we will need to continuously adjust to changing economic and competitive conditions while staying the course to our longer-term objectives. We will continue to proactively take actions to safeguard our financial position, leading technology and customer relationships. In order to drive shareholder value we focus on four financial targets; we want to grow the Company faster than the market, maintain best-in-class operating margins, have a healthy cash generation and grow earnings in the JVs.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
We have exciting developments ahead. The future will require us to be agile, brave and focused on performance in all we do.
I am proud and honored to lead Ericsson into a new decade where we will undoubtedly break new ground. Even more people and devices will share information across the world.
Hans Vestberg
President and CEO
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
For definitions of the financial terms used, see Glossary and Financial Terminology on page 234.
SEK million | 2009 | Change | 2008 | 2007 | 2006 | 2005 | ||||||||||||
Income statement items | ||||||||||||||||||
Net sales | 206,477 | –1 | % | 208,930 | 187,780 | 179,821 | 153,222 | |||||||||||
Operating income | 5,918 | –64 | % | 16,252 | 30,646 | 35,828 | 33,084 | |||||||||||
Financial net | 325 | –67 | % | 974 | 83 | 165 | 251 | |||||||||||
Net income | 4,127 | –65 | % | 11,667 | 22,135 | 26,436 | 24,460 | |||||||||||
Year-end position | ||||||||||||||||||
Total assets | 269,809 | –6 | % | 285,684 | 245,117 | 214,940 | 209,336 | |||||||||||
Working capital | 99,079 | –1 | % | 99,951 | 86,327 | 82,926 | 86,184 | |||||||||||
Capital employed | 181,680 | — | 182,439 | 168,456 | 142,447 | 133,332 | ||||||||||||
Net cash | 36,071 | 4 | % | 34,651 | 24,312 | 40,728 | 50,645 | |||||||||||
Property, plant and equipment | 9,606 | –4 | % | 9,995 | 9,304 | 7,881 | 6,966 | |||||||||||
Stockholders’ equity | 139,870 | –1 | % | 140,823 | 134,112 | 120,113 | 101,622 | |||||||||||
Minority interests | 1,157 | –8 | % | 1,261 | 940 | 782 | 850 | |||||||||||
Interest-bearing liabilities and post-employment benefits | 40,653 | — | 40,354 | 33,404 | 21,552 | 30,860 | ||||||||||||
Other information | ||||||||||||||||||
Earnings, per share, basic, SEK | 1.15 | –68 | % | 3.54 | 6.87 | 8.27 | 7.67 | |||||||||||
Earnings, per share, diluted, SEK | 1.14 | –68 | % | 3.52 | 6.84 | 8.23 | 7.64 | |||||||||||
Cash dividends per share, SEK | 2.00 | 1) | 8 | % | 1.85 | 2.50 | 2.50 | 2.25 | ||||||||||
Stockholders’ equity per share, SEK | 43.79 | –1 | % | 44.21 | 42.17 | 37.82 | 32.03 | |||||||||||
Number of shares outstanding (in millions) | ||||||||||||||||||
—end of period, basic | 3,194 | — | 3,185 | 3,180 | 3,176 | 3,173 | ||||||||||||
—average, basic | 3,190 | — | 3,183 | 3,178 | 3,174 | 3,169 | ||||||||||||
—average, diluted | 3,212 | — | 3,202 | 3,193 | 3,189 | 3,181 | ||||||||||||
Additions to property, plant and equipment | 4,006 | –3 | % | 4,133 | 4,319 | 3,827 | 3,365 | |||||||||||
Depreciation and write-downs/impairments of property, plant and equipment | 3,502 | 13 | % | 3,105 | 2,914 | 3,038 | 2,438 | |||||||||||
Acquisitions/capitalization of intangible assets | 11,413 | — | 1,287 | 29,838 | 18,319 | 2,250 | ||||||||||||
Amortization and write-downs/impairments of intangible assets | 8,621 | 55 | % | 5,568 | 5,459 | 4,479 | 3,364 | |||||||||||
Research and development expenses | 33,055 | –2 | % | 33,584 | 28,842 | 27,533 | 24,059 | |||||||||||
—as percentage of net sales | 16.0 | % | — | 16.1 | % | 15.4 | % | 15.3 | % | 15.7 | % | |||||||
Ratios | ||||||||||||||||||
Operating margin excluding joint ventures | 6.5 | % | — | 8.0 | % | 12.5 | % | 16.7 | % | 20.1 | % | |||||||
Operating margin | 2.9 | % | — | 7.8 | % | 16.3 | % | 19.9 | % | 21.6 | % | |||||||
EBITDA margin | 8.7 | % | — | 11.9 | % | 20.8 | % | 24.1 | % | 25.4 | % | |||||||
Cash conversion | 117 | % | — | 92 | % | 66 | % | 57 | % | 47 | % | |||||||
Return on equity | 2.6 | % | — | 8.2 | % | 17.2 | % | 23.7 | % | 26.7 | % | |||||||
Return on capital employed | 4.3 | % | — | 11.3 | % | 20.9 | % | 27.4 | % | 28.7 | % | |||||||
Equity ratio | 52.3 | % | — | 49.7 | % | 55.1 | % | 56.2 | % | 49.0 | % | |||||||
Capital turnover | 1.1 | — | 1.2 | 1.2 | 1.3 | 1.2 | ||||||||||||
Inventory turnover days | 68 | — | 68 | 70 | 71 | 74 | ||||||||||||
Trade receivables turnover | 2.9 | — | 3.1 | 3.4 | 3.9 | 4.1 | ||||||||||||
Payment readiness, SEK million | 88,960 | 5 | % | 84,917 | 64,678 | 67,454 | 78,647 | |||||||||||
—as percentage of net sales | 43.1 | % | — | 40.6 | % | 34.4 | % | 37.5 | % | 51.3 | % | |||||||
Statistical data, year-end | ||||||||||||||||||
Number of employees | 82,493 | 5 | % | 78,740 | 74,011 | 63,781 | 56,055 | |||||||||||
—of which in Sweden | 18,217 | –10 | % | 20,155 | 19,781 | 19,094 | 21,178 | |||||||||||
Export sales from Sweden, SEK million | 94,829 | –13 | % | 109,254 | 102,486 | 98,694 | 93,879 |
1) | For 2009, as proposed by the Board of Directors. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
DEAR SHAREHOLDER,
As we head into 2010 and a new decade, we should consider the phenomenal transformation of the telecoms industry over the past decade, including the convergence of the telecom, IT and media industries. Through this and the explosive development in fixed and mobile internet usage, mobile communications has had a remarkable growth, with the number of subscribers increasing from 700 million in 2000 to more than 4.5 billion in 2009. Significant consolidation has occurred among operators as well as equipment suppliers.
I would like to express my sincere thanks to Carl-Henric Svanberg for his outstanding helmsmanship during his time with the Company. Ericsson’s key to success during these years has been Carl-Henric Svanberg’s willingness to seek opportunity through change and proactively address challenges.
The Board’s work in 2009 had a significant focus on strategic matters. Ericsson’s strategy to leverage its leading position and technological prowess to invest in future growth areas remains unchanged.
The key future opportunity for the industry and Ericsson will be the increased traffic generated by mobile broadband, driven by internet and social media, and a shift from connecting places and people to connecting devices and applications. Systems integration skills and application enablers will play an increasingly important role in this market development. The Company intends to build a strong position in these areas to complement the current leadership in network technologies and operations.
Operator and consumer sensitivity to the macro-economy is an important factor closely monitored by the Board. During 2009, Ericsson was affected in the second half by the economic downturn as many operators reduced their network investments. This was largely offset by good sales in the first half and by increasing sales of services and multimedia solutions. The Board also addressed the Company’s restructuring program, the Nortel acquisition, and the expanded presence in Silicon Valley to support acceleration of the move to all-IP technology. Through key contract wins and the acquisition of parts of Nortel, Ericsson became the largest supplier of network technology and services in North America.
Ericsson’s joint ventures Sony Ericsson and ST-Ericsson were strongly affected by the market decline, and forceful actions have been taken to restore their profitability.
That said, I believe Ericsson remains well positioned in relation to its peers, with sustained revenues and margins and in certain areas increased market shares, a healthy balance sheet and a strong cash position. This enables the Company to pursue emerging opportunities created by the market situation.
The debate around executive compensation has intensified. Benchmarking with global companies similar to Ericsson shows that we have a conservative but competitive compensation structure that rewards performance and effectively aligns employees’ longer-term interests with those of shareholders’.
I am confident that these principles remain appropriate and reasonable.
Looking to the future, I welcome Hans Vestberg as our new CEO and wish him all the best in his new role. The Board and I are convinced that Hans has the qualities it takes to lead Ericsson, and we give him and his new team our full support.
Change and challenge seem to be the by-words for the world today. If embracing change and proactively addressing challenges brings rewards, then the coming years certainly look exciting for Ericsson.
I sincerely appreciate your support during the year.
Michael Treschow
Chairman of the Board
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
BOARD OF DIRECTORS’ REPORT 2009
This Board of Directors’ Report is based on Ericsson’s consolidated financial statements, prepared in accordance with IFRS as issued by the IASB. The application of reasonable but subjective judgments, estimates and assumptions to accounting policies and procedures affects the reported amounts of assets and liabilities and contingent assets and liabilities at the balance sheet date as well as the reported amounts of revenues and expenses during the reporting period. These amounts could differ materially under different judgments, assumptions and estimates. Please see Note C2—“Critical Accounting Estimates and Judgments” (p. 66).
Also non-IFRS measures are used to provide meaningful supplemental information to the IFRS results. Non-IFRS measures are designed to facilitate analysis by indicating Ericsson’s underlying performance, however, these measures should not be viewed in isolation or as substitutes to the IFRS measures. A reconciliation of non-IFRS measures with the IFRS results can be found on page 17.
This report includes forward-looking statements subject to risks and uncertainties. Actual developments could differ materially from those described or implied. Please see “Forward-Looking Statements” (p. 150) and “Risk Factors” (p. 142).
The external auditors review the quarterly interim reports, perform audits of the Annual Report and report their findings to the Board and its Audit Committee.
The terms “Ericsson”, “the Group”, and unless the context reasonably requires otherwise, also “the Company”, all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries. Unless otherwise noted, numbers in parentheses refer to the previous year (i.e. 2008).
CONTENTS
13 | ||
14 | ||
16 | ||
17 | ||
20 | ||
23 | ||
25 | ||
32 | ||
33 | ||
33 | ||
35 | ||
37 | ||
40 | ||
42 | ||
42 |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Five major trends affected our markets and operations in 2009:
Accelerated mobile data growth
Data traffic in developed markets is increasing dramatically, generating sales for additional network capacity.
Network modernization and IP
Many operators started migration to all-IP core networks.
Technology shift—2G/3G/4G
In 2009, Ericsson’s 3G sales surpassed 2G, however not yet offsetting the decline in GSM. The first commercial LTE (Long-Term Evolution) network was launched.
Impact from economic conditions
Demand for telecom infrastructure started to decline mid-2009, affecting sales in Networks—particularly in some developing markets, where the general economic downturn was exacerbated by weak currencies.
Operator focus on efficiency
Sales of services increased, not only managed services but also consulting and systems integration, driven by higher network complexity and operator focus on cost reductions.
North America
During 2009, Ericsson significantly strengthened its position in North America. A number of key contracts were won: LTE with Verizon and Metro PCS, the largest managed services contract ever with Sprint and a domain supplier agreement with AT&T for wireline access products. The Company also acquired Nortel’s CDMA and LTE businesses in North America.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Tough times for the JVs
Both Sony Ericsson and ST-Ericsson were impacted by the decline in handset demand in 2009. Sony Ericsson’s situation was worsened by an aging product portfolio. Both JVs reported losses and initiated aggressive cost restructuring programs and are on track to return to report profits. New CEOs and chairmen of the Boards were appointed in both JVs.
ICT and the climate
In 2009, climate change was on the agenda for governments. During the year, Carl-Henric Svanberg addressed the UN, promoting that a focused utilization of ICT solutions could reduce CO2 emissions by 15-20 percent. The ICT industry in itself contributes less than 2 percent to the emissions.
Telecom is a long-term growth industry
The Company is convinced that the factors driving industry growth are robust and should result in continued increased demand. The growth will be driven by the combined effects of the following:
Subscriber growth in emerging markets, supported by cheaper handsets.
Increased coverage and use.
Ever faster mobile broadband communications, improving user efficiency and experiences.
Data traffic driven by IP-based mobile broadband; in developed markets driven by the convenience of mobility, and in emerging markets by the lack of fixed broadband access.
New multimedia applications and communication between various new devices.
Competition
Competition remained intense. After the consolidation in recent years, there are fewer vendors—all with comprehensive product portfolios. Ericsson has maintained or increased its market shares during the year.
Ericsson aims to be the preferred business partner to its customers with an ultimate goal of sustainable long-term value creation. Faster than market sales growth, a best-in-class operating margin and a healthy cash conversion are key to the fulfillment of this goal.
As a market leader, Ericsson combines leading technology and services skills to develop superior solutions that deliver competitive advantage. Ericsson believes that highly satisfied customers and empowered and motivated employees are key to success. Several annual key performance indicators are used regarding shareholder value creation, customer satisfaction and employee engagement.
Shareholder value creation
Although margins in 2009 remained below historic levels, the Company strengthened its market position in strategically important areas, such as: LTE/4G technology and commercial contracts, market share in the US and managed services. This combined with a strong balance sheet, efficient and leaner processes after ambitious restructuring, and continued strong customer relations provided the means for value creation also in the macro-economic headwind. The share price increased during the year and a dividend was paid for a total shareholder return of 15 percent in 2009.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Management uses several metrics to monitor performance:
Faster than market sales growth
Ericsson’s sales for comparable units decreased by 9 percent, adjusted for currency and hedging effects. Due to the effects of the economic slowdown and to weaker demand for GSM equipment, the market for GSM/WCDMA equipment and related services is estimated to have declined by more than 10 percent in USD terms. Segment Networks’ sales for comparable units in constant currencies declined in line with the market. Based on external analyses and reported results by Ericsson and its main competitors, the Company believes its market shares were well maintained. A number of breakthrough contracts were signed which should enable the Company to grow faster than the market. Sales in Professional Services grew by 8 percent in local currencies. Sales for comparable parts of Multimedia grew by 5 percent. The overall market growth for Multimedia is difficult to assess, as the segment is very fragmented.
Best-in-class operating margin
Based on reported results for 2009, the operating margin for the Group, excluding joint ventures and restructuring charges, was 12 (11) percent and remains the highest among the Company’s main competitors that are publicly listed.
Cash conversion of over 70 percent
The cash conversion rate for 2009 was 117 (92) percent, reflecting a strong focus on cash flow with a significant reduction in operating assets.
Customer satisfaction and employee engagement
In the annual independent customer satisfaction survey, approximately 9,700 employees from 380 operators around the world were polled to assess their satisfaction with Ericsson compared to its main peers. In 2009, Ericsson maintained a level of excellence.
An employee survey is also independently conducted every year. In 2009, 91 percent of employees participated in the survey. The Human Capital Index, which measures employee contribution in adding value for customers and meeting business goals, remained at a high level.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Ericsson’s vision of an all-communicating world is rapidly becoming a reality as the convergence of the telecom, internet and media sectors gains momentum. Ericsson envisions continued evolution, from having connected some 1.5 billion places to connecting more than 5 billion people and 50 billion devices. The Company envisions that anything that can benefit from being connected will be connected, mainly via IP-based wireless communications.
Mobile broadband at the forefront
Following the unprecedented growth of mobile telephony is a rapidly expanding range of mobility-based devices and applications. The accelerating penetration of smartphones and mobile broadband usage are early signs of this development. Extending network coverage and increasing data speeds, combined with devices that have large screens, intuitive user interfaces and multimedia capabilities, enhances the user experience and stimulates demand for mobile-broadband services. Once areas have ubiquitous coverage, machine-to-machine communication enables a large variety of existing services to be enhanced, such as media, governmental, utilities, industry automation, banking and transport.
Spurring socio-economic development
Ericsson’s mission is to empower people, business and society through innovation, industry leadership and a long- term commitment to the vision of an all-communicating world. In the course of making people’s lives easier and more productive, Ericsson is spurring socio-economic development and a better environment which brings the Company’s vision ever closer to reality.
Leveraging the competitive dynamics
The Company’s strategy is driven by the competitive dynamics of the telecom market and Ericsson’s position, the combination of which gives rise to three strategic imperatives:
Economies of scale and scope are prerequisites for sustainable value creation. Industry standards govern product design and functionality, making it challenging for equipment suppliers to differentiate on product capabilities alone. Therefore, the Company strives to combine technology leadership with leadership in services.
The bargaining power of equipment suppliers depends primarily on their installed base. Operators not only look for the best products but also for long-term business partnerships that they can rely on to deliver end-to-end solutions for lower total cost of ownership, the ability to minimize time-to-market, strong professional services capabilities, and access to world-class subject matter experts.
Primary end-to-end suppliers with well-entrenched local presence, backed up by global resources and a proven track record, have a competitive advantage. The Company seeks to be a full systems solutions house with a broad but integrated product portfolio combined with superior technical competence, for example in systems integration.
Guiding principles
The guiding principles for attainment of the Company’s strategic imperatives include:
customer intimacy; highly qualified employees working closely with the customer to create effective solutions
continuous process improvements and innovation
scale in delivery and technical solutions.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
FINANCIAL RESULTS OF OPERATIONS
SEK billion | Non-IFRS measures 2009 | Non-IFRS measures 2008 | Percent change | Restructuring charges 2009 | Restructuring charges 2008 | IFRS 2009 | IFRS 2008 | ||||||||||||
Net sales | 206.5 | 208.9 | –1 | % | 206.5 | 208.9 | |||||||||||||
Cost of sales | –132.1 | –132.1 | 0 | % | –4.2 | –2.5 | –136.3 | –134.6 | |||||||||||
Gross income | 74.4 | 76.8 | –3 | % | –4.2 | –2.5 | 70.2 | 74.3 | |||||||||||
Gross margin % | 36.0 | % | 36.8 | % | 34.0 | % | 35.5 | % | |||||||||||
Operating expenses | –52.9 | –56.4 | –6 | % | –7.1 | –4.2 | –60.0 | –60.6 | |||||||||||
Operating expenses as % of sales | 25.6 | % | 27.0 | % | 29.0 | % | 29.0 | % | |||||||||||
Other operating income and expenses | 3.1 | 3.0 | 4 | % | 3.1 | 3.0 | |||||||||||||
Operating income before share in earnings of JVs and associated companies | 24.6 | 23.4 | 5 | % | –11.3 | –6.7 | 13.3 | 16.7 | |||||||||||
Operating margin % before share in earnings of JVs and associated companies | 11.9 | % | 11.2 | % | 6.5 | % | 8.0 | % | |||||||||||
Share in earnings of JVs and associated companies | –6.1 | 0.4 | –1.3 | –0.9 | –7.4 | –0.4 | |||||||||||||
Operating income | 18.5 | 23.9 | –22 | % | –12.6 | –7.6 | 5.9 | 16.3 | |||||||||||
Operating margin % | 9.0 | % | 11.4 | % | 2.9 | % | 7.8 | % | |||||||||||
Financial income and expense, net | 0.3 | 1.0 | |||||||||||||||||
Taxes | –2.1 | –5.6 | |||||||||||||||||
Net income | 4.1 | 11.7 | |||||||||||||||||
EPS diluted (SEK) | 1.14 | 3.52 | |||||||||||||||||
Non-IFRS measures are used in the table above as supplemental information to the IFRS results. Since there were significant restructuring costs during 2008 and 2009, but with relatively little benefit in 2008 and consequently significant impact on reported results and margins both years, non-IFRS measures excluding restructuring charges are presented to facilitate analysis by indicating Ericsson’s underlying performance. However, these measures should not be viewed in isolation or as substitutes to the IFRS measures. For more details on the restructuring activities and corresponding charges, please see Note C5—“Expenses by Nature”.
Sales sustained in weaker market
Increased sales in the first half of 2009 were offset in the second half by impact from the economic slowdown. Overall, sales declined marginally from last year to SEK 206.5 billion. Sales for comparable units were stable year over year, i.e. excluding SEK 2.7 billion of sales from the acquired Nortel business in North America in the fourth quarter and SEK 5.2 billion in 2008 from the divested PBX and mobile platform operations. Adjusted also for effects of exchange rates and hedging, sales declined 9 percent. Lower sales in Networks were largely offset by higher sales in Professional Services and Multimedia. The economic downturn coupled with tighter credit supply impacted operator spending, in particular in certain emerging markets.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The demand varied considerably between markets. Among our largest markets, the US, China, UK and Turkey had good sales increases. Australia, India and Japan were stable, whereas sales in Brazil, Indonesia, Italy, Pakistan and Spain declined. Several important contracts were won in 2009: four LTE contracts, the appointment as fixed access domain supplier to AT&T and a services contract with Sprint in the US.
Gross margin stable excluding restructuring charges
Gross margin declined only slightly as effects of price pressure, increased share of services sales, and the initial transition costs for the Sprint contract were largely offset by cost cutting and restructuring efforts.
Operating expenses excluding restructuring charges were reduced
Operating expenses declined year-over-year as a result of restructuring activities and the spin-off of mobile platforms. The Company continues to focus on innovations and R&D. however, spending as a percentage of sales was 13 percent compared to 15 percent in 2008 due to cost reductions and efficiency gains.
Operating margin excluding share in earnings of JVs and restructuring charges increased slightly
Restructuring and other cost reduction measures have lowered the breakeven point. The operating margin in Multimedia increased significantly, reflecting a more narrow business focus.
Share in earnings of JVs and associated companies declined SEK 6.5 billion year-over-year
Both Sony Ericsson and ST-Ericsson were adversely affected by the lower handset sales during the economic downturn. Both companies have undertaken ambitious restructuring activities, and Sony Ericsson is improving its product portfolio focusing on mid- to high-end phones.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Under new management, both JVs are well on track to return to report profits.
Restructuring increased and will continue into 2010
In the beginning of the year, a program to reduce annual run rate of costs by SEK 10 billion was launched, following the 2008 program aiming at SEK 6–7 billion. In the third quarter, additional SEK 5–6 billion of savings were targeted with anticipated costs of the same magnitude. Full effects are expected to be achieved in the second half of 2010, assuming current level of operations. This year’s restructuring charges were SEK 11.3 (6.8) billion, relating to activities to reduce production costs, reduce product variants and platforms, increase the re-use of software, consolidate R&D activities, and improve administrative processes. This resulted in fewer platforms and solutions and was coupled with write-downs of capitalized development costs and acquired IPR assets for affected products.
Earnings per share (EPS) diluted down 68 percent
EPS diluted declined from SEK 3.52 last year to SEK 1.14 this year, largely driven by the losses in our JVs and the restructuring program.
Employees increased by net 3,750 in 2009
Headcount increased to 82,500 (78,750), largely as a result of new managed services contracts. About 2,500 employees from the acquired Nortel CDMA and LTE operations will be included from 2010. The additions were partly offset by reductions due to restructuring and the transfer of mobile platforms to ST-Ericsson. The competence and capabilities of the workforce is increasingly service and software oriented.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
December 31, SEK billion | 2009 | 2008 | ||
ASSETS | ||||
Non-current assets, total | 87.4 | 87.2 | ||
—of which intangible assets | 48.2 | 48.2 | ||
—of which property, plant and equipment | 9.6 | 10.0 | ||
—of which financial assets | 15.3 | 14.1 | ||
—of which deferred tax assets | 14.3 | 14.9 | ||
Current assets, total | 182.4 | 198.5 | ||
—of which inventory | 22.7 | 27.8 | ||
—of which trade receivables | 66.4 | 75.9 | ||
—of which other receivables/financing | 16.6 | 19.8 | ||
—of which short-term investments, cash and cash equivalents | 76.7 | 75.0 | ||
Total assets | 269.8 | 285.7 | ||
EQUITY AND LIABILITIES | ||||
Equity | 141.0 | 142.1 | ||
Non-current liabilities | 43.3 | 39.5 | ||
—of which post-employment benefits | 8.5 | 9.9 | ||
—of which borrowings | 30.0 | 24.9 | ||
—of which other non-current liabilities | 4.8 | 4.7 | ||
Current liabilities | 85.5 | 104.1 | ||
—of which provisions | 12.0 | 14.0 | ||
—of which current borrowings | 2.1 | 5.5 | ||
—of which trade payables | 18.9 | 23.5 | ||
—of which other current liabilities | 52.5 | 61.0 | ||
Total equity and liabilities1) | 269.8 | 285.7 |
1) | Of which interest-bearing liabilities and post-employment benefits SEK 40.7 billion (SEK 40.4 billion in 2008). |
In 2009, despite the strategic investments in ST-Ericsson and the Nortel operations and a difficult macro-economic business environment, a healthy capital structure and equity ratio were maintained and the debt maturity profile was significantly improved.
Intangible assets flat with acquisitions offset by amortizations and write-downs
Added intangible assets from the Nortel acquisition of SEK 8.8 billion were offset by amortizations and impairment losses. Impairment losses on acquired intangibles were SEK 4.3 (0) billion in 2009, attributable to restructuring.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Property, plant and equipment slightly down
The Company’s assets are largely related to test equipment for in-house manufacturing, R&D and services, including our network operations centers. A large share of manufacturing and IT operations are outsourced and most properties are leased.
Financial assets up slightly
Financial assets increased slightly, with the investment in ST-Ericsson partially offset by the reduced value of investments in JVs, attributable to their reported losses.
Customer financing did not increase and deferred tax assets were slightly reduced with utilization of tax loss carryforwards.
Strong reductions in receivables and inventory
Considerable progress was made in the second half to achieve stable days sales outstanding (DSO) at 106 and inventory days at 68. However, targeted levels have not yet been reached and the improvement efforts will be continued.
Cash remained strong at SEK 77 (75) billion
Due to a strong cash flow, a good level of cash and short-term investments was maintained. A strong liquidity is deemed important to keep flexibility for volatility in sales and cash flows and to be able to take advantage of opportunities in the market.
Equity down SEK 1.1 billion
Stockholders’ equity decreased by SEK 1.1 billion. The net income of SEK 4.1 billion and a capital increase of SEK 0.7 billion, attributable to the employee stock purchase plan, were more than offset by the dividend of SEK 6.3 billion. However, the equity ratio was maintained at a healthy level of 52 (50) percent.
Return on equity 2.6 (8.2) percent
The decline in return on equity (ROE) was primarily a consequence of JV losses and the restructuring charges.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Return on capital employed 4.3 (11.3) percent
The return on capital employed (ROCE) declined to 4.3 percent. Excluding restructuring charges, ROCE would have been 11.2 (15.5) percent.
Pension liabilities down SEK 1.4 billion after employer contributions
Post-employment benefits related to defined benefit plans declined to SEK 8.5 (9.9) billion in 2009. A liability increase of SEK 1.2 billion, due to lower interest rates, was more than offset by higher values of plan assets of SEK 1.2 billion and employer contributions of SEK 2.1 billion to trust funds. The funded ratio (plan assets as percentage of defined benefit obligations) increased to 76 (68) percent.
Provisions declined due to larger cash outlays
The total amount for provisions declined to SEK 12.4 (14.4) billion, largely attributable to SEK 4.7 billion of larger cash outlays than last year, of which SEK 2.5 billion related to restructuring.
Trade payables declined by SEK 4.6 billion
The number of payable days improved some from 55 to 57 days, close to the target of 60 days or more, despite the macroeconomic conditions, where some suppliers have had to be supported with shorter payment terms in a tight credit market.
Debt maturity profile improved
During the year, the Company increased borrowings by SEK 1.7 billion and considerably improved the maturity profile. Debt maturing in 2009 of USD 0.5 billion and in 2010 of EUR 0.5 billion were replaced with a 7-year loan of USD 0.6 billion and a 4-year loan of EUR 0.6 billion. In addition to borrowings, the Company also has unutilized committed credit facilities of USD 2.0 billion available, maturing in 2014.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Credit Ratings
Credit ratings were unchanged during 2009, remaining at “solid investment grade”: Moody’s at Baa1 and Standard & Poor’s at BBB+.
Sony Ericsson borrowings guaranteed
Ericsson and SONY have on a 50/50 basis guaranteed EUR 350 million of borrowings for general business purposes, as improved liquidity was needed following Sony Ericsson’s weak results and the restructuring program. The amount guaranteed is not deemed significant, considering Ericsson’s financial position.
Off-balance sheet arrangements
There are currently no material off-balance sheet arrangements that have, or would be reasonably likely to have, a current or anticipated effect on the Company’s financial condition, revenues, expenses, result of operations, liquidity, capital expenditures or capital resources.
JANUARY–DECEMBER
SEK billion | 2009 | 2008 | ||||
Net income | 4.1 | 11.7 | ||||
Income reconciled to cash | 21.0 | 26.0 | ||||
Changes in operating net assets | 3.5 | –2.0 | ||||
Cash flow from operating activities | 24.5 | 24.0 | ||||
Cash flow from investing activities | –37.5 | –8.5 | ||||
—of which capital expenditures, sales of PP&E, product development | –4.9 | –4.1 | ||||
—of which acquisitions/divestments, net | –18.1 | 1.8 | ||||
—of which short-term investments for cash management purposes and other investing activities | –14.5 | –6.2 | ||||
Cash flow before financing activities | –13.0 | 15.5 | ||||
Cash flow from financing activities | –1.7 | –7.2 | ||||
Cash conversion (Cash flow from operating activities divided by income reconciled to cash) | 117 | % | 92 | % | ||
Gross cash (Cash, cash equivalents and short-term investments) | 76.7 | 75.0 | ||||
Net Cash (Gross cash less interest-bearing liabilities and post-employment benefits) | 36.1 | 34.7 | ||||
Cash flow from operations stable at SEK 24.5 billion
A lower net income was offset by non-cash items, such as the losses in JVs, depreciation, amortization of intangibles, largely related to restructuring, and strong working capital reductions, resulting in a similar cash flow from operations as in 2008.
Cash out from investing activities SEK –37.5 billion
Cash outlays for recurring investing activities increased slightly to SEK –4.9 billion.
Acquisitions/divestments during the year were net SEK –18.1 billion, with the major items being the formation of the ST-Ericsson joint venture, the minority stake in LHS and Nortel’s CDMA and LTE businesses.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Cash outflow for short-term investments for cash management purposes and other investing activities was net SEK –14.5 billion, largely attributable to SEK –17.1 billion of short-term investments driven by the strong cash flow from operations.
Cash flow from financing activities SEK –1.7 billion
Dividends paid of SEK –6.3 billion were partly offset by increased borrowings of SEK 4.3 billion and other financing activities of SEK 0.2 billion.
Strong cash conversion at 117 (92) percent
The cash conversion rate was 117 (92) percent, well above the target level of 70 percent. The percentage increase was largely attributable to the strong improvement in operating net assets and the lower income reconciled to cash.
Restricted cash
Cash balances in certain countries with restrictions on transfers of funds to the Parent Company as cash dividends, loans or advances amounted to SEK 8.9 (8.2) billion.
Capital expenditures
Amounts for annual capital expenditures are normally around two percent of sales. This level corresponds to the needs for keeping and maintaining the current capacity level, including the continuous introduction of new technology and methods. The expenditures are largely related to test equipment in R&D units and network operations centers and to production and test equipment in manufacturing and repair operations.
The Board reviews the Company’s investment plans and proposals.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CAPITAL EXPENDITURES 2005–2009
SEK billion | 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||
Capital expenditures | 4.0 | 4.1 | 4.3 | 3.8 | 3.4 | ||||||||||
—of which in Sweden | 1.3 | 1.6 | 1.3 | 1.0 | 1.0 | ||||||||||
as percent of net sales | 1.9 | % | 2.0 | % | 2.3 | % | 2.2 | % | 2.2 | % |
Capital expenditures in relation to sales are expected to remain at about two percent. The Company has sufficient cash and cash generation capacity to fund expected capital expenditures as well as the acquisitions of the Nortel/GSM operations and Pride Spa and the contribution to the Swedish pension trust fund without external borrowings.
We believe that the Company’s property, plant and equipment and the facilities that the Company now occupies are suitable for its present needs in most locations. As of December 31, 2009, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.
Operator investments are increasing in mobile broadband, driven by a strong ramp up of data traffic. The broadband growth has not yet offset the decline in GSM sales, which in 2009 was accelerated due to the current economic climate. Operator investment patterns varied significantly between regions and countries. A number of developing markets became increasingly cautious, while others, including large markets such as China and the US, showed good growth. There was a continued strong demand for services targeting our customers’ operational efficiency.
Regional overview
SALES PER REGION AND SEGMENT 2009
SEK billion | Net- works | Prof. Services | Multi- media | Total | Percent change | ||||||||||
Western Europe | 23.8 | 18.3 | 2.4 | 44.6 | –14 | % | |||||||||
CEMA1) | 32.7 | 12.9 | 5.1 | 50.7 | –4 | % | |||||||||
Asia Pacific | 50.5 | 12.2 | 3.1 | 65.8 | 4 | % | |||||||||
Latin America | 13.0 | 5.9 | 1.1 | 20.1 | –13 | % | |||||||||
North America | 17.1 | 6.7 | 1.6 | 25.4 | 41 | % | |||||||||
Total | 137.1 | 56.1 | 13.3 | 206.5 | –1 | % | |||||||||
Share of total | 66.4 | % | 27.2 | % | 6.4 | % | 100 | % | |||||||
Percent Change | –3 | % | 15 | % | 5 | % | –1 | % | |||||||
1) | Central and Eastern Europe, Middle East and Africa. |
Sales in Western Europe decreased by –6 (–2) percent for comparable unitswith growth of professional services and broadband more than offset by lower GSM sales. The growing demand for mobile broadband and professional services is expected to continue, as is the decline for GSM. The macro-economic development led to a weaker demand for replacement handsets but mobile phone usage appeared to be largely unaffected and mobile broadband traffic continued to show strong growth.
In Central and Eastern Europe, Middle East and Africa (CEMA), sales decreased by –4 (+9) percent, despite continued network buildouts in a number of markets, as the region has been more affected than most by the macroeconomic development. Many countries within the CEMA region have low penetration levels and consumer demand remains robust even if some operators are currently unable or unwilling to invest at healthy levels. A similar situation is seen in other emerging markets such as Latin America and Asia Pacific.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Asia Pacific remained Ericsson’s largest region with a sales increase of +4 (+16) percent,fuelled by continued good demand in China and India. The Company has a leading position in India, where subscribers are expected to ultimately exceed one billion from the current 496 million. Auctions for 3G licenses in India were postponed to 2010. Although Chinese suppliers have significantly increased their domestic market share, Ericsson maintains a strong market position in China. Political unrest and effects of the economic slowdown negatively affected sales growth in certain countries, such as Indonesia, Pakistan and Bangladesh.
Latin American sales decreased by –13 (+25) percent,reflecting lower demand across the region compared to strong growth over the last couple of years. Demand for mobile broadband continues to develop well, but delays in licensing of new spectrum are causing operators to hold back investments in new technologies and applications.
North American sales increased by +41 (+34) percent, mainly driven by demand for mobile broadband and professional services. With a number of breakthrough contracts for LTE, fixed access and services and the acquisition of Nortel’s CDMA and LTE businesses, the Company is well positioned for continued growth and is now the largest supplier of technology and services to network operators in the region.
Market shares were well maintained and the Company retains its ambition to grow faster than the market.
Networks
Overall operator demand for mobile GSM/WCDMA network equipment and related services is estimated to have declined by more than 10 percent in 2009. At the same time consumer demand continued to grow, the number of mobile subscriptions increased to a total of almost 4.6 billion and data traffic accelerated.
Network sales were down by –3 (+10) percent to SEK 137.1 (142.0) billion. Sales for comparable units declined by 5 percent, i.e. excluding SEK 2.7 billion of sales from acquired Nortel operations. Adjusted also for currency and hedge effects, sales declined in line with the market. Lower GSM sales, particularly in high-growth markets such as China, contributed to the decline. Sales in WCDMA continued to show good growth driven by demand for mobile broadband.
GSM shipments reached their all-time-high volume in 2008. This year, Ericsson’s WCDMA sales surpassed that of GSM for the first time. WCDMA growth did not offset the GSM decline.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Mobile broadband continues to be in focus as more and more networks are being upgraded. Smartphones, netbooks and notebooks drive data traffic and revenues for operators, resulting in demand for network expansions and upgrades.
The global network coverage from WCDMA is still less than half of that of GSM. In China, the 3G licenses were awarded early 2009. Ericsson participated in China Unicom’s WCDMA rollout, the largest and fastest ever. Another achievement was the world’s largest live network upgrade in record time for Vodafone Essar in India, reaching a peak replacement rate of one radio base station every minute. India is expected to award 3G licenses in 2010.
For the next generation wireless technology, 4G/LTE, Ericsson won key contracts with Verizon, Metro PCS, NTT DoCoMo and TeliaSonera. The industry support for LTE is very strong and this technology is expected to play an important role in many markets with suitable spectrum. Ericsson is leading the transformation and convergence of the core network with the largest installed base of all-IP networks based on Softswitch and IP Multimedia System (IMS) technology.
The LTE core network is all-IP. To meet the demand for this new all-IP core, Ericsson has introduced the industry’s most comprehensive Evolved Packet Core portfolio which will support LTE network introduction. The portfolio is built on Ericsson’s existing packet core products and new functionality will be introduced through software upgrades.
The increased data traffic driven by mobile broadband continues to create demand for transmission capacity for mobile backhaul. Ericsson offers a wide range of solutions to remove bottlenecks in the transport network. Successful mobile backhaul networks were completed in Turkey, Sweden, Canada and the US in 2009. Sales of optical and microwave transmission solutions to fixed as well as mobile operators developed in line with the market.
In the fixed access area, the Company had break-in wins for fiber (GPON) connection in the Americas and in China.
Operators are evolving from legacy circuit-switched networks to all-IP, in both fixed and mobile networks, and this creates opportunities for Ericsson. A new Silicon Valley campus has been established with the intention of driving the convergence of IP and mobile networks and reaching out to new partners in mobile broadband markets. The Company remains optimistic regarding growth opportunities for all-IP networks with IP routing, IMS and transmission.
With the acquisition of the Nortel assets for CDMA and LTE, the Company strengthened its ability to serve North America’s mobile operators. The acquisition significantly expands Ericsson’s footprint in this market, particularly as operators in this region are emerging as early adopters of LTE technology. The agreement also includes certain patents and patent licenses relating to CDMA and LTE. Going forward, R&D expenses are expected to be relatively low in CDMA compared with other technologies.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Professional Services
Professional Services sales continued to show good growth, increasing by 15 (14) percent to SEK 56.1 (49.0) billion. Growth measured in local currencies amounted to 8 (13) percent. However, sales were negatively affected by the reduced scope of a managed services agreement and somewhat lower sales of project-related services, reflecting the slowdown in network sales. Managed services was one of the main drivers for the sales increase, growing by 22 (17) percent to SEK 17.4 (14.3) billion, significantly outpacing the market. More than 60 percent of revenues in Professional Services are now of a recurring nature.
As the professional services market develops, there are many opportunities for project business, but operators are also seeking longer-term partnerships for a competitive edge. Combined with an expanding managed services market, this should help sustain a healthy level of recurring business for Ericsson.
Ericsson is the clear leader in managed services and at year end 2009 Ericsson-managed network operations served over 370 (250) million users. Despite a higher proportion of managed services sales from new contracts with associated start-up costs, Professional Services’ operating margin remained in the mid-teens at 15 (16) percent. This is due to increased efficiency in the delivery organization.
Ericsson won several milestone contracts for managed services during the year. These include Sprint and Zain, the first full-scope managed services contracts in North America and Africa—not only firsts for Ericsson but also for the industry. The acquisition of Nortel’s CDMA and LTE businesses creates opportunities for synergies in the services operations in North America.
Consulting and systems integration also had encouraging developments during the year, particularly in revenue assurance and support systems transformation, exemplified by a multi-country contract for revenue assurance with Mobilkom Group of Austria and a service assurance contract with Wataniya in Algeria. Operational consulting is also an area of growth, exemplified by a contract with Claro in Guatemala (fixed and wireless).
Common challenges faced by operators today are business growth, operational efficiency and network evolution towards IP. In a converging communications world, new complexity in business models must also be added to the challenges. Services expertise and experience, in combination with technology leadership and business understanding, enable the Company to take on a prime integrator role in complex deployment and transformation projects.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Multimedia
Multimedia sales increased 5 percent for comparable units with revenue management negatively affected during the second half of the year by lower network deployments. The segment continues to have attractive prospects for sales growth to network operators and service providers and the Company is well positioned to benefit from a market rebound.
Operating margin improved to 8 (0) percent while EBITDA margin doubled to 16 percent with stringent cost control and the operational benefits of a more concentrated business, i.e. excluding PBX systems and mobile platforms, focusing on TV solutions, business support systems and revenue management.
Solution area TV performed well during 2009 in what proved to be a challenging market environment. The Company strengthened its position in the IPTV market with a number of wins for its industry-leading IMS-enabled middleware, where full systems integration and solutions delivery is also provided. The product range in the Video on Demand and Content Management area was extended and a new generation of encoding platforms was introduced, redefining the achievable limits of compression performance. Industry recognition of market leadership was reinforced by three prestigious awards at IBC: Best IPTV solution, Best Content Management solution and Best Compression solution.
As operators modernize and transform their networks to all-IP, with more and more services added, the importance of business support systems increases. Ericsson’s business support systems enable management of subscribers, provisioning of services and subscriptions, collection of usage data, charging and invoicing for services used and settlements with business partners in the service value chain. Business support systems presence was increased by leveraging the strong market position in Networks and Professional Services, especially systems integration, with a broad solutions portfolio in revenue management, provisioning and service delivery.
More than 800 million subscriptions have been activated through Ericsson’s provisioning and service delivery platforms and 1 billion subscribers are now charged and billed through Ericsson’s Revenue Management solutions. A Dynamic Discount Solution (DDS), the first telecom yield management system, was launched and deployed in a number of high-growth markets.
Ericsson advanced its leadership in mobile payment solutions and is first with a global solution to power application stores with mobile web payment capabilities. An Online Payment service was launched with great success through 60 operators in 15 markets. Ericsson was awarded the Best Transactions Provider Award—Mobile Entertainment 2009 and received a high ranking in the Forrester Messaging Wave Report.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
There are opportunities for network operators and service providers to increase the value of their offerings toward consumers by taking advantage of the transformation to all-IP. Ericsson’s introduction of the two IP-based applications Rich Communication Suite and Business Communication Suite has attracted significant market interest. They enable Ericsson’s customers to provide services regardless of handset model or operating system. Ericsson also reinforced its leading position in Location Based Services with a number of new contracts. In addition, a Real Time Traffic Information service was launched in Europe and Asia.
The Company is making good progress in building a strong portfolio of applications enabling network operators and service providers to grow revenues and expand into new value chains beyond traditional telecom services. Ericsson continues to invest in new multimedia opportunities which may affect profitability on occasion. Most earlier investments are starting to pay off.
Joint Ventures
Sony Ericsson
The global handset market is believed to have declined by 10 percent in unit shipments, mainly due to weakening demand for mid- to high-end feature phones—an important segment for Sony Ericsson with its higher than average market share exposure. As a consequence, Sony Ericsson’s market share decreased from ~7 percent to less than 5 percent.
Units shipped declined by 41 percent to 57.1 (96.6) million while the average selling price increased by 3 percent to EUR 119 (116). Sales decreased by 40 percent from EUR 11.2 billion to 6.8 billion. Gross margin declined significantly year-on-year but improved during the year as benefits of cost reductions and new products started to materialize.
Income before taxes, excluding restructuring charges, was a loss of EUR 878 million. The income gradually improved during the year from an improved gross margin and reduced operating expenses. Ericsson’s share in Sony Ericsson’s income before taxes was SEK –5.7 billion.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
In the second half of the year, borrowing facilities of EUR 455 million were secured to improve liquidity. The parent companies guaranteed EUR 350 million of these facilities on a 50/50 basis without joint responsibility. EUR 255 million were utilized and EUR 200 million remain available as a backup facility. The net cash position was EUR 620 million at year end.
Programs initiated 2008 to lower annual operating expenses by EUR 880 million will continue, with full benefits expected in the second half of 2010. Restructuring charges are estimated to be well within the previously announced EUR 500 million.
Sir Howard Stringer, Chairman, CEO and President of SONY Corporation succeeded Carl-Henric Svanberg as Chairman of the Board and Bert Nordberg, Executive Vice President and Head of Ericsson Silicon Valley, succeeded Dick Komiyama as President and CEO.
ST-Ericsson
Proforma sales declined 25 percent from USD 3.6 billion to 2.7 billion. Sales grew progressively during the year, mainly due to good performance in Asia. The joint venture remains a key supplier to four of the five largest mobile phone manufacturers in the world.
Adjusted operating losses for the full year amounted to USD 440 million but results improved progressively during the year. The first quarter saw a proforma loss of USD 149 million. This was followed by losses of USD 165 million in the second quarter, USD 77 million in the third quarter and USD 50 million in the fourth quarter. The improvements reflect a tight control of product costs and operating expenses as well as the positive effects of cost reduction activities.
ST-Ericsson is reporting in US-GAAP. Ericsson’s share in ST-Ericsson’s income before tax, adjusted to IFRS, was SEK –1.8 billion. Adjustments for IFRS-compliance mainly consist of capitalization of R&D expenses for hardware development.
The cost reduction programs are on schedule and target USD 595 million savings per year, of which USD 250 million were achieved by end of 2009. The full effects of the cost-reduction activities are expected in the second half of 2010.
A new product roadmap for market leadership has been established by combining the strengths of parent companies STMicroelectronics and Ericsson. ST-Ericsson’s market position was further enhanced by securing leadership in the fast growing TD-SCDMA technology for the Chinese market and the announcement of a close cooperation with Nokia to deliver platforms for new smartphones.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Wireless microelectronics industry veteran Gilles Delfassy succeeded Alain Dutheil as President and CEO after the successful integration of the JV operations. Hans Vestberg succeeded Carl-Henric Svanberg as Chairman of the Board.
In the fall of 2007, Ericsson was named a defendant in three putative class action suits filed in the United States District Court for the Southern District of New York. The complaints alleged violations of US securities laws in connection with Ericsson’s October 2007 profit warning. In February 2008, the court consolidated the three class actions into one. In June 2008, Ericsson filed a motion to dismiss the complaint. In December, the court granted the motion and dismissed the case. In early January 2009, the plaintiffs appealed the decision to dismiss the case. On October 8, 2009, the Second Circuit affirmed the district court and dismissed the case. Consequently, there are no pending legal actions that relate to Ericsson’s October 2007 profit warning.
In October 2005, Ericsson filed a complaint with the European Commission requesting that it investigate and stop US-based Qualcomm’s anti-competitive conduct in the licensing of essential patents for 3G mobile technology. In November 2009, the complaints were withdrawn and the investigation closed.
Together with most of the mobile communications industry, Ericsson has been named a defendant in two class action lawsuits in the US, where plaintiffs allege that adverse health effects could be associated with mobile phone usage. The cases are currently pending in the federal court in Pennsylvania and the Superior Court of the District of Columbia. In September 2008, the federal court in Pennsylvania dismissed plaintiffs’ claims as preempted by federal law. Plaintiffs are appealing this decision to the Third Circuit Court of Appeals. The District of Columbia case is stayed pending the outcome of an appeal in a related case.
In April 2007, an Australian company, QPSX Developments Pty Ltd., filed a patent infringement lawsuit against Ericsson and other defendants in the US, alleging that Ericsson infringed a patent related to asynchronous transfer mode (ATM) technology. Currently, all of the asserted patent claims have been rejected as invalid by an examiner in the US Patent and Trademark Office in connection with a reexamination proceeding. QPSX is appealing that decision. On August 27, 2009, the court granted Ericsson’s motion to stay pending the outcome of the reexamination proceeding.
Swedish fiscal authorities have disallowed deductions for sales commission payments via external service companies to sales agents in certain countries. Most of the taxes have already been paid. The decision covering the fiscal year 1999 was appealed. In December 2006, the County Administrative Court in Stockholm rendered a
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
judgment in favor of the fiscal authorities. The Administrative Court of Appeal in Stockholm affirmed the County Administrative Court’s judgment. The judgment has been appealed to the Administrative Supreme Court.
For more information on risks related to litigations, see chapter Risk Factors.
Material contractual obligations are outlined in Note C33 “Contractual obligations”. These are primarily related to operating leases for office and production facilities, purchase contracts for outsourced manufacturing, R&D and IT operations, and the purchase of components for the Company’s own manufacturing.
Ericsson is party to certain agreements, which include provisions that may take effect or be altered or invalidated by a change in control of the Company as a result of a public takeover offer. However, none of the agreements currently in effect would entail any material consequence to Ericsson due to a change in control of the Company.
In accordance with the Swedish Code of Corporate Governance (the Code), a separate Corporate Governance Report including an Internal Control section has been prepared. The Company is committed to complying with best-practice corporate governance standards on a global level wherever possible. This includes continued compliance with the corporate governance provisions expressed by the Code.
An ethical business
Ericsson’s Code of Business Ethics summarizes the Group’s fundamental policies and directives governing its relationships internally, with its stakeholders and with others. It also sets out how the Group works to achieve and maintain its high standards. There have been no amendments or waivers to Ericsson’s Code of Business Ethics for any Director, member of management or other employee.
Board of Directors 2009/2010
The Annual General Meeting on April 22, 2009, re-elected Michael Treschow as Chairman of the Board and Roxanne S. Austin, Sir Peter L. Bonfield, Börje Ekholm, Ulf J. Johansson, Sverker Martin-Löf, Nancy McKinstry, Anders Nyrén, Carl-Henric Svanberg, and Marcus Wallenberg as Directors of the Board. Anna Guldstrand, Jan Hedlund and Karin Åberg were appointed as union representatives with Monica Bergström, Pehr Claesson and Kristina Davidsson as deputies.
Management
In 2009, Hans Vestberg was appointed new President and CEO, succeeding Carl-Henric Svanberg as of January 1, 2010. The President and CEO is supported by the Group Management Team which, in addition to the President and CEO, consists of heads of Group Functions and heads of business units.
A management system is implemented to ensure that the business is well managed and able to fulfill the objectives of major stakeholders within established risk limits. The system also monitors internal control and compliance with applicable laws, listing requirements and governance codes.
Remuneration
Fees to the members of the Board of Directors and the remuneration of management as well as the 2009 guidelines for remuneration to senior management are reported in Notes to the Consolidated Financial Statements—Note C29, “Information Regarding Members of the Board of Directors, the Management and Employees”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
As of December 31, 2009, there were no loans outstanding from and no guarantees issued to or assumed by Ericsson for the benefit of any member of the Board of Directors or senior management.
All relevant information regarding remuneration can be found in chapter Remuneration Report.
The Board of Directors’ proposal for guidelines for remuneration to senior management
The Board of Directors proposes the following guidelines for remuneration and other employment terms for the senior management for the period up to the 2011 Annual General Meeting. Compared to the guidelines resolved by the 2009 Annual General Meeting, these guidelines have been restructured and rephrased to better demonstrate the basic principles for remuneration within the Ericsson Group.
Details of how we deliver on our principles and policy, including information on previously decided long-term variable remuneration that has not yet become due for payment, can be found in the Remuneration Report and in Note C29, “Information regarding Members of the Board of Directors, the Management and Employees” in the Annual Report 2009.
2010 Remuneration Policy
Remuneration at Ericsson is based on the principles of performance, competitiveness and fairness. These principles and good practice in Sweden guide our policy to:
Attract and retain highly competent, performing and motivated people that have the ability, experience and skill to deliver on the Ericsson strategy.
Encourage behavior consistent with Ericsson’s culture and core values of professionalism, respect and perseverance.
Ensure fairness in reward by delivering total remuneration that is appropriate but not excessive.
Ensure a total compensation mix of fixed and variable remuneration and benefits that reflects the Company´s principles and is competitive where Ericsson competes for talent.
Encourage variable remuneration which, first, aligns employees with clear and relevant targets, second, reinforces performance and, third, enables flexible remuneration costs.
Ensure that all variable remuneration plans have maximum award and vesting limits.
Encourage employees to deliver sustained performance and build up a personal shareholding in Ericsson, aligning the interests of shareholders and employees.
Communicate clearly to both employees and shareholders how Ericsson translates remuneration principles and policy into practice.
Group Management
For senior management consisting of the Executive Leadership Team, including the President and CEO, in the following referred to as the “Group Management”, total remuneration consists of fixed salary, short- and long-term variable remuneration, pension and other benefits. Furthermore, the following guidelines apply for Group Management:
Variable remuneration is through cash and stock-based programs awarded against specific business targets derived from the long-term business plan approved by the Board of Directors. Targets may include financial targets at either corporate or unit level, operational targets, employee motivation targets and customer satisfaction targets.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
With the current composition of Group Management, the Company’s cost during 2010 for the variable remuneration of Group Management can, at a constant share price, amount to between 0 and 140 percent of the aggregate fixed salary cost, all excluding social security costs.
All benefits, including pension benefits, follow the competitive practice in the home country taking total compensation into account. The retirement age is normally 60 to 65 years of age.
By way of exception, additional arrangements can be made when deemed required. Such additional arrangement shall be limited in time and shall not exceed a period of 36 months and two times the remuneration that the individual concerned would have received had no additional arrangement been made.
The mutual notice period may be no more than six months. Upon termination of employment by the Company, severance pay amounting to a maximum of 18 months fixed salary is paid. Notice of termination given by the employee due to significant structural changes, or other events that in a determining manner affect the content of work or the condition for the position, is equated with notice of termination served by the Company.
SUSTAINABILITY AND CORPORATE RESPONSIBILITY
The Company has implemented strong social, environmental and ethical standards supporting risk management and value creation. This commitment generates positive business impacts that benefit society.
Ericsson’s approach to Sustainability and Corporate Responsibility (CR) is integrated into its core business operations and in its relationships with stakeholders. The Board of Directors considers these aspects in governance decision-making. Group level policies and directives ensure consistency across global operations.
Ericsson publishes an annual Sustainability and CR Report which provides additional information.
Minimizing risk
Responsible business practices
Ericsson supports the UN Global Compact and endorses its ten principles regarding human and labor rights, anti-corruption and environmental protection. The Ericsson Group Management System includes policies and directives that cover responsible business practices, such as the Code of Business Ethics, Code of Conduct (CoC), anti-corruption and environmental management. It is reinforced by training, workshops and monitoring, including a global assessment program run by an external assurance provider in which CR criteria represent approximately 20 percent of the total areas assessed.
Supply chain
Suppliers must comply with Ericsson’s CoC and Environmental Requirements. The Company performs regular audits and works with suppliers to ensure measurable and continuous improvements. Priorities from a risk model include network roll- out, tower manufacturing and logistics. Findings are followed up to ensure that lasting improvements are made. One common finding is suppliers’ insufficient routines for ensuring compliance to the CoC requirements in their supply chain.
Design for Environment
Controls are in place to ensure compliance with environmental regulations, e.g. the EU regulation for Registration, Evaluation, Authorization and restriction of Chemicals (REACH). Ericsson’s List of Banned and Restricted Substances was updated in 2009. The Company has to date produced more than 10 million lead-free soldered printed board assemblies with reliability equal to lead-soldered boards.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Take-back
Ericsson Ecology Management and Product Take-back is a global initiative to take responsibility of products at the end of their life. Close to 100 percent of decommissioned equipment is recycled, exceeding the Waste from Electronic and Electrical Equipment Directive (WEEE) stipulation of 75 percent. During 2009 more than 5,300 tons were collected.
Radio waves and health
Ericsson provides public information on radio waves and health, and supports independent research to further increase knowledge in this area. Ericsson currently co-sponsors about 40 ongoing research projects related to electromagnetic fields, radio waves and health; over 90 studies have been supported since 1996. Independent expert groups and public health authorities, including the World Health Organization, have reviewed the total amount of research and consistently concluded that the balance of evidence does not demonstrate any health effects associated with radio wave exposure from either mobile phones or radio base stations.
Creating value
The environmental opportunity
Information and Communication Technology (ICT) represents about two percent of global CO2 emissions, but can potentially offset a significant portion of the remaining 98 percent from other sectors. Ericsson takes active measures to ensure that its own carbon footprint will be reduced. A carbon footprint reduction target was set in 2008 to reduce emissions relative to products sold by 40 percent over five years, from in-house activities and the life-cycle impacts of products. In 2009, Ericsson exceeded the annual 10 percent reduction target by:
• | A 20 percent reduction in direct emissions from Ericsson activities, through reducing product weight, increasing the share of surface mode transports to 60 percent, and by reducing business travel by approximately 10 percent globally. This led to a 200,000 ton CO2 reduction. |
• | A 15 percent reduction in indirect emissions from products in operation was achieved. Reducing the energy consumption of products sold will lead to a 3.5 million ton CO2 reduction over the product lifetime. |
In addition, part of Ericsson’s sustainability strategy is to focus on the role that broadband can play in helping to offset global CO2 emissions. In 2009, Ericsson focused on sustainable city solutions, and partnered with WWF Sweden to assess the positive impact that ICT has in the creation of low-carbon economies, co-publishing recommendations for policy makers.
Sony Ericsson launched its Greenheart phone, with an in-phone manual, recycled plastics, energy efficient display and waterbased paints decreasing the overall CO2 emissions of the phone by 15 percent.
Meeting the Millennium Development Goals
Mobile connectivity fuels economic growth, which is particularly vital for the billions of people living at the base of the economic pyramid—the markets of the future. Ericsson is committed to using its technology and competence to help achieve the UN Millennium Development Goals (MDGs), and customer engagement is part of its strategy to meet this aim.
In 2009, a monitoring and evaluation study, conducted in cooperation with Columbia University, revealed that access to mobile communications in the Millennium Villages has concretely contributed to the achievement of the MDGs. It also showed that mobile applications are especially well suited for collecting information and monitoring critical areas such as health, education, security and small business development.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Ericsson Response
Ericsson Response is a global employee volunteer initiative to rapidly roll out communication solutions and provide telecoms experts to assist disaster relief operations. Ericsson Response cooperates with the UN Office for the Coordination of Humanitarian Affairs, the UN World Food Programme and the International Federation of Red Cross and Red Crescent Societies (IFRC).
In 2009, support was provided to relief workers in saving children in Southern Sudan and after heavy flooding in Panama. Continued support was given to the UN in establishing operations in the Central African Republic and in the Democratic Republic of Congo.
In recognition of performance
The Millennium Villages Project received a Global Telecoms Business Innovation Award.
Ericsson China was named the “China Green Benchmark Company” for the second year in a row. Ericsson was also recognized as the “Green Pioneer” at the 2009 “Korea-EU Industrial Cooperation Day”. In the UK Brand Emissions Leaders survey, Ericsson was named one of the brand leaders in reducing its carbon emissions.
Ericsson’s Board of Directors is actively engaged in the Company’s risk management. Risks related to set long-term objectives are discussed and strategies formally approved by the Board as part of the annual strategy process. Risks related to annual targets for the Company are also reviewed by the Board and then monitored continuously during the year.
Operational risk management is integrated within the Ericsson Group Management System to ensure effectiveness, efficiency, business continuity and compliance with corporate governance, legal and other requirements. Certain transactional risks require specific Board approval, e.g. material acquisitions, management remuneration, borrowing or customer finance in excess of pre-defined limits.
For more information on risks related to Ericsson’s business, see chapter Risk Factors.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Strategic and tactical risks
In the annual strategy and target setting process, objectives are set for the next five years, risks and opportunities are assessed and strategies are developed to achieve the objectives. To ensure that actions are taken to realize the strategies, focus areas are identified in target setting and planning for the coming year.
In 2009, the general economic downturn in 2008–2009 and the consequences for the business were assessed in relation to both strategy and target setting. For the setting of long-term objectives, important industry and market fundamentals were analyzed and risks and opportunities evaluated. Near-term, a continued focus on cost management and a strong liquidity were emphasized due to the increased difficulties of forecasting customer demand.
Risks and opportunities were identified and analyzed in the following balanced scorecard perspectives:
Financial perspective
Top line growth: the decline caused by reduction in 2G spend has yet to be offset by growth in 3G and LTE driven by data traffic in mobile broadband networks. Ericsson will focus on converged solutions, IMS, multi-standard radios and services plus opportunities in transmission and evolved EDGE.
Margin improvement: addressed by platform consolidation, software reuse, reduced number of sites and rapid transformation of transferred managed services operations and integration of acquired Nortel units.
Cash flow: continued focus on working capital improvements. A strong cash position is deemed important for flexibility to execute on potential market opportunities.
JVs: continued cooperation with JVs and co-owners needed to make them profitable again as soon as possible.
Customer perspective
Convergence of the telecom, datacom and media industries results in new forms of competition and customers. Ericsson will focus on competitive offerings for mobile broadband, converged core solutions, network management systems and systems integration.
The competitive landscape is constantly changing, as consolidation continues among customers and vendors. Continued investments in R&D for premium, cost-effective and future-proof solutions are essential. Customer intimacy for network planning and migration is key for forging customer partnerships.
Ericsson’s installed base is an important asset for sales of upgrades, network convergence and systems integration. Now also Nortel’s US customer base is added, providing additional opportunities in CDMA and LTE.
Continuous follow-up of quality of delivered products and services to be maintained to ensure customer satisfaction.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Market position perspective
Continued strong competition in the market is addressed through cost reductions and premium end-to-end solutions, based on continued leadership in R&D and services.
Market leadership is being safeguarded through rapid technological development and establishment of a key player position in network transformation—IP, mobile broadband, multimedia and consulting.
Backhaul demand is growing, driven by strong data traffic. Ericsson will seize this opportunity by harvesting its leading microwave position.
The Company will also leverage the broader product portfolio created through acquisitions, promote OneVoice and IMS for LTE networks, and continue its strong Design for Environment program to lower operators’ cost of ownership and drive a positive environmental impact.
The Company will capitalize on the dramatic improvement of its US footprint and its Silicon Valley presence.
The joint ventures will need to execute their restructuring programs and also address multiple operating systems and new market players, e.g. Google/Android. Sony Ericsson will focus its product portfolio more on high-end handsets.
Operations and people perspectives
Restructuring and other activities have been defined for margin protection, including industrialization of managed services.
Continued focus in R&D on shortened lead times for product/solution development.
Increased flexibility and responsiveness will be achieved through efforts to shorten lead times also for delivery of hardware and software.
The Company must ensure it has top competence in key technology areas and systems integration.
Empowerment and remuneration are important aspects to continue to be a competitive and attractive employer.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operational and financial risks
Operational risks are owned and managed by operational units. Risk management is embedded in various process controls, such as decision tollgates and approvals. Certain cross-process risks, such as information security/IT, corporate responsibility and business continuity as well as insurable risks are centrally coordinated. Financial risk management is governed by a Group policy and carried out by the Treasury and Customer Finance functions, both supervised by the Finance Committee of the Board of Directors. The policy governs risk exposures related to foreign exchange, liquidity/ financing, interest rates, credit risk and market price risk in equity instruments. For further information on financial risk management, see Notes to the Consolidated Financial Statements – Note C14, “Trade Receivables and Customer Finance”, Note C19, “Interest-Bearing Liabilities” and Note C20, “Financial Risk Management and Financial Instruments”.
Compliance risks
Ericsson has implemented Group policies and directives to ensure compliance with applicable laws and regulations, including a Code of Business Ethics. Risk management is integrated in the Company’s business processes. Policies and controls are implemented to ensure compliance with financial reporting standards and stock market regulations, e.g. the US Sarbanes-Oxley Act.
Monitoring and audits
Company management monitors the compliance with policies, directives and processes through internal self-assessment within all units. This is complemented by internal and external audits. External financial audits are performed by PricewaterhouseCoopers, and ISO/management system audits by Det Norske Veritas, DNV.
The Parent Company business consists mainly of corporate management, holding company functions and internal banking activities as well as customer credit management, performed on a commission basis by Ericsson Credit AB.
The Parent Company is the owner of a substantial part of Ericsson’s intellectual property rights. It manages the patent portfolio, including patent applications, licensing and cross-licensing of patents and defending of patents in litigations.
The Parent Company has 6 (7) branch offices. In total, the Group has 65 (62) branch and representative offices.
Financial information
Net sales for the year amounted to SEK 0.3 (5.1) billion and income after financial items was SEK 8.1 (19.4) billion.
Effective January 1, 2009, the right to all license revenues from third parties related to patent licenses was transferred to Ericsson AB, a wholly owned subsidiary, and consequently net sales in 2009 were insignificant compared to 2008. TEMS SWEDEN AB was sold during the year.
Exports accounted for 100 (70) percent of net sales. The Parent Company had no sales in 2009 or 2008 to subsidiaries, while 45 (46) percent of total purchases of goods and services were from such companies.
Major changes in the Parent Company’s financial position for the year include:
Investments in the joint venture ST-Ericsson of SEK 8.6 billion.
Decreased current and non-current receivables from subsidiaries of SEK 10.1 billion.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Decreased other current receivables of SEK 2.0 billion.
Increased cash, cash equivalents and short-term investments of SEK 3.2 billion.
Increased current and non-current liabilities to subsidiaries of SEK 5.0 billion.
Decreased other current liabilities of SEK 7.4 billion.
At year end, cash, cash equivalents and short-term investments amounted to SEK 62.4 (59.2) billion.
Share information
In the second quarter, as decided by the Board of Directors with authorization from the Annual General Meeting, a stock issue and a subsequent repurchase was made for the share-based employee remuneration program. 27 million Class C shares were issued and later repurchased as treasury stock. The shares were converted into Class B shares. The quotient value of the repurchased shares was SEK 135.0 million, representing less than 1 percent of capital stock, and the acquisition cost was SEK 135.1 million.
As per December 31, 2009, the total number of shares was 3,273,351,735, of which 261,755,983 Class A shares, each carrying one vote, and 3,011,595,752 Class B shares, each carrying one-tenth of one vote. The two largest shareholders at year end were Investor and Industrivärden holding 19.33 and 13.62 percent respectively of the voting rights in the Parent Company.
In accordance with the conditions of the Long-Term Variable Remuneration Program (LTV) for Ericsson employees, 9,087,564 treasury shares were sold or distributed to employees in 2009. The quotient value of these shares was SEK 45.4 million, representing less than 1 percent of capital stock, and compensation received amounted to SEK 213.2 million. The holding of treasury stock at December 31, 2009, was 78,978,533 Class B shares. The quotient value of these shares is SEK 394.9 million, representing 2 percent of capital stock, and the related acquisition cost amounts to SEK 672.4 million.
Proposed disposition of earnings
The Board of Directors proposes that a dividend of SEK 2.00 (1.85 in 2008) per share be paid to shareholders duly registered on the record date April 16, 2010, and that the Parent Company shall retain the remaining part of non-restricted equity. The Class B treasury shares held by the Parent Company are not entitled to receive a dividend. Assuming that no treasury shares remain on the record date, the Board of Directors proposes that earnings be distributed as follows:
Amount to be paid to the shareholders | SEK 6,546,703,470 | |
Amount to be retained by the Parent Company | SEK 35,406,164,930 | |
Total non-restricted equity of the Parent Company | SEK 41,952,868,400 | |
As a basis for its dividend proposal, the Board of Directors has made an assessment in accordance with Chapter 18, Section 4 of the Swedish Companies Act of the Parent Company’s and the Group’s need for financial resources as well as the Parent Company’s and the Group’s liquidity, financial position in other respects and long-term ability to meet their commitments. The Group reports an equity ratio of 52 (50) percent and a net cash amount of SEK 36.1 (34.7) billion.
The Board of Directors has also considered the Parent Company’s result and financial position and the Group’s position in general. In this respect, the Board of Directors has taken into account known commitments that may have an impact on the financial positions of the Parent Company and its subsidiaries.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The proposed dividend does not limit the Group’s ability to make investments or raise funds, and it is our assessment that the proposed dividend is well-balanced considering the nature, scope and risks of the business activities as well as the capital requirements for the Parent Company and the Group.
In an auction on November 25, 2009, Ericsson acquired certain assets relating to Nortel’s GSM business in North America for a cash purchase price of USD 70 million. Closing is expected by March 31, 2010, subject to approval by US and Canadian bankruptcy courts and satisfying normal regulatory conditions.
On January 12, 2010, Ericsson announced an agreement to acquire Pride Spa, an Italian systems integration company with approximately 1,000 employees.
On January 18, 2010, the Company appointed Rima Qureshi and Magnus Mandersson as heads of business unit CDMA and Global Services respectively. Both are members of the Executive Leadership Team.
In January 2010, as per the trust’s funding requirements, the Company made an employer contribution payment of SEK 730 million to the Swedish pension trust fund.
On February 8, 2010, the Company announced the appointment of Mats H. Olsson and Angel Ruiz as members of the Executive Leadership Team as well as a reorganization of its 23 market units into ten regions.
On March 31, 2010, Ericsson announced that Marita Hellberg, Senior Vice President and Head of Group Function Human Resources and Organization will take over as Head of Human Resources of Ericsson’s new region China and North East Asia from July 1st.
On April 1, 2010 Ericsson announced that the acquisition of substantially all the assets of Nortel’s GSM business had been completed, effective March 31. The closing follows the announcement on November 25, 2009, that Ericsson had entered into an asset purchase agreement for the assets of Nortel’s GSM business in North America.
On April 21, 2010, the Company announced that it had entered into a share purchase agreement to acquire Nortel’s majority shareholding (50%+1 share) in LG-Nortel, the joint venture of LG Electronics and Nortel Networks. Purchase price is USD 242 million on a cash and debt free basis. The transaction is subject to customary regulatory approvals.
The Board of Directors and the President declare that the consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB, and give a fair view of the Group’s financial position and results of operations. The financial statements of the Parent Company have been prepared in accordance with generally accepted accounting principles in Sweden and give a fair view of the Parent Company’s financial position and results of operations.
The Board of Directors’ Report for the Ericsson Group and the Parent Company provides a fair view of the development of the Group’s and the Parent Company’s operations, financial position and results of operations and describes material risks and uncertainties facing the Parent Company and the companies included in the Group.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders of Telefonaktiebolaget LM Ericsson (publ)
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, comprehensive income, shareholders equity and cash flows present fairly, in all material respects, the financial position of Telefonaktiebolaget LM Ericsson and its subsidiaries at December 31, 2009 and December 31, 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in item 15(b) of the Annual Report on Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As described in Management’s Report on Internal Control Over Financial Reporting included in Item 15 (b), management has excluded Nortel from its assessment of internal control over financial reporting as of December 31, 2009 because it was acquired by the Company in a purchase business combination on November 13, 2009. We have also excluded Nortel from our audit of internal control over financial reporting.
The Nortel operation is part of the Network segment whose total assets and total revenues represent 0,6% and 1,3%, respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2009.
Stockholm, April 21, 2010
PricewaterhouseCoopers AB
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Years ended December 31, SEK million | Notes | 2009 | 2008 | 2007 | |||||||
Net sales | C3, C4 | 206,477 | 208,930 | 187,780 | |||||||
Cost of sales | –136,278 | –134,661 | –114,059 | ||||||||
Gross income | 70,199 | 74,269 | 73,721 | ||||||||
Gross margin % | 34.0 | % | 35.5 | % | 39.3 | % | |||||
Research and development expenses | –33,055 | –33,584 | –28,842 | ||||||||
Selling and administrative expenses | –26,908 | –26,974 | –23,199 | ||||||||
Operating expenses | –59,963 | –60,558 | –52,041 | ||||||||
Other operating income and expenses | C6 | 3,082 | 2,977 | 1,734 | |||||||
Operating income before shares in earnings of joint ventures and associated companies | 13,318 | 16,688 | 23,414 | ||||||||
Operating margin before shares in earnings of joint ventures and associated companies (%) | 6.5 | % | 8.0 | % | 12.5 | % | |||||
Share in earnings of joint ventures and associated companies | C12 | –7,400 | –436 | 7,232 | |||||||
Operating income | 5,918 | 16,252 | 30,646 | ||||||||
Financial income | C7 | 1,874 | 3,458 | 1,778 | |||||||
Financial expenses | C7 | –1,549 | –2,484 | –1,695 | |||||||
Income after financial items | 6,243 | 17,226 | 30,729 | ||||||||
Taxes | C8 | –2,116 | –5,559 | –8,594 | |||||||
Net income | 4,127 | 11,667 | 22,135 | ||||||||
Net income attributable to: | |||||||||||
Stockholders of the Parent Company | 3,672 | 11,273 | 21,836 | ||||||||
Minority interest | 455 | 394 | 299 | ||||||||
Other information | |||||||||||
Average number of shares, basic (million)1) | C9 | 3,190 | 3,183 | 3,178 | |||||||
Earnings per share attributable to stockholders of the Parent Company, basic (SEK)1)2) | C9 | 1.15 | 3.54 | 6.87 | |||||||
Earnings per share attributable to stockholders of the Parent Company, diluted (SEK)1)2) | C9 | 1.14 | 3.52 | 6.84 | |||||||
1) | A reverse split 1:5 was made in June 2008. Comparative figures are |
2) | Based on Net income attributable to stockholders of the Parent |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Years ended December 31, SEK million | Notes | 2009 | 2008 | 2007 | ||||
Net income | 4,127 | 11,667 | 22,135 | |||||
Other comprehensive income | ||||||||
Actuarial gains and losses, and the effect of the asset ceiling, related to pensions | C16 | –605 | –4,015 | 1,208 | ||||
Revaluation of other investments in shares and participations Fair value remeasurement | C16 | –2 | –7 | 2 | ||||
Cash Flow hedges | ||||||||
Gains/losses arising during the period | C16 | 672 | –5,080 | 584 | ||||
Reclassification adjustments for gains/losses included in profit or loss | C16 | 3,850 | 1,192 | –1,390 | ||||
Adjustments for amounts transferred to initial carrying amount of hedged items | C16 | –1,029 | — | — | ||||
Changes in cumulative translation adjustments | C16 | –1,361 | 8,528 | –797 | ||||
Tax on items relating to components of OCI | C16 | –1,040 | 2,330 | –73 | ||||
Total other comprehensive income | 485 | 2,948 | –466 | |||||
Total comprehensive income | 4,612 | 14,615 | 21,669 | |||||
Total Comprehensive Income attributable to: | ||||||||
Stockholders of the Parent Company | 4,211 | 13,988 | 21,371 | |||||
Minority interest | 401 | 627 | 298 | |||||
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONSOLIDATED BALANCE SHEET
December 31, SEK million | Notes | 2009 | 2008 | |||
ASSETS | ||||||
Non-current assets | ||||||
Intangible assets | C10 | |||||
Capitalized development expenses | 2,079 | 2,782 | ||||
Goodwill | 27,375 | 24,877 | ||||
Intellectual property rights, brands and other intangible assets | 18,739 | 20,587 | ||||
Property, plant and equipment | C11, C26, C27 | 9,606 | 9,995 | |||
Financial assets | ||||||
Equity in joint ventures and associated companies | C12 | 11,578 | 7,988 | |||
Other investments in shares and participations | C12 | 256 | 309 | |||
Customer finance, non-current | C12 | 830 | 846 | |||
Other financial assets, non-current | C12 | 2,577 | 4,917 | |||
Deferred tax assets | C8 | 14,327 | 14,858 | |||
87,367 | 87,159 | |||||
Current assets | ||||||
Inventories | C13 | 22,718 | 27,836 | |||
Trade receivables | C14 | 66,410 | 75,891 | |||
Customer finance, current | C14 | 1,444 | 1,975 | |||
Other current receivables | C15 | 15,146 | 17,818 | |||
Short-term investments | C20 | 53,926 | 37,192 | |||
Cash and cash equivalents | C25 | 22,798 | 37,813 | |||
182,442 | 198,525 | |||||
Total assets | 269,809 | 285,684 | ||||
EQUITY AND LIABILITIES | ||||||
Equity | ||||||
Stockholders’ equity | C16 | 139,870 | 140,823 | |||
Minority interest in equity of subsidiaries | C16 | 1,157 | 1,261 | |||
141,027 | 142,084 | |||||
Non-current liabilities | ||||||
Post-employment benefits | C17 | 8,533 | 9,873 | |||
Provisions, non-current | C18 | 461 | 311 | |||
Deferred tax liabilities | C8 | 2,270 | 2,738 | |||
Borrowings, non-current | C19, C20 | 29,996 | 24,939 | |||
Other non-current liabilities | 2,035 | 1,622 | ||||
43,295 | 39,483 | |||||
Current liabilities | ||||||
Provisions, current | C18 | 11,970 | 14,039 | |||
Borrowings, current | C19, C20 | 2,124 | 5,542 | |||
Trade payables | C22 | 18,864 | 23,504 | |||
Other current liabilities | C21 | 52,529 | 61,032 | |||
85,487 | 104,117 | |||||
Total equity and liabilities1) | 269,809 | 285,684 | ||||
Diluted earnings per share are calculated by dividing net income attributable to stockholders of the Parent Company, when appropriate adjusted by the sum of the weighted average number of ordinary shares outstanding
1) | Of which interest-bearing liabilities and
|
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONSOLIDATED STATEMENT OF CASH FLOWS
January–December, SEK million | Notes | 2009 | 2008 | 2007 | ||||
Operating activities | ||||||||
Net income | 4,127 | 11,667 | 22,135 | |||||
Adjustments to reconcile net income to cash | C25 | 16,856 | 14,318 | 7,172 | ||||
20,983 | 25,985 | 29,307 | ||||||
Changes in operating net assets | ||||||||
Inventories | 5,207 | –3,927 | –445 | |||||
Customer finance, current and non-current | 598 | 549 | 365 | |||||
Trade receivables | 7,668 | –11,434 | –7,467 | |||||
Trade payables | –3,522 | 4,794 | –1,558 | |||||
Provisions and post-employment benefits | –2,950 | 3,830 | –4,401 | |||||
Other operating assets and liabilities, net | –3,508 | 4,203 | 3,409 | |||||
3,493 | –1,985 | –10,097 | ||||||
Cash flow from operating activities | 24,476 | 24,000 | 19,210 | |||||
Investing activities | ||||||||
Investments in property, plant and equipment | C11 | –4,006 | –4,133 | –4,319 | ||||
Sales of property, plant and equipment | 534 | 1,373 | 152 | |||||
Acquisitions of subsidiaries and other operations | C25, C26 | –19,321 | –74 | –26,292 | ||||
Divestments of subsidiaries and other operations | C25, C26 | 1,239 | 1,910 | 84 | ||||
Product development | C10 | –1,443 | –1,409 | –1,053 | ||||
Other investing activities | 2,606 | 944 | 396 | |||||
Short-term investments | –17,071 | –7,155 | 3,499 | |||||
Cash flow from investing activities | –37,462 | –8,544 | –27,533 | |||||
Cash flow before financing activities | –12,986 | 15,456 | –8,323 | |||||
Financing activities | ||||||||
Proceeds from issuance of borrowings | 14,153 | 5,245 | 15,587 | |||||
Repayment of borrowings | –9,804 | –4,216 | –1,291 | |||||
Sale of own stock and options exercised | 69 | 3 | 94 | |||||
Dividends paid | –6,318 | –8,240 | –8,132 | |||||
Other financing activities | 199 | – | – | |||||
Cash flow from financing activities | –1,701 | –7,208 | 6,258 | |||||
Effect of exchange rate changes on cash | –328 | 1,255 | 406 | |||||
Net change in cash | –15,015 | 9,503 | –1,659 | |||||
Cash and cash equivalents, beginning of period | 37,813 | 28,310 | 29,969 | |||||
Cash and cash equivalents, end of period | C25 | 22,798 | 37,813 | 28,310 | ||||
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Capital stock | Additional paid in capital | Revaluation of other investments in shares and participations | Cash flow hedges | Cumulative translation adjustments | Retained earnings | Stockholders’ equity | Minority interests | Total equity | ||||||||||
January 1, 2009 | 16,232 | 24,731 | –1 | –2,356 | 2,124 | 100,093 | 140,823 | 1,261 | 142,084 | |||||||||
Total comprehensive income | — | — | –3 | 2,434 | –1,461 | 3,241 | 4,211 | 401 | 4,612 | |||||||||
Transactions with owners | ||||||||||||||||||
Stock issue | 135 | — | — | — | — | — | 135 | — | 135 | |||||||||
Sale of own shares | — | — | — | — | — | 75 | 75 | — | 75 | |||||||||
Repurchase of own shares | — | — | — | — | — | –135 | –135 | — | –135 | |||||||||
Stock Purchase and Stock Option Plans | — | — | — | — | — | 658 | 658 | — | 658 | |||||||||
Dividends paid | — | — | — | — | — | –5,897 | –5,897 | –421 | –6,318 | |||||||||
Business combinations | — | — | — | — | — | — | — | –84 | –84 | |||||||||
December 31, 2009 | 16,367 | 24,731 | –4 | 78 | 663 | 98,035 | 139,870 | 1,157 | 141,027 | |||||||||
January 1, 2008 | 16,132 | 24,731 | 5 | 307 | –6,345 | 99,282 | 134,112 | 940 | 135,052 | |||||||||
Total comprehensive income | — | — | –6 | –2,663 | 8,469 | 8,188 | 13,988 | 627 | 14,615 | |||||||||
Transactions with owners | ||||||||||||||||||
Stock issue | 100 | — | — | — | — | — | 100 | — | 100 | |||||||||
Sale of own shares | — | — | — | — | — | 88 | 88 | — | 88 | |||||||||
Repurchase of own shares | — | — | — | — | — | –100 | –100 | — | –100 | |||||||||
Stock Purchase and Stock Option Plans | — | — | — | — | — | 589 | 589 | — | 589 | |||||||||
Dividends paid | — | — | — | — | — | –7,954 | –7,954 | –286 | –8,240 | |||||||||
Business combinations | — | — | — | — | — | — | — | –20 | –20 | |||||||||
December 31, 2008 | 16,232 | 24,731 | –1 | –2,356 | 2,124 | 100,093 | 140,823 | 1,261 | 142,084 | |||||||||
January 1, 2007 | 16,132 | 24,731 | 3 | 877 | –5,569 | 83,939 | 120,113 | 782 | 120,895 | |||||||||
Total comprehensive income | — | — | 2 | –570 | –776 | 22,715 | 21,371 | 298 | 21,669 | |||||||||
Transactions with owners | ||||||||||||||||||
Sale of own shares | — | — | — | — | — | 62 | 62 | — | 62 | |||||||||
Stock Purchase and Stock Option Plans | — | — | — | — | — | 509 | 509 | — | 509 | |||||||||
Dividends paid | — | — | — | — | — | –7,943 | –7,943 | –189 | –8,132 | |||||||||
Business combinations | — | — | — | — | — | — | — | 49 | 49 | |||||||||
December 31, 2007 | 16,132 | 24,731 | 5 | 307 | –6,345 | 99,282 | 134,112 | 940 | 135,052 | |||||||||
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
C1 SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements comprise Telefonaktiebolaget LM Ericsson, the Parent Company, and its subsidiaries (“the Company”) and the Company’s interests in joint ventures and associated companies. The Parent Company is domiciled in Sweden at Torshamnsgatan 23, SE-164 83 Stockholm.
The consolidated financial statements for the year ended December 31, 2009, have been prepared in accordance with International Financial Reporting Standards (IFRS) as endorsed by the EU and RFR 1.2 “Additional rules for Group Accounting”, related interpretations issued by the Swedish Financial Reporting Board (Rådet för Finansiell Rapportering), and the Swedish Annual Accounts Act. Further, the Company’s financial statements are prepared in accordance with IFRS as issued by IASB.
The financial statements were approved by the Board of Directors on February 26, 2010. The balance sheets and income statements are subject to approval by the annual meeting of shareholders.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
New standards, amendments of standards and interpretations, effective as from January 1, 2009, changing presentation or disclosure:
IAS 1 (Revised), “Presentation of Financial Statements”. The revised standard requires all non-owner changes in equity to be shown in a performance statement. The Company therefore presents two statements, the Income Statement and a Statement of Comprehensive Income. Also, to improve the understanding of the Company’s financial performance, a new subtotal line has been added in the Income Statement, “Operating income before share in earnings of joint ventures and associated companies”. This is to distinguish between operating income from operations consolidated and from shares in earnings of joint ventures and associated companies accounted for using the equity method.
IFRS 7 “Financial instruments—Disclosures” (amendment). The amendment requires enhanced disclosures about fair value measurement and liquidity risk. In particular, the amendment requires disclosure of fair value measurements by level of a fair value measurement hierarchy. As the change in accounting policy only results in additional disclosure, there is no impact on earning per share.
IFRS 8 “Operating Segments”. This standard replaces IAS 14 “Segment Reporting” and requires a “management approach”, under which segment information is presented on the same basis as that used for internal reporting to the Chief Operating Decision Maker (CODM). In Ericsson, the Group Management Team is defined as the CODM function. The new standard has not resulted in any changes of the reportable segments, except for changes in the content of disclosures in note C3 Segment Information.
New standards, amendments of standards and interpretations, effective as from January 1, 2009, changing financial result and position and disclosures:
IFRS 2 (amendment), “Share-based payment” deals with vesting conditions and cancellations. It clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services. In the period when an employee takes a refund of previously made contributions (and stops making further contributions) all remaining compensation expense is recognized. Non-vesting conditions would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. The amendment has not had a material impact on the Company’s financial statements.
Revised IAS 23, “Borrowing Costs” and “Improvements to IFRSs”, (May 2008). In respect of borrowing costs relating to qualifying assets for which the commencement date for capitalization is on or after January 1, 2009, the Company capitalizes borrowing costs directly attributable to the acquisition, design, construction or production of a qualifying asset as part of the cost of that asset. Previously the Company immediately recognized all borrowing costs as an expense. The change in IAS 23 has not had a material impact on the Company’s financial statements. Any capitalization of borrowing costs would normally relate to internally generated intangible assets (see note C10).
The following amendments and IFRIC:s have not had any material impact on the Company’s financial statements:
IAS 32 and IAS 1 (Amendments) “Puttable Financial Instruments” and “Obligations Arising on Liquidation”.
IAS 39 (Amendment) “Financial instruments: Recognition and Measurement—Eligible hedged Items.”
Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Amendments to IFRIC Interpretation 9 and IAS 39. Reassessment of Embedded Derivatives.
IFRIC 13 “Customer Loyalty Programmes” addresses the accounting by companies that operate, or otherwise participate in, customer loyalty programmes for their customers.
IFRIC 15 “Agreements for Construction of Real Estate”. In note C4 Net Sales the Company discloses the split between revenue related to IAS 11 and IAS 18.
IFRIC 16 “Hedges of a Net Investment in a Foreign Operation”.
IFRIC 18 “Transfers of Assets from Customers”.
Improvements to IFRSs, published in May 2008 and effective from January 1, 2009
Improvements to IFRSs, published in April 2009 and effective from January 1, 2010.
For information on “New standards and interpretations not yet adopted” please see page 65.
Changes in financial reporting structure
The joint venture ST-Ericsson was formed on February 3, 2009. By merging STMicroelectronics’ wireless business and Ericsson Mobile Platforms, a large company in the semiconductor industry was created. ST-Ericsson is reported as a separate operating segment, accounted for using the equity method.
Definition of Other comprehensive income (OCI)
OCI comprises items of income and expense (including reclassification adjustments) that are not recognized in the income statement as required or permitted by IFRS. See also comments under IAS 1 above.
Basis of presentation
The financial statements are presented in millions of Swedish Krona (SEK). They are prepared on a historical cost basis, except for certain financial assets and liabilities that are stated at fair value: derivative financial instruments, financial instruments held for trading, financial instruments classified as available-for-sale and plan assets related to defined benefit pension plans.
Basis of consolidation
The consolidated financial statements are prepared in accordance with the purchase method. Accordingly, consolidated stockholders’ equity includes equity in subsidiaries, joint ventures and associated companies earned only after their acquisition.
Subsidiaries are all companies in which Ericsson has an ownership interest, directly or indirectly, including effective potential voting rights, has the power to govern the financial and operating policies generally associated with ownership of more than one half of the voting rights or in which Ericsson by agreement has control. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.
Intra-group balances and any unrealized income and expense arising from intra-group transactions are fully eliminated in preparing the consolidated financial statements. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Business combinations
At the acquisition of a business, the cost of the acquisition, being the purchase price, is measured as the fair value of the assets given, and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. The acquisition cost is allocated to acquired assets, liabilities and contingent liabilities based upon appraisals made, including assets that were not recognized on the acquired entity’s balance sheet, for example intangible assets such as customer relations, brands and patents. Goodwill arises when the purchase price exceeds the fair value of recognizable acquired net assets. Final amounts must be established within one year after the transaction date at the latest.
Minority interest
The Company treats transactions with minority interests as transactions with external parties. Disposals of minority interests are recognized as gains and losses in the income statement. Purchases from minority interests result in goodwill if there is a difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.
Joint ventures and associated companies
Investments in joint ventures and associated companies, i.e. where voting stock interest, including effective potential voting rights, is at least 20 percent but not more than 50 percent, or where a corresponding influence is obtained through agreement, are accounted for in accordance with the equity method. Under the equity method, the investment in an associate is initially recognized at cost and the carrying amount is increased or decreased to recognize the investor’s share of the profit or loss of the investee after the date of acquisition.
Ericsson’s share of income before taxes is reported in item “Share in earnings of joint ventures and associated companies”, included in Operating Income. This is due to that these interests are held for operating rather than investing or financial purposes. Ericsson’s share of income taxes related to joint ventures and associated companies is reported under the line item Taxes in the income statement.
Unrealized gains on transactions between the Company and its associated companies and joint ventures are eliminated to the extent of the Company’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Shares in earnings of joint ventures and associated companies included in consolidated equity which are undistributed are reported in Retained earnings in the balance sheet.
Impairment testing as well as recognition or reversal of impairment of investments in each joint venture is performed in the same manner as for intangible assets other than goodwill. The entire carrying amount of each investment, including goodwill, is tested as a single asset. See also description under “Intangible assets other than goodwill” below.
Foreign currency remeasurement and translation
Items included in the financial statements of each entity of the Company are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Swedish Krona (SEK), which is the Parent Company’s functional and presentation currency.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at period-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, unless deferred in OCI under the hedge accounting practices as described below.
Changes in the fair value of monetary securities denominated in foreign currency classified as available-for-sale are analyzed between translation differences resulting from changes in the amortized cost of the security and other changes in the carrying amount of the security. Translation differences related to changes in the amortized cost are recognized in profit or loss, and other changes in the carrying amount are recognized in OCI.
Translation differences on non-monetary financial assets and liabilities are reported as part of the fair value gain or loss.
Group companies
The results and financial position of all the group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet;
income and expenses for each income statement are translated at average exchange rates; and
all resulting net exchange differences are recognized as a separate component of OCI.
On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are accounted for in OCI. When a foreign operation is partially disposed of or sold, exchange differences that were recorded in OCI are recognized in the income statement as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate.
There is no significant impact due to a currency of a hyperinflationary economy.
Statement of cash flows
The statement of cash flow is prepared in accordance with the indirect method. Cash flows in foreign subsidiaries are translated at the average exchange rate during the period. Payments for subsidiaries acquired or divested are reported as cash flow from investing activities, net of cash and cash equivalents acquired or disposed of, respectively.
Cash and cash equivalents consist of cash, bank, and short-term investments that are highly liquid monetary financial instruments with a remaining maturity of three months or less at the date of acquisition.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue recognition
The Company offers a comprehensive portfolio of telecommunication and data communication systems, multimedia solutions and professional services, covering a range of technologies.
The contracts are of four main types:
delivery-type.
contracts for various types of services, for example multi-year managed services contracts.
license agreements for the use of the Company’s technology or intellectual property rights, not being a part of another product.
construction-type.
The majority of the Company’s products and services are sold under delivery-type contracts including multiple elements, such as base stations, base station controllers, mobile switching centers, routers, microwave transmission links, various software products and related installation and integration services. Such contract elements generally have individual item prices in agreed price lists per customer.
Sales are recorded net of value added taxes, goods returned, trade discounts and rebates. Revenue is recognized with reference to all significant contractual terms when the product or service has been delivered, when the revenue amount is fixed or determinable, and when collection is reasonably assured. Specific contractual performance and acceptance criteria may impact the timing and amounts of revenue recognized.
The profitability of individual contracts is periodically assessed, and provisions for any estimated losses are made immediately when losses are probable.
For sales between consolidated companies, associated companies, joint ventures and segments, the Company applies arm’s length pricing.
Definitions of contract types and related more specific revenue recognition criteria
Different revenue recognition methods, based on either IAS 18 “Revenue” or IAS 11 “Construction contracts”, are applied based on the solutions provided to customers, the nature and sophistication of the technology involved and the contract conditions in each case.
The contract types that are accounted for in accordance with IAS 18 are:
Delivery-type contracts, i.e. contracts for delivery of a product or a combination of products to form a whole or a part of a network as well as delivery of stand-alone products. Medium-size and large delivery type contracts generally include multiple elements. Such elements are normally standardized types of equipment or software as well as services, such as network rollout.
Revenue is recognized when risks and rewards have been transferred to the customer, normally stipulated in the contractual terms of trade. For delivery-type contracts with multiple elements, revenue is allocated to each element based on relative fair values. If there are undelivered elements essential to the functionality of delivered elements, the Company defers recognition of revenue until all elements essential to the functionality have been delivered.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Contracts for services include various types of services such as: training, consulting, engineering, installation, multi-year managed services and hosting. Revenue is generally recognized when the services have been provided. Revenue for managed service contracts and other services contracts covering longer periods is recognized pro rata over the contract period.
Contracts generating license fees from third parties for the use of the Company’s technology or intellectual property rights. Revenue is normally recognized based on sales of products sold to the customer/ licensee.
The contract type that is accounted for in accordance with IAS 11 is:
Construction-type contracts. In general, a construction-type contract is a contract where the Company supplies to a customer, a complete network, which to a large extent is based upon new technology or includes major components which are specifically designed for the customer. Revenues from construction-type contracts are recognized according to stage of completion, generally using the milestone output method.
Earnings per share
Basic earnings per share are calculated by dividing net income attributable to stockholders of the Parent Company by the weighted average number of shares outstanding (total number of shares less treasury stock) during the year.
Diluted earnings per share are calculated by dividing net income attributable to stockholders of the Parent Company, when appropriate adjusted by the sum of the weighted average number of ordinary shares outstanding and dilutive potential ordinary shares. Potential ordinary shares are treated as dilutive when, and only when, their conversion to ordinary shares would decrease earnings per share.
Stock options and rights to matching shares are considered dilutive when the actual fulfillment of any performance conditions as of the reporting date would give a right to ordinary shares. Furthermore, stock options are considered dilutive only when the exercise price is lower than the period’s average share price.
Financial assets
Financial assets are recognized when the Company becomes a party to the contractual provisions of the instrument. Regular purchases and sales of financial assets are recognized on the settlement date.
Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Company has transferred substantially all risks and rewards of ownership. Separate assets or liabilities are recognized if any rights and obligations are created or retained in the transfer.
The Company classifies its financial assets in the following categories: at fair value through profit or loss, loans and receivables, and available for sale. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
Financial assets are initially recognized at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the income statement.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The fair values of quoted financial investments and derivatives are based on quoted market prices or rates. If official rates or market prices are not available, fair values are calculated by discounting the expected future cash flows at prevailing interest rates. Valuations of FX options and Interest Rate Guarantees (IRG) are made by using a Black-Scholes formula. Inputs to the valuations are market prices for implied volatility, foreign exchange and interest rates.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling or repurchasing in the near term.
Derivatives are classified as held for trading, unless they are designated as hedges. Assets in this category are classified as current assets.
Gains or losses arising from changes in the fair values of the “financial assets at fair value through profit or loss”—category (excl derivatives) are presented in the income statement within Financial income in the period in which they arise. Derivatives are presented in the income statement either as cost of sales, other operating income, financial income or financial expense, depending on the intent with the transaction.
Loans and receivables
Receivables are subsequently measured at amortized cost using the effective interest rate method, less allowances for impairment charges. Trade receivables include amounts due from customers. The balance represents amounts billed to customer as well as amounts where risk and rewards have been transferred to the customer but the invoice has not yet been issued.
Collectibility of the receivables is assessed for purposes of initial revenue recognition.
Available-for-sale financial assets
Available-for-sale financial assets are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date.
Dividends on available-for-sale equity instruments are recognized in the income statement as part of financial income when the Company’s right to receive payments is established.
Changes in the fair value of monetary securities denominated in a foreign currency and classified as available-for-sale are analyzed between translation differences resulting from changes in amortized cost of the security and other changes in the carrying amount of the security. The translation differences on monetary securities are recognized in profit or loss; translation differences on non-monetary securities are recognized in OCI. Changes in the fair value of monetary and non-monetary securities classified as available-for-sale are recognized in OCI. When securities classified as available-for-sale are sold or impaired, the accumulated fair value adjustments previously recognized in OCI are included in the income statement.
Impairment
At each balance sheet date, the Company assesses whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
significant or prolonged decline in the fair value of the security below its cost is considered as an indicator that the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognized in profit or loss—is removed from OCI and recognized in the income statement. Impairment losses recognized in the income statement on equity instruments are not reversed through the income statement.
An assessment of impairment of receivables is performed when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivable. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within selling expenses. When a trade receivable is finally established as uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited to selling expenses in the income statement.
Financial Liabilities
Financial liabilities are recognized when the Company becomes bound to the contractual obligations of the instrument.
Financial liabilities are derecognized when they are extinguished, i.e. when the obligation specified in the contract is discharged, cancelled or expires.
Borrowings
Borrowings are initially recognized at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized in the income statement over the period of the borrowings using the effective interest method.
Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.
Trade payables
Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.
Derivatives at fair value through profit or loss
Certain derivative instruments do not qualify for hedge accounting and are accounted for at fair value through profit or loss. Changes in the fair value of these derivative instruments that do not qualify for hedge accounting are recognized immediately in the income statement either as cost of sales, other operating income, financial income or financial expense, depending on the intent of the transaction.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Derivative financial instruments and hedging activities
Derivatives are initially recognized at fair value at trade date and subsequently re-measured at fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either:
a) | fair value hedge:a hedge of the fair value of recognized liabilities; |
b) | cash flow hedge: a hedge of a particular risk associated with a highly probable forecast transaction; or |
c) | net investment hedge:a hedge of a net investment in a foreign operation. |
At the inception of the hedge, the Company documents the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.
The fair values of various derivative instruments used for hedging purposes are disclosed in Note C20, “Financial Risk Management and Financial Instruments”. Movements in the hedging reserve in OCI are shown in Note C16, “Equity and OCI”.
The fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as current assets or liabilities.
Fair value hedges
Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The Company only applies fair value hedge accounting for hedging fixed interest risk on borrowings. Both gains and losses relating to the interest rate swaps hedging fixed rate borrowings and the changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk are recognized in the income statement within Financial expenses. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortized to profit or loss over the remaining period to maturity.
Cash flow hedges
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in OCI. The gain or loss relating to an ineffective portion is recognized immediately in the income statement within financial income or expense.
Amounts deferred in OCI are recycled in the income statement in the periods when the hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place), either in Net Sales or Cost of Sales. When the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory or fixed assets), the gains and losses previously deferred in OCI are transferred from OCI and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognized in Cost of Sales in case of inventory or in Depreciation in case of fixed assets. When a hedging instrument expires or is
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss which at that time remains in OCI is recognized in the income statement when the forecast transaction is ultimately recognized. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in OCI is immediately transferred to the income statement within financial income or expense.
Net investment hedges
Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognized in OCI. A gain or loss relating to an ineffective portion is recognized immediately in the income statement within financial income or expense. Gains and losses deferred in OCI are included in the income statement when the foreign operation is partially disposed of or sold.
Financial guarantees
Financial guarantee contracts are initially recognized at fair value (i.e. usually the fee received). Subsequently, these contracts are measured at the higher of:
the amount determined as the best estimate of the net expenditure required to settle the obligation according to the guarantee contract, and
the recognized contractual fee less cumulative amortization when amortized over the guarantee period, using the straight-line-method.
The best estimate of the net expenditure comprises future fees and cash flows from subrogation rights.
Inventories
Inventories are measured at the lower of cost or net realizable value on a first-in, first-out (FIFO) basis.
Risks of obsolescence have been measured by estimating market value based on future customer demand and changes in technology and customer acceptance of new products.
Intangible assets
Intangible assets other than goodwill
Intangible assets other than goodwill comprise capitalized development expenses and acquired intangible assets, such as patents, customer relations, trademarks and software. At initial recognition, capitalized development expenses are stated at cost while acquired intangible assets related to business combinations are stated at fair value. Subsequent to initial recognition, both capitalized development expenses and acquired intangible assets are stated at initially recognized amounts less accumulated amortization and any impairment. Amortization and any impairment losses are included in Research and development expenses, mainly for capitalized development expenses and patents, in Selling and administrative expenses, mainly for customer relations and brands, and in Cost of sales.
Costs incurred for development of products to be sold, leased or otherwise marketed or intended for internal use are capitalized as from when technological and economical feasibility has been established until the product is available for sale or use. These capitalized expenses are mainly generated internally and include direct labor and directly attributable overhead. Amortization of capitalized development expenses begins when the product is available for general release. Amortization is made on a product or platform basis according to the straight-line
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
method over periods not exceeding five years. Research and development expenses directly related to orders from customers are accounted for as a part of Cost of sales. Other research and development expenses are charged to income as incurred.
Amortization of acquired intangible assets, such as patents, customer relations, brands and software, is made according to the straight-line method over their estimated useful lives, not exceeding ten years.
The Company has not recognized any intangible assets with indefinite useful life other than goodwill.
Impairment tests are performed whenever there is an indication of possible impairment. However, intangible assets not yet available for use are tested annually. An impairment loss is recognized if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. The recoverable amount is the higher of the value in use and the fair value less costs to sell. In assessing value in use, the estimated future cash flows after tax are discounted to their present value using an after-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Application of after tax amounts in calculation, both in relation to cash flows and discount rate is applied due to that available models for calculating discount rate include a tax component.
Corporate assets have been allocated to cash-generating units in relation to each unit’s proportion of total net sales. The amount related to corporate assets is not significant. Impairment losses recognized in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amounts and if the recoverable amount is higher than the carrying value. An impairment loss is reversed only to the extent that the asset’s carrying amount after reversal does not exceed the carrying amount, net of amortization, which would have been reported if no impairment loss had been recognized.
Goodwill
As from the acquisition date, goodwill acquired in a business combination is allocated to each cash-generating unit (CGU) of the Company expected to benefit from the synergies of the combination. Ericsson’s five operating segments have been identified as CGUs. Goodwill is assigned to three of them, Networks, Professional Services and Multimedia.
An annual impairment test for the CGUs to which goodwill has been allocated is performed in the fourth quarter, or when there is an indication of impairment. Impairment testing as well as recognition of impairment of goodwill is performed in the same manner as for intangible assets other than goodwill, see description under “Intangible assets other than goodwill” above. An impairment loss in respect of goodwill is not reversed.
Additional disclosure is required in relation to goodwill impairment testing, see Note C2, “Critical Accounting Estimates and Judgments” below and in Note C10, “Intangible Assets”.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment losses.
Depreciation is charged to income, generally on a straight-line basis, over the estimated useful life of each component of an item of property, plant and equipment, including buildings. Estimated useful lives are, in general, 25–50 years for buildings, 20 years for land improvements, 3–10 years for machinery and equipment, and up to 5 years for equipment on lease. Depreciation and any impairment charges are included in Cost of sales, Research and development or Selling and administrative expenses.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company recognizes in the carrying amount of an item of property, plant and equipment the cost of replacing a component and derecognizes the residual value of the replaced component.
Impairment testing as well as recognition or reversal of impairment of property, plant and equipment is performed in the same manner as for intangible assets other than goodwill, see description under “Intangible assets other than goodwill” above.
Gains and losses on disposals are determined by comparing the proceeds less cost to sell with the carrying amount and are recognized within Other operating income and expenses in the income statement.
Leasing
Leasing when the Company is the lessee
Leases on terms in which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition, the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that type of asset, although the depreciation period must not exceed the lease term.
Other leases are operating leases, and the leased assets under such contracts are not recognized on the balance sheet. Costs under operating leases are recognized in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease.
Leasing when the Company is the lessor
Leasing contracts with the Company as lessor are classified as finance leases when the majority of risks and rewards are transferred to the lessee, and otherwise as operating leases. Under a finance lease, a receivable is recognized at an amount equal to the net investment in the lease and revenue is recognized in accordance with the revenue recognition principles.
Under operating leases the equipment Is recorded as property, plant and equipment and revenue as well as depreciation is recognized on a straight-line basis over the lease term.
Income taxes
Income taxes in the consolidated financial statements include both current and deferred taxes. Income taxes are reported in the income statement unless the underlying item is reported directly in equity or OCI. For those items, the related income tax is also reported directly in equity or OCI. A current tax liability or asset is recognized for the estimated taxes payable or refundable for the current year or prior years.
Deferred tax is recognized for temporary differences between the book values of assets and liabilities and their tax values and for tax loss carry forwards. A deferred tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the deductible temporary differences and tax loss carry forwards can be utilized. Deferred tax is not recognized for the following temporary differences: goodwill not deductible for tax purposes, for the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and for differences related to investments in subsidiaries when It Is probable that the temporary difference will not reverse in the foreseeable future.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred tax is measured at the tax rate that is expected to be applied to the temporary differences when they reverse, based on the tax laws that have been enacted or substantively enacted by the reporting date. An adjustment of deferred tax asset/liability balances due to a change in the tax rate is recognized in the income statement, unless it relates to a temporary difference earlier recognized directly in equity or OCI, in which case the adjustment is also recognized in equity or OCI.
The measurement of deferred tax assets involves judgment regarding the deductibility of costs not yet subject to taxation and estimates regarding sufficient future taxable income to enable utilization of unused tax losses in different tax jurisdictions. All deferred tax assets are subject to annual review of probable utilization. The largest amounts of tax loss carry forwards relate to Sweden, with indefinite period of utilization.
Provisions
Provisions are made when there are legal or constructive obligations as a result of past events and when it is probable that an outflow of resources will be required to settle the obligations and the amounts can be reliably estimated. When the effect of the time value of money is material, discounting is made of estimated outflows. However, the actual outflows as a result of the obligations may differ from such estimates.
The provisions are mainly related to warranty commitments, restructuring, customer projects and other obligations, such as unresolved income tax and value added tax issues, claims or obligations as a result of patent infringement and other litigations, supplier claims and customer finance guarantees.
Product warranty commitments consider probabilities of all material quality issues based on historical performance for established products and expected performance for new products, estimates of repair cost per unit, and volumes sold still under warranty up to the reporting date.
A restructuring obligation is considered to have arisen when the Company has a detailed formal plan for the restructuring (approved by management), which has been communicated in such a way that a valid expectation has been raised among those affected.
Project related provisions include estimated losses on onerous contracts, contractual penalties and undertakings. For losses on customer contracts, a provision equal to the total estimated loss is recorded when a loss from a contract is anticipated and possible to estimate reliably. These contract loss estimates include any probable penalties to a customer under a loss contract.
Other provisions include provisions for unresolved income tax issues, value added tax issues, litigations, supplier claims, customer finance and other provisions. The Company provides for estimated future settlements related to patent infringements based on the probable outcome of each infringement. The ultimate outcome or actual cost of settling an individual infringement may vary from the Company’s estimate.
The Company estimates the outcome of any potential patent infringement made known to the Company through assertion and through the Company’s own monitoring of patent-related cases in the relevant legal systems. To the extent that the Company makes the judgment that an identified potential infringement will more likely than not result in an outflow of resources, the Company records a provision based on the Company’s best estimate of the expenditure required to settle with the counterpart.
In the ordinary course of business, the Company is subject to proceedings, lawsuits and other unresolved claims, including proceedings under laws and government regulations and other matters. These matters are often
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
resolved over a long period of time. The Company regularly assesses the likelihood of any adverse judgments in or outcomes of these matters, as well as potential ranges of possible losses. Provisions are recognized when it is probable that an obligation has arisen and the amount can be reasonably estimated based on a detailed analysis of each individual issue.
Certain present obligations are not recognized as provisions as it is not probable that an economic outflow will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. Such obligations are reported as contingent liabilities. For further detailed information, see Note C24, “Contingent liabilities”.
Post-employment benefits
Pensions and other post-employment benefits are classified as either defined contribution plans or defined benefit plans. Under a defined contribution plan, the Company’s only obligation is to pay a fixed amount to a separate entity (a pension trust fund) with no obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits. The related actuarial and investment risks fall on the employee. The expenditures for defined contribution plans are recognized as expenses during the period when the employee provides service. Under a defined benefit plan, it is the Company’s obligation to provide agreed benefits to current and former employees. The related actuarial and investment risks fall on the Company.
The present value of the defined benefit obligations for current and former employees is calculated using the Projected Unit Credit Method. The discount rate for each country is determined by reference to market yields on high-quality corporate bonds that have maturity dates approximating the terms of the Company’s obligations. In countries where there is no deep market in such bonds, the market yields on government bonds are used. The calculations are based upon actuarial assumptions, assessed on a quarterly basis, and are as a minimum prepared annually. Actuarial assumptions are the Company’s best estimate of the variables that determine the cost of providing the benefits. When using actuarial assumptions, it is possible that the actual results will differ from the estimated results or that the actuarial assumptions will change from one period to another. These differences are reported as actuarial gains and losses. They are for example caused by unexpectedly high or low rates of employee turnover, changed life expectancy, salary changes, changes in the discount rate and differences between actual and expected return on plan assets. Actuarial gains and losses are recognized in OCI in the period in which they occur. The Company’s net liability for each defined benefit plan consists of the present value of pension commitments less the fair value of plan assets and is recognized net on the balance sheet. When the result is a net benefit to the Company, the recognized asset is limited to the total of any cumulative past service cost and the present value of any future refunds from the plan or reductions in future contributions to the plan.
The net of return on plan assets and interest on pension liabilities is reported as financial income or expense, while the current service cost and any other items in the annual pension cost are reported as operating income or expense.
Payroll taxes related to actuarial gains and losses are included in determining actuarial gains and losses.
Share-based compensation to employees and the Board of Directors
Share-based compensation is related to remuneration to employees, including key management personnel and the Board of Directors. Under IFRS, a company shall recognize compensation costs for share-based compensation programs based on a measure of the value to the company of services received under the plans.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Compensation to employees
Stock option plans
In accordance with IFRS 1 and IFRS 2, Ericsson has chosen not to apply IFRS 2 to equity instruments granted before November 7, 2002.
IFRS 2 is applied to the equity settled employee option program granted after November 7, 2002 (i.e. on program where the vesting period ended 2005). Ericsson recognizes compensation costs representing the fair value at grant date of the outstanding employee options. In the balance sheet, the corresponding amounts are accounted for as equity. The fair value of the options is calculated using an option-pricing model. The total costs are recognized during the vesting period, i.e. the period during which the employees had to fulfill vesting requirements. When the options are exercised, social security charges are to be paid in certain countries on the value of the employee benefit; generally based on the difference between the market price of the share and the strike price. Such social security charges are accrued during the vesting period.
Stock purchase plans
For stock purchase plans, compensation costs are recognized during the vesting period, based on the fair value of the Ericsson share at the employee’s investment date. The fair value is based upon the share price at investment date, adjusted for the fact that no dividends will be received on matching shares prior to matching and other features that are non-vesting conditions. The employee pays a price equal to the share price at investment date for the investment shares. The investment date is considered as the grant date. In the balance sheet, the corresponding amounts are accounted for as equity. Vesting conditions are non-market based and affect the number of shares that Ericsson will match. Other features of a share-based payment are not vesting conditions. These features would need to be included in the grant date fair value for transactions with employees and others providing similar services. In the period when an employee takes a refund of previously made contributions (and stops making further contributions) all remaining compensation expense is recognized. Non-vesting conditions would not impact the number of awards expected to vest or valuation thereof subsequent to grant date. When calculating the compensation costs for shares under performance-based matching programs, the Parent Company at each reporting date assesses the probability that the performance targets are met. Compensation expenses are based on estimates of the number of shares that will match at the end of the vesting period. When shares are matched, social security charges are to be paid in certain countries on the value of the employee benefit. The employee benefit is generally based on the market value of the shares at the matching date. During the vesting period, estimated amounts for such social security charges are accrued.
Compensation to the Board of Directors
During 2008, the Parent Company introduced a share-based compensation program as a part of the remuneration to the Board of Directors. The program gives non-employed Directors elected by the General Meeting of Shareholders a right to receive part of their remuneration as a future payment of an amount which corresponds to the market value of a share of class B in the Parent Company at the time of payment, as further disclosed in Note C29, “Information Regarding Members of the Board of Directors, the Management and Employees”. The cost for cash settlements is measured and recognized based on the estimated costs for the program on a pro rata basis during the service period, being one year. The estimated costs are remeasured during and at the end of the service period.
Segment reporting
An operating segment is a component of a company whose operating results are regularly reviewed by the Company’s chief operating decision maker, (CODM), to make decisions about resources to be allocated to the segment and assess its performance. Within the Company, the Group Management Team is defined as the CODM function.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The segment presentation, as per each segment is based on the accounting policies as disclosed in this note. The arm’s length principle is applied in transactions between the segments.
The Company’s segment disclosure about geographical areas is based on in which country transfer of risks and rewards occur.
Borrowing costs
The Company capitalizes borrowing costs in relation to qualifying assets, for the Company normally being internally generated intangible assets as capitalized development expenses. All other borrowing costs are expensed as incurred.
Government grants
Government grants are recognized when there is a reasonable assurance of compliance with conditions attached to the grants and that the grants will be received.
For the Company, government grants are linked to performance of research or development work or to capital expenditures that are subsidized as governmental stimulus to employment or investments in a certain country or region. Government grants linked to research and development are normally deducted in reporting the related expense, whereas grants related to assets are accounted for deducting the grant when establishing the acquisition cost of the asset.
New standards and interpretations not yet adopted
A number of issued new standards, amendments to standards and interpretations are not yet effective for the year ended December 31, 2009, and have not been applied in preparing these consolidated financial statements:
IAS 27 (revised), ‘Consolidated and separate financial statements’, (effective from July 1, 2009). The revised standard requires the effects of all transactions with non-controlling interests to be recorded in OCI if there is no change in control and these transactions will no longer result in goodwill or gains or losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is remeasured to fair value, and a gain or loss is recognized in profit or loss. The Company will apply IAS 27 (revised) prospectively to transactions with non-controlling interests from January 1, 2010.
IFRS 3 (revised), ‘Business combinations’ (effective from July 1, 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed as incurred. The Company will apply IFRS 3 (revised) prospectively from January 1, 2010. Acquisition-related costs incurred prior to the adoption of IFRS 3 (R) have been treated as a part of the purchase price, as required by IFRS 3. These costs amount to SEK 53 million as per December 31, 2009.
IFRS 2 (amendments), ‘Group cash-settled share-based payment transactions’ (effective from January 1, 2010). In addition to incorporating IFRIC 8, ‘Scope of IFRS 2’, and IFRIC 11, ‘IFRS 2—Group and
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
LEASING WITH THE COMPANY AS LESSEELeasing with the Company as lessee
Assets under finance leases, recorded as property, plant and equipment, consist of:
FINANCE LEASES
2008 | 2007 | 2009 | 2008 | |||||
Acquisition costs | ||||||||
Real estate | 2,059 | 1,743 | 1,942 | 2,059 | ||||
Machinery | 4 | 4 | 4 | 4 | ||||
2,063 | 1,747 | 1,946 | 2,063 | |||||
Accumulated depreciation | ||||||||
Real estate | -763 | -589 | –662 | –763 | ||||
Machinery | -4 | -2 | –4 | –4 | ||||
-767 | -591 | –666 | –767 | |||||
Accumulated impairment losses | ||||||||
Real estate | -10 | -80 | –49 | –10 | ||||
Net carrying value | 1,286 | 1,076 | 1,231 | 1,286 | ||||
As of December 31, 2008,2009, future minimum lease payment obligations for leases were distributed as follows:
Finance leases | Operating leases | Finance leases | Operating leases | |||||
2009 | 208 | 3,429 | ||||||
Finance leases | Operating leases | |||||||
199 | 2,757 | |||||||
2011 | 156 | 2,153 | 168 | 2,611 | ||||
2012 | 144 | 1,673 | 166 | 2,102 | ||||
2013 | 144 | 984 | 164 | 1,270 | ||||
2014 and later | 1,381 | 2,951 | ||||||
2014 | 209 | 935 | ||||||
2015 and later | 1186 | 2,371 | ||||||
Total | 2,232 | 13,947 | 2,070 | 12,474 | ||||
Future finance charges1) | -804 | n/a | –676 | n/a | ||||
Present value of finance lease liabilities | 1,428 | 13,947 | 1,394 | 12,474 | ||||
1) | Average effective interest rate on lease payables is |
Expenses in 20082009 for leasing of assets were SEK 4,708 (2,878)3,839 (4,708) million, of which variable expenses were SEK 1 (8)0 (1) million. The leasing contracts vary in length from 1 to 20 years.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company’s lease agreements normally do not include any contingent rents. In the few cases they occur, it relatesthey relate to charges for heating linked to the oil price index. Most of the leases of real estate contain terms of renewal, giving the company the right to prolong the agreement in question for a predefined period of time. All of the finance leases of facilities contain purchase options. Only a very limited number of the Company’s lease agreements contain restrictions on stockholders’ equity or other means of finance. The major agreement contains a restriction stating that the Parent Company must maintain a stockholders’stockholders��� equity of at least SEK 25 billion.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
LEASES WITHNOTES TO THE COMPANY AS LESSORCONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Leases with the Company as lessor
Leasing income mainly relates to subleasing of real estate. These leasing contracts vary in length from 1 to 1011 years.
At December 31, 2008,2009, future minimum payment receivables were distributed as follows:
Finance leases | Operating leases | Finance leases | Operating leases | |||||
2009 | — | 122 | ||||||
Finance leases | Operating leases | |||||||
— | 72 | |||||||
2011 | — | 25 | — | 51 | ||||
2012 | — | 1 | — | 17 | ||||
2013 | — | 1 | — | 14 | ||||
2014 and later | — | 3 | ||||||
2014 | — | 14 | ||||||
2015 and later | — | 54 | ||||||
Total | — | 224 | — | 262 | ||||
Unearned financial income | — | n/a | — | n/a | ||||
Uncollectible lease payments | — | n/a | — | n/a | ||||
Net investments in financial leases | — | n/a | — | n/a | ||||
Leasing income in 20082009 was SEK 205 (160)181 (205) million.
C28 TAX ASSESSMENT VALUES IN SWEDEN
2008 | 2007 | 2009 | 2008 | |||||
Land and land improvements | 58 | 58 | 58 | 58 | ||||
Buildings | 265 | 265 | 265 | 265 | ||||
Total | 323 | 323 | 323 | 323 | ||||
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
C29 INFORMATION REGARDING EMPLOYEES, MEMBERS OF THE BOARD OF DIRECTORS, THE MANAGEMENT AND MANAGEMENTEMPLOYEES
NUMBER OF EMPLOYEESCONTENTS
1. | Remuneration to the Board of Directors | 126 | ||
2. | Remuneration to the Group Management | 127 | ||
Remuneration costs for the Group Management | 127 | |||
Remuneration Policy for Group Management | 129 | |||
3. | Long-Term Variable Remuneration | 131 | ||
Stock Purchase Plan | 131 | |||
The Key Contributor Retention Plan | 131 | |||
The Executive Performance Stock Plan | 131 | |||
Stock option plans | 132 | |||
Shares for all plans | 133 | |||
4. | Employee numbers, wages and salaries | 135 | ||
Employee numbers | 135 | |||
Employee wages and salaries | 136 |
Remuneration to the Board of Directors
REMUNERATION TO MEMBERS OF THE BOARD OF DIRECTORS
Board fees | Number of synthetic shares/ portion of Board fee | Value at grant date of synthetic shares allocated 2009 A | Number of previously allocated synthetic shares | Net change in value of allocated synthetic shares1) B | Committee fees | Total fees paid in cash2) C | Total recognized costs 2009 (A+B+C) | ||||||||||
Board member | |||||||||||||||||
Michael Treschow | 3,750,000 | 40,747/75 | % | 2,812,500 | 38,323.80 | +227,763 | 250,000 | 1,187,500 | 4,227,763 | ||||||||
Marcus Wallenberg | 750,000 | 2,716/25 | % | 187,500 | 2,554.80 | +15,153 | 125,000 | 687,500 | 890,153 | ||||||||
Sverker Martin–Löf | 750,000 | 0/0 | % | — | — | — | — | 750,000 | 750,000 | ||||||||
Roxanne S. Austin | 750,000 | 8,149/75 | % | 562,500 | 7,664.60 | +45,524 | 250,000 | 437,500 | 1,045,524 | ||||||||
Sir Peter L. Bonfield | 750,000 | 2,716/25 | % | 187,500 | 2,554.80 | +15,153 | 250,000 | 812,500 | 1,015,153 | ||||||||
Börje Ekholm | 750,000 | 8,149/75 | % | 562,500 | 7,664.60 | +45,524 | 125,000 | 312,500 | 920,524 | ||||||||
Ulf J. Johansson | 750,000 | 8,149/75 | % | 562,500 | 7,664.60 | +45,524 | 350,000 | 537,500 | 1,145,524 | ||||||||
Nancy McKinstry | 750,000 | 5,433/50 | % | 375,000 | 7,664.60 | +53,904 | 125,000 | 500,000 | 928,904 | ||||||||
Anders Nyrén | 750,000 | 0/0 | % | — | — | — | 125,000 | 875,000 | 875,000 | ||||||||
Carl-Henric Svanberg | — | — | — | — | — | — | — | — | |||||||||
Employee Representatives | |||||||||||||||||
Jan Hedlund | 18,000 | — | — | — | — | 18,000 | 18,000 | ||||||||||
Anna Guldstrand | 21,000 | — | — | — | — | 21,000 | 21,000 | ||||||||||
Karin Åberg | 19,500 | — | — | — | — | 19,500 | 19,500 | ||||||||||
Monica Bergström | 19,500 | — | — | — | — | 19,500 | 19,500 | ||||||||||
Kristina Davidsson | 21,000 | — | — | — | — | 21,000 | 21,000 | ||||||||||
Pehr Claesson | 21,000 | — | — | — | — | 21,000 | 21,000 | ||||||||||
Total | 9,870,000 | 76,059 | 5,250,000 | 74,091.80 | +448,545 | 1,600,000 | 6,220,000 | 11,918,545 | |||||||||
1) | The difference in value as of December 31, 2009 compared to December 31, 2008 (with respect to synthetic shares allocated 2008) and compared to grant date 2009 (with respect to synthetic shares allocated 2009). The value of synthetic shares allocated 2008 includes SEK 1.85 per share in compensation for dividends resolved by the Annual General Meeting 2009. |
2) | Committee fee and cash portion of the Board fee. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Comments to the table
The Chairman of the Board was entitled to a Board fee of SEK 3,750,000. The Chairman also received SEK 125,000 for each Board committee on which he served.
The other Directors appointed by the Annual General Meeting were entitled to a fee of SEK 750,000 each. In addition, each non-employed Director serving on a Board committee received a fee of SEK 125,000 for each committee. However, the Chairman of the Audit Committee received a fee of SEK 350,000 and the other non-employed members of the Audit Committee received a fee of SEK 250,000 each.
Members of the Board, who are not employees of the Company, have not received any remuneration other than the fees and synthetic shares as above. None of the directors have entered into a service contract with the Parent Company or any of its subsidiaries, providing for termination benefits.
Members and Deputy Members of the Board who are Ericsson employees received no remuneration or benefits other than their entitlements as employees. However, a fee of SEK 1,500 per attended Board meeting was paid to each employee representative on the Board and their deputies.
The Annual General Meeting 2009 resolved that non-employed Directors may choose to receive the Board fee, (i.e. exclusive of committee fee) as follows: i) 25 percent of the Board fee in cash and 75 percent in the form of synthetic shares, with a value corresponding to 75 percent of the Board fee at the time of allocation, ii) 50 percent in cash and 50 percent in the form of synthetic shares, or iii) 75 percent in cash and 25 percent in the form of synthetic shares. Directors may also choose not to participate in the synthetic share program and receive 100 percent of the Board fee in cash. Committee fees are always paid in cash. The number of synthetic shares is based on a volume-weighed average of the market price of Ericsson Class B shares on the NASDAQ OMX Stockholm exchange during the five trading days immediately following the publication of Ericsson’s interim report for the first quarter of 2009: SEK 69.0222. The number of synthetic shares is rounded down to the nearest whole number of shares.
The synthetic shares are vested during the Directors’ term of office and the right to receive payment with regard to the allocated synthetic shares occurs after the publication of the Company’s year-end financial statement during the fifth year following the Annual General Meeting which resolved on the synthetic share program, i.e. in 2014.
The amount payable shall be determined based on the volume-weighed average price for shares of Class B during the five trading days immediately following the publication of the year-end financial statement.
Synthetic shares were allocated to members of the Board for the first time 2008, on equal terms and conditions as resolved 2009. Payment based on synthetic shares may thus occur for the first time in 2013 with respect to the synthetic shares allocated 2008. The value of all outstanding synthetic shares fluctuates in line with the market value of Ericsson’s Class B share and may differ from year to year compared to the original value on their respective grant dates. The change in value of the outstanding synthetic shares is established each year and affects the total recognized costs that year. As per December 31, 2009 the total number of synthetic shares under the programs is 150,150.80 and the total accounted debt is SEK 10,039,515.
Remuneration to the Group Management
Remuneration costs for the Group Management
The total remuneration to the President and CEO and to other members of the Group Management includes fixed salary, short-term and long-term variable remuneration, pension and other benefits. These remuneration elements are based on the guidelines for remuneration and other employment conditions for senior management as approved at AGM 2009, see the approved guidelines in “2009 Remuneration Policy for Group Management”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Remuneration Policy and how it is implemented at Ericsson is outlined in “Remuneration Report”.
REMUNERATION COSTS INCURRED DURING 2009 FOR THE PRESIDENT AND CEO AND OTHER MEMBERS OF GROUP MANAGEMENT
SEK | The President | Other Members of Group Management | Total | |||
Salary | 15,981,000 | 45,672,309 | 61,653,309 | |||
Provisions for annual variable remuneration earned 2009 to be paid 2010 | 6,226,920 | 15,137,637 | 21,364,557 | |||
Long-term variable remuneration provision | 1,261,476 | 1,910,875 | 3,172,351 | |||
Pension costs | 18,917,620 | 28,656,277 | 47,573,897 | |||
Other benefits | 59,664 | 2,363,773 | 2,423,437 | |||
Total | 42,446,680 | 93,740,871 | 136,187,551 | |||
Comments to the table
During 2009, there were three Executive Vice Presidents, appointed by the Board of Directors, of whom one has have left his position during the year. No one of these executives has acted as deputy to the President and CEO during the year. All Executive Vice Presidents are included in the group “Other members of Group Management”.
The group “Other members of Group Management” comprises the following persons: Hans Vestberg, Jan Frykhammar, Johan Wibergh, Carl Olof Blomqvist, Cesare Avenia (from November 9, 2009), Håkan Eriksson, Douglas Gilstrap (from September 7, 2009), Marita Hellberg, Magnus Mandersson (from November 13, 2009), Torbjörn Possne, Henry Sténson, and Jan Wäreby. Bert Nordberg left the Group Management Team as of September 1, 2009. Joakim Westh left the Group Management Team as of January 1, 2009, but is included up to June 30, 2009, as he was fulfilling his six-month notice period.
The salary stated in the table includes vacation salary paid during 2009.
During 2010, the President and CEO has received SEK 6,804,000 as compensation for outstanding vacation at the time of his resignation, i.e. earned but not used vacation days during his employment at Ericsson.
“Long-term variable remuneration provisions” refers to the compensation costs during 2009 for all outstanding share based plans. For a description of compensation cost, including accounting treatment, see Note C1, “Significant Accounting Policies, Share based employee compensation”.
For the President and CEO and other members of Group Management employed in Sweden a supplementary plan is applied in addition to the occupational pension plan for salaried staff on the Swedish labor market (ITP) with pension from 60 years. These pension plans are not conditional upon future employment at Ericsson. For the President and CEO, the contribution during 2009 for old age pension in the supplementary pension plan was SEK 7,489,825 and the fee in the ITP plan SEK 1,427,795. The pension cost for the President and CEO includes a pension supplement of SEK 10,000,000 paid to his existing pension insurance. Changes of commitments made to the President and CEO and other members of Group Management for benefit based temporary disability and survivor’s pension until retirement age are also included in the pension costs.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Ericsson’s commitments for benefit based pensions per December 31, 2009, under IAS 19 amounted to SEK 3,025,527 for the President and CEO which refers to the ITP plan. For other members of Group Management the Company’s commitments amounted to SEK 47,969,448 of which SEK 36,890,051 refers to the ITP plan and the remaining SEK 11,079,397 to temporary disability and survivor’s pensions until retirement age.
For previous Presidents, the Company has made provisions for defined benefit pension plans in connection with their active service periods within the Company.
OUTSTANDING MATCHING RIGHTS
As per December 31, 2009 Number of Class B shares | The President | Other Members of Group Management | ||
Stock Purchase Plans 2006, 2007, 2008 and 2009 and Executive Performance Stock Plans 2007, 2008 and 2009 | 410,123 | 553,688 |
Comments to the tables
For the definition of matching rights, see description in “Long-term variable remuneration”.
The number of matching rights is based on expected performance matching under Executive Performance Stock Plans 2007, 2008 and 2009 (there is no payout under the 2006 Executive Performance Stock Plan).
During 2009, the President and CEO received 9,183 matching shares and other members of Group Management 10,857 matching shares.
Remuneration Policy for Group Management
The following guidelines for remuneration and other employment terms for Group Management were approved by the Annual General Meeting 2009.
2009 Remuneration Policy for Group Management
This policy covers the remuneration and other terms of employment for the Group Management Team, including the President and CEO, in the following referred to as the “Group Management”.
Remuneration of Group Management in Ericsson is based on the principles of performance, competitiveness and fairness. Different remuneration elements are designed to reflect these principles. Therefore a mix of several remuneration elements is applied in order to reflect the remuneration principles in a balanced way.
The Group Management’s total remuneration consists of fixed salary, variable components in the form of annual short-term variable remuneration and long-term variable remuneration, pension and other benefits. Together these elements constitute an integral remuneration package. If the size of any of the elements should be increased or decreased, at least one other element has to be decreased or increased if the competitive position of the total package should remain unchanged.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
1. Relative importance of fixed and variable components of the remuneration of Group Management and the linkage between performance and remuneration
Ericsson takes account of global remuneration practices together with the practice of the home country of each member of Group Management.
Fixed salary is set to be competitive. Its absolute level is determined by the size and complexity of the job and the year-to-year performance of the individual jobholder.
Performance is specifically reflected in the variable remuneration—both in an annual variable component and in a long-term variable part. Although this may vary over time to take account of pay trends, currently the target level of the short-term variable remuneration for Group Management is 30 to 40 percent of the fixed salary. The long-term variable remuneration is set to achieve a target of around 30 percent of the fixed salary. In both cases the variable pay is measured against the achievement of specific business objectives, reflecting the judgment of the Board of Directors as to the right balance between fixed and variable pay and the market practice for remuneration of executives. All variable remuneration plans have maximum award and vesting limits.
With the current composition of Group Management, the Company’s cost during 2009 for the short-term variable and the long-term variable remuneration of Group Management can, at a constant share price, amount to between 0 and 125 percent of the aggregate fixed salary cost, all excluding social security costs.
2. The principal terms of variable remuneration
The annual variable remuneration is through a cash-based program with specific business targets derived from the annual business plan approved by the Board of Directors. The exact nature of the targets will vary depending on the specific job but may include financial targets at either corporate level or at a specific business unit level, operational targets, employee motivation targets and customer satisfaction targets.
Share based long-term variable remuneration plans are submitted each year for approval by the shareholders in General Meeting. The payout is determined by three specific variables, the individual’s own investment in shares, a long-term financial target at corporate level and the share price development.
3. Pension
Pension benefits follow the competitive practice in the home country. For Group Management in Sweden, the Company applies a defined contribution scheme for old age pension in addition to the basic pension plans on the Swedish labor market.
The retirement age is normally 60 years of age but can vary in individual cases.
4. Other benefits
The basic principle is that other benefits, such as company car and medical schemes, shall be competitive in the local market.
5. Additional remuneration arrangements
By way of exception, additional arrangements can be made when deemed required in order to attract or retain key competences or skills, or to encourage individuals to move to new locations or positions. Such additional arrangement shall be limited in time and shall not exceed a period of 36 months and two times the remuneration that the individual concerned would have received had no additional arrangement been made.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. Notice of termination and severance pay
For Group Management in Sweden the mutual notice period is six months. Upon termination of employment by the Company, severance pay amounting to a maximum of 18 months fixed salary is paid. Notice of termination given by the employee due to significant structural changes, or other events that in a determining manner affect the content of work or the condition for the position, is equated with notice of termination served by the Company.
Long-Term Variable Remuneration
The Stock Purchase Plan is designed to offer an incentive for all employees to participate in the Company where practicable, which is consistent with industry practice and with our ways of working. For the 2009 plan employees are able to save up to 7.5 percent (CEO 9 percent) of gross fixed salary for purchase of Class B contribution shares at market price on the NASDAQ OMX Stockholm or ADSs at NASDAQ (contribution shares) during a twelve-month period (contribution period). If the contribution shares are retained by the employee for three years after the investment and the employment with the Ericsson Group continues during that time, the employee’s shares will be matched with a corresponding number of Class B shares or ADSs free of consideration. Employees in 94 countries participate in the plans.
The table below shows the contribution periods and participation details for ongoing plans.
Plan | Contribution period | Number of participants at launch | Take-up rate–percent of all employees | ||||
Stock Purchase plan 2006 | August 2006–July 2007 | 17,000 | 29 | % | |||
Stock Purchase plan 2007 | August 2007–July 2008 | 19,000 | 26 | % | |||
Stock Purchase plan 2008 | August 2008–July 2009 | 19,000 | 25 | % | |||
Stock Purchase plan 2009 | August 2009–July 2010 | 18,000 | 25 | % |
Participants save each month, beginning with August payroll, towards quarterly investments. These investments (in November, February, May and August) are matched on the third anniversary of each such investment, subject to continued employment, and hence the matching spans over two financial years and two tax years.
The Key Contributor Retention Plan
The Key Contributor Retention Plan is part of Ericsson’s talent management strategy and is designed to give recognition for performance, critical skills and potential as well as encourage retention of key employees. Under the program, up to 10 percent of employees (2009: 6,702 employees) are selected through a nomination process that identifies individuals according to performance, critical skills and potential. Participants selected obtain one extra matching share in addition to the ordinary one matching share for each contribution share purchased under the Stock Purchase Plan during a twelve-month program period.
The Executive Performance Stock Plan
The Executive Performance Stock Plan is designed to focus the management on driving earnings and provide competitive remuneration. Senior executives, including Group Management, are selected to obtain up to four or six extra shares (performance matching shares) in addition to the ordinary one matching share for each
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
contribution share purchased under the Stock Purchase Plan. Up to 0.5 percent of employees (2009: 218 executives) are offered to participate in the plan. As from the 2006 program, the CEO has been allowed to invest up to 9 percent of fixed salary in contribution shares and may obtain up to eight performance matching shares in addition to the Stock Purchase Plan matching share for each contribution share. The performance matching is subject to the fulfillment of a performance target of average annual Earnings Per Share (EPS) growth. The table below shows all Executive Performance Stock Plans to date.
EXECUTIVE PERFORMANCE STOCK PLANS
Plan | Base year EPS1) | Target average annual EPS growth range2) | Matching share vesting range3) | Maximum opportunity as percentage of fixed salary4) | Percentage vesting | |||||
Performance Stock Plan 20045) | 3.45 | 5% to 25% | 0 to 4 0 to 6 | 30% 45% | 100% 100% | |||||
Performance Stock Plan 20056) | 6.68 | 3% to 15% | 0 to 4 0 to 6 | 30% 45% | 0% 0% | |||||
Performance Stock Plan 2006 | 7.58 | 3% to 15% | 0 to 4 0 to 6 0 to 8 | 30% 45% 72% | 0% 0% 0% | |||||
Performance Stock Plan 2007 | 8.83 | 5% to 15% | 0.67 to 4 1 to 6 1.33 to 8 | 30% 45% 72% | ||||||
Performance Stock Plan 2008 | 4.43 | 5% to 15% | 0.67 to 4 1 to 6 1.33 to 8 | 30% 45% 72% | ||||||
Performance Stock Plan 2009 | 2.90 | 5% to 15% | 0.67 to 4 1 to 6 1.33 to 8 | 30% 45% 72% |
1) | Sum of four quarters up to June 30 of plan year. |
2) | EPS range found from three-year average EPS of the twelve quarters to the end of the performance period and corresponding growth targets. |
3) | Corresponding to EPS range (no Performance Share Plan matching below this range). Matching shares per contribution share invested in addition to Stock Purchase Plan matching according to program of up to 4, 6 or 8 matching shares. |
4) | At full investment, full vesting and constant share price. Excludes Stock Purchase Plan matching. |
5) | The 2004 plan vested in full. |
6) | No vesting and therefore no Performance Share Plan matching for 2005 and 2006 plans |
Originally, for the Stock Option Plan 2002, 10.8 million options were granted to 12,800 key employees. Of the originally issued employee options, there remained, as of December 31, 2009, no employee options outstanding whatsoever, since the plan expired on November 11, 2009. Each employee option did entitle the holder to purchase one Class B share for SEK 39.00.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
STOCK OPTION PLANS
Ongoing plans 2009 | Grant/expiry date | Exercise price1) (SEK) | Vesting period from grant date | Number of participants at grant | Number of participants end of 2009 | |||||
Stock Option Plan 20022) | 11 Nov 2002/11 Nov 2009 | 39.00 | 1/3 after 1 year, 1/3 after 2 years, 1/3 after 3 years | 12,800 | — |
1) | Market price at grant date—re-pricing is only permitted under limited circumstances, principally relating to changes in the capital structure of Ericsson. |
2) | For stock options exercised during 2009, the weighted average share price was SEK 72.18. |
All plans are funded with treasury stock and are equity settled. Treasury stock for all plans has been issued in directed cash issues of Class C shares at the quotient value and purchased under a public offering at the subscription price plus a premium corresponding to the subscribers’ financing costs, and then converted to Class B shares.
For all plans, additional shares have been allocated for financing of social security expenses. Treasury stock is sold on the NASDAQ OMX Stockholm to cover social security payments when arising due to exercise of options or matching of shares. During 2009, 1,044,535 shares were sold at an average price of SEK 70.04. Sale of shares is recognized directly in equity.
If, as of December 31, 2009, all shares allocated for future matching under the Stock Purchase Plan were transferred, and shares designated to cover social security payments were disposed of as a result of the exercise and the matching, approximately 54 million Class B shares would be transferred, corresponding to 1.7 percent of the total number of shares outstanding, 3,194 million. As of December 31, 2009, 79 million Class B shares were held as treasury stock.
The table below shows how shares (representing options and matching rights but excluding shares for social security costs) are being used for all outstanding plans. From left to right the table includes (A) the number of shares originally approved by the Annual General Meeting, adjusted for rights offering and reverse split where applicable; (B) how many of the originally designated shares that were outstanding at the beginning of 2009; (C) how many shares awards that were granted over during 2009; (D) the number of shares exercised or matched during 2009; (E) the number of shares forfeited by participants or expired under the plan rules during 2009; (F) the balance left as outstanding at the end of 2009, having added new grants to the shares outstanding at the beginning of the year and deducted the shares related to awards exercised, matched, forfeited and expired. The final column (G) shows the compensation costs charged to the accounts during 2009 for each plan, calculated as fair value in SEK.
For a description of compensation cost, including accounting treatment, see Note C1, “Significant Accounting Policies, Share-based employee compensation”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SHARES FOR ALL PLANS
Plan (million shares) | Originally designated1) A | Outstanding beginning of 2009 B | Awarded during 2009 C | Exercised/ matched during 2009 D | Forfeited/ expired during 2009 E | Outstanding end of 2009 F=B+C-D-E | Compensation costs charged during 2009 (MSEK) G | |||||||||
2002 Stock Option Plan | 10.8 | 3.8 | — | 3.4 | 0.4 | — | 2) | — | ||||||||
2005 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 6.3 | 3.2 | — | 2.7 | 0.5 | — | 25 | 4) | ||||||||
2006 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 6.4 | 4.6 | — | 1.2 | 0.1 | 3.3 | 126 | 4) | ||||||||
2007 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 9.7 | 9.4 | — | 0.5 | 0.3 | 8.6 | 3) | 189 | 4) | |||||||
2008 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 16.5 | 3.7 | 8.3 | 0.4 | 0.3 | 11.3 | 3) | 183 | 4) | |||||||
2009 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 22.4 | — | 2.5 | — | — | 2.5 | 3) | 6 | 4) | |||||||
Total | 72.1 | 24.7 | 10.8 | 8.2 | 1.6 | 25.7 | 529 | 5) | ||||||||
1) | Adjusted for rights offering and reverse split when applicable. |
2) | All outstanding options in the 2002 Stock Option Plan expired during 2009 and no options therefore remain exercisable. |
3) | Presuming maximum performance matching under the Executive Performance Stock Plans. The 2005 and 2006 plans have lapsed. |
4) | Fair value is calculated as the share price on the investment date, reduced by the net present value of the dividend expectations during the three-year vesting period. Net present value calculations are based on data from external party. Fair value is also adjusted for participants failing to keep hold of their contribution shares during the vesting period. For shares under the Executive Performance Stock Plans, the Company assesses the probability of meeting the performance targets when calculating the compensation cost. Fair value of the Class B share at each investment date during 2009 was: February 15 SEK 68.11, May 15 SEK 60.00, August 15 SEK 60.88 and November 15 SEK 65.83. |
5) | Total compensation costs charged during 2008: SEK 572 million, 2007: SEK 496 million. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Employee numbers, wages and salaries
AVERAGE NUMBER OF EMPLOYEES
2008 | 2007 | 2009 | 2008 | |||||||||||||||||||||
Men | Women | Total | Men | Women | Total | Men | Women | Total | Men | Women | Total | |||||||||||||
Western Europe1) | 32,289 | 9,167 | 41,456 | 32,118 | 8,961 | 41,079 | 30,676 | 9,493 | 40,169 | 32,289 | 9,167 | 41,456 | ||||||||||||
Central and Eastern Europe, | ||||||||||||||||||||||||
Middle East and Africa | 7,028 | 1,723 | 8,751 | 5,483 | 1,596 | 7,079 | ||||||||||||||||||
Central and Eastern Europe, Middle East and Africa | 8,168 | 1,831 | 9,999 | 7,028 | 1,723 | 8,751 | ||||||||||||||||||
Asia Pacific | 12,111 | 3,343 | 15,454 | 10,952 | 2,844 | 13,796 | 13,513 | 3,825 | 17,338 | 12,111 | 3,343 | 15,454 | ||||||||||||
Latin America | 6,151 | 1,335 | 7,486 | 4,779 | 1,058 | 5,837 | 5,876 | 1,254 | 7,130 | 6,151 | 1,335 | 7,486 | ||||||||||||
North America | 4,556 | 1,286 | 5,842 | 4,329 | 1,225 | 5,554 | 9,366 | 2,358 | 11,724 | 4,556 | 1,286 | 5,842 | ||||||||||||
Total2) | 62,135 | 16,854 | 78,989 | 57,661 | 15,684 | 73,345 | 67,599 | 18,761 | 86,360 | 62,135 | 16,854 | 78,989 | ||||||||||||
| ||||||||||||||||||||||||
1) Of whichSweden | 14,685 | 4,990 | 19,675 | 14,128 | 4,618 | 18,746 | 13,930 | 4,591 | 18,521 | 14,685 | 4,990 | 19,675 | ||||||||||||
2) Of which EU | 34,100 | 9,633 | 43,733 | 33,563 | 9,351 | 42,914 | 32,970 | 10,055 | 43,025 | 34,100 | 9,633 | 43,733 |
NUMBER OF EMPLOYEES AT YEAR END
Employees by region | 2008 | 2007 | ||
Western Europe1) | 41,618 | 41,517 | ||
Central and Eastern Europe, Middle East and Africa | 7,976 | 7,329 | ||
Asia Pacific | 15,165 | 13,120 | ||
Latin America | 8,247 | 6,547 | ||
North America | 5,734 | 5,498 | ||
Total2) | 78,740 | 74,011 | ||
| ||||
1) Of which Sweden | 20,155 | 19,781 | ||
2) Of which EU | 43,093 | 42,387 |
Employees per segment | 2008 | 2007 | ||
Networks | 45,823 | 44,661 | ||
Professional Services | 23,244 | 19,790 | ||
Multimedia | 9,673 | 9,560 | ||
Total | 78,740 | 74,011 | ||
EMPLOYEES BY GENDER AND AGE AT YEAR END 2008
Female | Male | Percent of total | |||||||
Under 25 years old | 790 | 2,502 | 4 | % | |||||
26–35 years old | 6,099 | 21,757 | 35 | % | |||||
36–45 years old | 6,730 | 23,754 | 39 | % | |||||
46–55 years old | 2,530 | 10,562 | 17 | % | |||||
Over 55 years old | 799 | 3,237 | 5 | % | |||||
Percent of total | 21 | % | 79 | % | 100 | % | |||
Employees by region | 2009 | 2008 | ||
Western Europe1) | 38,305 | 41,618 | ||
Central and Eastern Europe, Middle East and Africa | 10,145 | 7,976 | ||
Asia Pacific | 16,766 | 15,165 | ||
Latin America | 6,055 | 8,247 | ||
North America | 11,222 | 5,734 | ||
Total2) | 82,493 | 78,740 | ||
�� | ||||
| ||||
1) Of which Sweden | 18,217 | 20,155 | ||
2) Of which EU | 41,396 | 43,093 | ||
Employees per segment | ||||
Networks | 49,874 | 45,823 | ||
Professional Services | 24,570 | 23,244 | ||
Multimedia | 8,049 | 9,673 | ||
Total | 82,493 | 78,740 | ||
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
EMPLOYEES BY GENDER AND AGE AT YEAR END 2009
Female | Male | Percent of total | |||||||
Under 25 years old | 1,228 | 3,321 | 5 | % | |||||
26–35 years old | 6,778 | 23,022 | 36 | % | |||||
36–45 years old | 6,918 | 23,749 | 37 | % | |||||
46–55 years old | 2,908 | 10,768 | 17 | % | |||||
Over 55 years old | 784 | 3,017 | 5 | % | |||||
Percent of total | 23 | % | 77 | % | 100 | % | |||
NUMBER OF EMPLOYEES RELATED TO COST OF SALES AND OPERATING EXPENSES
2008 | 2007 | 2006 | 2009 | 2008 | 2007 | |||||||
Cost of sales | 35,717 | 33,904 | 27,682 | 41,521 | 35,717 | 33,904 | ||||||
Operating expenses | 43,023 | 40,107 | 36,099 | 40,972 | 43,023 | 40,107 | ||||||
Total | 78,740 | 74,011 | 63,781 | 82,493 | 78,740 | 74,011 | ||||||
EMPLOYEE MOVEMENTS
2008 | 2007 | 2009 | 2008 | |||||
Head count at year-end | 78,740 | 74,011 | 82,493 | 78,740 | ||||
Employees who have left the Company | 3,415 | 6,657 | 9,147 | 3,415 | ||||
Employees who have joined the Company | 8,144 | 16,887 | 12,900 | 8,144 | ||||
Temporary employees | 1,124 | 1,415 | 693 | 1,124 |
REMUNERATIONEmployee wages and salaries
WAGES AND SALARIES AND SOCIAL SECURITY EXPENSES
2008 | 2007 | 2009 | 2008 | |||||
Wages and salaries | 38,607 | 34,111 | 41,247 | 38,607 | ||||
Social security expenses | 12,690 | 10,660 | 13,630 | 12,690 | ||||
Of which pension costs | 3,206 | 3,074 | 3,588 | 3,206 |
Amounts related to the President and CEO and the Group Management Team are included.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
WAGES AND SALARIES PER REGION
2008 | 2007 | 2009 | 2008 | |||||
Western Europe1) | 24,138 | 22,278 | 23,039 | 24,138 | ||||
Central and Eastern Europe, Middle East and Africa | 3,354 | 2,520 | 4,323 | 3,354 | ||||
Asia Pacific | 4,594 | 3,714 | 5,346 | 4,594 | ||||
Latin America | 1,879 | 1,431 | 2,181 | 1,879 | ||||
North America2) | 4,642 | 4,168 | 6,358 | 4,642 | ||||
Total3) | 38,607 | 34,111 | 41,247 | 38,607 | ||||
| ||||||||
| ||||||||
1) Of which Sweden | 11,825 | 11,025 | 10,324 | 11,825 | ||||
2) Of which United States | 3,296 | 2,904 | 4,928 | 3,296 | ||||
3) Of which EU | 24,699 | 22,603 | 23,734 | 24,699 |
Remuneration in foreign currency has been translated to SEK at average exchange rates for the year.
REMUNERATION TO BOARD MEMBERS AND PRESIDENTS IN SUBSIDIARIES
2008 | 2007 | |||
Salary and other remuneration | 316 | 266 | ||
Of which annual variable remuneration | 41 | 43 | ||
Pension costs | 36 | 28 |
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2009 | 2008 | |||
Salary and other remuneration | 315 | 316 | ||
Of which annual variable remuneration | 42 | 41 | ||
Pension costs | 34 | 36 |
BOARD MEMBERS, PRESIDENTS AND GROUP MANAGEMENT BY GENDER AT YEAR END
2008 | 2007 | 2009 | 2008 | |||||||||||||||||||||
Females | Males | Females | Males | Females | Males | Females | Males | |||||||||||||||||
Parent Company | ||||||||||||||||||||||||
Board members and President | 38 | % | 62 | % | 38 | % | 62 | % | 38 | % | 62 | % | 38 | % | 62 | % | ||||||||
Group Management | 9 | % | 91 | % | 10 | % | 90 | % | 8 | % | 92 | % | 9 | % | 91 | % | ||||||||
Subsidiaries | ||||||||||||||||||||||||
Board members and Presidents | 12 | % | 88 | % | 11 | % | 89 | % | 10 | % | 90 | % | 12 | % | 88 | % |
REMUNERATION POLICY AND REMUNERATIONC30 RELATED PARTY TRANSACTIONS
During 2009, various related party transactions were executed pursuant to contracts based on terms customary in the industry and negotiated on an arm’s length basis. For information regarding equity and Ericsson’s share of assets, liabilities and income in joint ventures and associated companies, see Note C12, “Financial Assets, Non-Current”.
Sony Ericsson Mobile Communications AB (SEMC)
In October 2001, SEMC was established as a joint venture between Sony Corporation and Ericsson, and a substantial portion of Ericsson’s handset operations was sold to SEMC. The joint venture is headquartered in London, United Kingdom. As part of the formation of the joint venture, contracts were entered into between Ericsson and SEMC.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE BOARD OF DIRECTORS ANDCONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Major transactions are as follows:
License revenues.Both owners of SEMC, Sony Corporation and Ericsson, receive license revenues for SEMC’s usage of trademarks and intellectual property rights. The decline in license revenues during 2009 is a consequence of the formation of ST-Ericsson.
Purchases.Ericsson purchases mobile phones from SEMC to support contracts with a number of customers for mobile systems which also include limited quantities of phones.
Dividends.Both owners of SEMC receive dividends, when so decided by the board of directors. During 2009 Ericsson received no dividends from SEMC.
2009 | 2008 | 2007 | ||||
Related party transactions | ||||||
License revenues | 1,746 | 5,856 | 5,743 | |||
Purchases | 164 | 261 | 333 | |||
Ericsson’s share of dividends | — | 3,627 | 3,949 | |||
Related party balances | ||||||
Receivables | 369 | 1,002 | 932 | |||
Liabilities | 14 | 176 | 204 |
SEMC has been granted a long-term loan with a maximum amount of SEK 3,606 million. The parent companies of Ericsson and Sony Corporation have issued guarantees for this loan on a 50/50 basis, without joint responsibility. Ericsson’s part thus amounted to SEK 1,803 million. As of December 31, 2009, Ericsson’s part of the principal amount outstanding amounted to SEK 779 million inclusive of accrued interest SEK 6 million. Maturity date for the maximum amount of the issued guarantees occurs in 2011 (SEK 1,030 million) and 2010 (SEK 773 million).
ST-Ericsson
ST-Ericsson, the joint venture between Ericsson and STMicroelectronics, was formed on February 2, 2009, by merging Ericsson Mobile Platforms with ST-NXP Wireless. The joint venture is equally owned by Ericsson and STMicroelectronics. ST-Ericsson is an industry leader in design, development and the creation of cutting-edge mobile platforms and wireless semiconductors. ST-Ericsson is a key supplier to four of the industry’s top five handset manufacturers, who together represent about 80 percent of global handset shipments, as well as to other leading companies in the industry. The joint venture is headquartered in Geneva, Switzerland, and employs approximately 8,000 persons.
Major transactions are as follows:
Sales. Ericsson provides ST-Ericsson with services in the areas of R&D, HR, IT and facilities.
Purchases.Major part of Ericsson’s purchases from ST-Ericsson consists of chipsets and R&D services.
Dividends.Both owners of ST-Ericsson receive dividends, when so decided by the board of directors. During 2009 Ericsson received no dividends from ST-Ericsson.
2009 | ||
Related party transactions | ||
Sales | 740 | |
Purchases | 624 | |
Ericsson’s share of dividends | — | |
Related party balances | ||
Receivables | 244 | |
Liabilities | 365 |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE GROUP MANAGEMENTCONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees toward ST-Ericsson.
Ericsson Nikola Tesla d.d.
Ericsson Nikola Tesla d.d. is a joint stock company for design, sales and service of telecommunication systems and equipment, and an associated member of the Ericsson Group. Ericsson Nikola Tesla d.d. is located in Zagreb, Croatia. Ericsson holds 49.07 percent of the shares.
Major transactions are as follows:
Sales.Ericsson sells telecommunication equipment to Ericsson Nikola Tesla d.d.
License revenues.Ericsson receives license revenues for Ericsson Nikola Tesla d.d.’s usage of trademarks.
Purchases.Ericsson purchases development resources from Ericsson Nikola Tesla d.d.
Dividends.Ericsson received dividends from Ericsson Nikola Tesla d.d. during 2009.
2009 | 2008 | 2007 | ||||
Related party transactions | ||||||
Sales | 654 | 1,020 | 1,010 | |||
License revenues | 7 | 9 | 9 | |||
Purchases | 569 | 547 | 506 | |||
Ericsson’s share of dividends | 66 | 227 | 267 | |||
Related party balances | ||||||
Receivables | 93 | 85 | 103 | |||
Liabilities | 70 | 58 | 55 |
Ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees toward Ericsson Nikola Tesla d.d.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Price- waterhouse- Coopers | Others | Total | ||||
2009 | ||||||
Audit fees | 98 | 3 | 101 | |||
Audit related fees | 10 | — | 10 | |||
Tax services fees | 16 | 2 | 18 | |||
Other fees | 1 | 2 | 3 | |||
Total | 125 | 7 | 132 | |||
2008 | ||||||
Audit fees | 97 | 4 | 101 | |||
Audit related fees | 7 | — | 7 | |||
Tax services fees | 14 | 2 | 16 | |||
Other fees | 1 | 5 | 6 | |||
Total | 119 | 11 | 130 | |||
2007 | ||||||
Audit fees | 102 | 7 | 109 | |||
Audit related fees | 4 | — | 4 | |||
Tax services fees | 13 | 12 | 25 | |||
Other fees | — | 6 | 6 | |||
Total | 119 | 25 | 144 | |||
All services provided by the auditors were pre-approved prior to the engagement.
During the period 2007–2009, in addition to audit services, PricewaterhouseCoopers provided certain audit related services and tax services to the Company. The audit related services include consultation on financial accounting, services related to acquisitions and assessments of internal control. The tax services include general expatriate services and corporate tax compliance work.
Audit fees to other auditors largely consist of local statutory audits for minor companies.
C32 EVENTS AFTER THE BALANCE SHEET DATE
In a November 25 auction, 2009, Ericsson acquired certain assets relating to Nortel’s GSM business in North America for a cash purchase price of USD 70 million. Closing is expected by March 31, 2010, subject to approval by US and Canadian bankruptcy courts and satisfying normal regulatory conditions.
On January 12, 2010, Ericsson announced agreement to acquire Pride Spa, an Italian systems integration company with approximately 1,000 employees.
In January 2010, the Company made an employer contribution payment of SEK 730 million to the Swedish pension trust fund due to funding requirements.
On March 31, 2010, Ericsson announced that Marita Hellberg, Senior Vice President and Head of Group Function Human Resources and Organization will take over as Head of Human Resources of Ericsson’s new region China and North East Asia from July 1st.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On April 1, 2010 Ericsson announced that the acquisition of substantially all the assets of Nortel’s GSM business had been completed, effective March 31. The closing follows the announcement on November 25, 2009, that Ericsson had entered into an asset purchase agreement for the assets of Nortel’s GSM business in North America.
On April 21, 2010, the Company announced that it had entered into a share purchase agreement to acquire Nortel’s majority shareholding (50%+1 share) in LG-Nortel, the joint venture of LG Electronics and Nortel Networks. Purchase price is USD 242 million on a cash and debt free basis. The transaction is subject to customary regulatory approvals.
Remuneration PolicyCONTRACTUAL OBLIGATIONS 2009
Payment due by period | Total | |||||||||
(SEK billion) | <1 year | 1–3 years | 3–5 years | >5 years | 2009 | |||||
Long-term debt1)2) | 1.2 | 4.2 | 10.8 | 14.2 | 30.4 | |||||
Finance lease obligations3) | 0.2 | 0.3 | 0.4 | 1.2 | 2.1 | |||||
Operating leases3) | 3.2 | 4.7 | 2.2 | 2.4 | 12.5 | |||||
Other non-current liabilities | — | 0.3 | 0.1 | 1.6 | 2.0 | |||||
Purchase obligations4) | 7.1 | — | — | — | 7.1 | |||||
Trade Payables | 18.9 | — | — | — | 18.9 | |||||
Commitments for customer financing5) | 3.0 | — | — | — | 3.0 | |||||
Total | 33.6 | 9.5 | 13.5 | 19.4 | 76.0 | |||||
1) | Including interest payments. |
2) | See also Note C20, “Financial Risk Management and Financial Instruments”. |
3) | See also Note C27, “Leasing”. |
4) | The amounts of purchase obligations are gross, before deduction of any related provisions. |
5) | See also Note C14, “Trade Receivables and Customer Financing”. |
For information about financial guarantees, see Note C24, “Contingent Liabilities”
Except for Group Managementthose transactions described in this report, Ericsson has not been a party to any material contracts over the past three years other than those entered into during the ordinary course of business.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
You should carefully consider all the information in this Annual Report and in particular the risks and uncertainties outlined below. Any of the factors described below, or any other risk factors discussed elsewhere in this report, could have a material negative effect on our business, operational and after-tax results, financial position, cash flow, liquidity, credit rating, brand and/or our share price. Furthermore, our operational results may have a greater variability than in the past and we may have difficulties in accurately predicting future developments. See also “Forward-Looking Statements”.
CONTENTS
142 | ||
147 | ||
149 |
Market, Technology and Business Risks
Demand is difficult to predict
Adverse economic conditions could cause network operators to postpone investments or initiate other cost-cutting initiatives to improve their financial position. This could result in significantly reduced expenditures for network infrastructure and services, in which case our operating results would suffer. We have established flexibility to cost-effectively accommodate fluctuations in demand. However, if demand were to fall in the future, we may experience material adverse effects on our revenues, cash flow, capital employed and value of our assets and we may even incur operating losses. If demand is significantly weaker or more volatile than expected, this may have a material adverse impact on our credit rating, borrowing opportunities and costs as well as on the trading price of our shares. When deemed necessary, we undertake specific restructuring or cost saving initiatives, however, there are no guarantees that such initiatives are sufficient, successful or executed in time to deliver necessary improvements in earnings.
The extent of the current adverse conditions in the financial markets and global economic downturn may exacerbate some of the risk factors we are exposed to. Most of our customers are financially stable and have networks with good utilization. However, some operators, in particular in markets with weak currencies, may incur borrowing difficulties and lower traffic than expected, which may affect their investment plans. The potential adverse effects of the economic downturn include:
Reduced demand for products and services, resulting in increased price competition or deferrals of purchases, with lower revenues not being possible to compensate with reduced costs.
Risks of excess and obsolete inventories and excess manufacturing capacity and risk of financial difficulties or failures among our suppliers.
Increased demand for customer finance, difficulties in collection of accounts receivable and increased risk of counterpart failures.
Risk of impairment losses related to our intangible assets as a result of lower forecasted sales of certain products.
Increased difficulties in forecasting sales and financial results as well as increased volatility in our reported results.
Decline in the value of the assets in the Company’s pension plans.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Short-term volatility has an impact
Our sales to network operators represent a mix of equipment, software and services, which normally generate different gross margins. Third party products normally have lower margins than own products. As a consequence, reported gross margin in a specific period will be affected by the overall mix of products and services as well as the relative content of third party products. Network expansions and upgrades have much shorter lead times for delivery than initial network buildouts. Such orders are normally placed with short notice by customers, i.e. less than a month, and consequently variations in demand are difficult to forecast. As a result, changes in our product and service mix may affect our ability to accurately forecast sales and margins or detect in advance whether actual results will deviate from market consensus.
Convergence brings opportunity and risk
We are affected by market conditions within the telecom industry, including the convergence of the telecom, data and media industries. The convergence is largely driven by technological development related to IP-based communications. This change increases our addressable market, changes the competitive landscape, and affects our objective setting, risk assessment and strategies. If we fail to understand the market development, acquire the necessary competence or develop and market products, services and solutions that are competitive in this changing market, our future results will suffer.
We depend on growth and the success of new services
Most of our business depends on continued growth in mobile communications in terms of both number of subscriptions and usage per subscriber, which in turn requires the continued deployment and evolution of our network systems by customers. If operators are not successful in their attempts to increase the number of subscribers and/or stimulate increased usage, our business and operational results could be materially adversely affected.
Fixed and mobile networks converge and new technologies, such as IP and broadband, enable operators to deliver a range of new types of services in both fixed and mobile networks. We are dependent upon the market acceptance of such services, e.g. music, internet and navigation in the handset, and on the outcome of regulatory and standardization activities in this field, such as spectrum allocation. If delays in standardization or market acceptance occur, this could adversely affect our business and operational results.
We operate in a highly competitive industry
The following principlesmarkets we operate in are highly competitive in price, functionality and service quality as well as in the timing of development and introduction of new products and services.
We face intense competition from significant competitors and Chinese companies in particular have become relatively stronger in recent years. Our competitors may implement new technologies before we do, offer more attractively priced or enhanced products, services or solutions, or they may offer other incentives that we do not provide. Some of our competitors may have greater resources in certain business segments or geographic markets than we do. We may also encounter increased competition from new market entrants, alternative technologies or evolving industry standards. The rapid technological change also results in shorter life-cycles for remunerationproducts, increasing the risk in all product investments.
Continuous price erosion is a symptom of this rapid technological change and we must counteract this by introducing new products to the market and by continuously enhancing the functionality while reducing the cost of new and existing products. Our operating results depend largely on our ability to compete in this market environment.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Vendor consolidation may lead to a new competitive landscape
Industry convergence and consolidation among equipment suppliers could potentially result in stronger competitors that are competing as end-to-end suppliers as well as competitors more specialized in particular areas. Consolidation may also result in competitors with greater resources than we have or in reduction of our current scale advantages. This could have a material adverse effect on our business, operating results, and financial condition.
Operator consolidation may increase our dependence on a limited number of customers
We derive most of our business from large, multi-year agreements with a limited number of significant customers. Although no single customer currently represents more than 5 percent of sales, a loss of or a reduced role with a key customer could have a significant adverse impact on sales, profit and market share for an extended period.
In recent years, network operators have undergone significant consolidation, resulting in a large number of operators with activities in several countries. This trend is expected to continue, and also intra-country consolidation is likely to accelerate as a result of competitive pressure.
A market with fewer and larger operators will increase our reliance on key customers and may negatively impact our bargaining position and profit margins. Moreover, if the combined companies operate in the same geographic market, networks may be shared and less network equipment and associated services will be required. Another possible consequence of customer consolidation could be a delay in network investments pending negotiations of e.g. merger/acquisition agreements, securing necessary approvals, or integration of their businesses. Recently, network operators have started to share parts of their network infrastructure through cooperation agreements rather than legal consolidations, which may adversely affect demand for network equipment.
Long-term frame agreements can expose us to risk
Long-term agreements are typically awarded on a competitive bidding basis. In some cases, such agreements also include commitments to future price reductions. In order to maintain the gross margin with such price reductions, we continuously strive to reduce the costs of our products. We reduce costs through design improvements, negotiation of better purchase prices, allocation of more production to low-cost countries and increased productivity in our own production. However, there can be no assurance that our actions to reduce costs will be sufficient or quick enough to maintain our gross margin in such contracts.
Transforming into a more service-based company
Operators are increasingly outsourcing parts of their operations as a way to reduce cost and focus on new services. This has opened up a market which we have addressed. The growth rate is difficult to forecast and each new contract carries a risk that transformation and integration of the operations is not as fast or smooth as planned. Early contract margins are generally lower and the mix of new/old contracts may affect reported results negatively in a given period. Contracts normally cover several years and revenues are of a recurring nature. However, sometimes contract scopes are reduced with negative impact on sales and earnings. Ericsson is the market leader in managed services but competition in this area is increasing, which may have adverse effects on growth and profitability.
Success of R&D investments is uncertain
To be a player in our industry requires large investments in technology and creates exposure to rapid technological and market changes. We spend significant amounts and resources in innovation work for new
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
technology, products and solutions. In order for us to be successful, those technologies, products and solutions must be accepted by relevant standardization bodies and by the industry as a whole. If we invest in the development of technologies, products and solutions that do not function as expected, are not adopted by the industry, are not ready in time or are not successful in the marketplace our sales and earnings may suffer.
Acquisitions and divestments
In addition to in-house innovation efforts, we make strategic acquisitions in order to obtain various benefits, e.g. to reduce time-to-market, to gain access to technology and/or competence, to increase our scale or to broaden our product portfolio or expand our customer base. From time to time we also divest parts of our operations to optimize our product portfolio or operations. There are no guarantees that such acquisitions or divestments are successful or that we will succeed in integrating the acquired entities to gain the expected benefits within the time frame we expect or at all.
Joint ventures and partnerships
If our partnering arrangements fail to perform as expected (whether through an incorrect assessment of our needs or the capabilities or financial stability of our strategic partners), our ability to work with these partners or develop new products and solutions may be constrained and this may harm our competitive position in the market. Additionally, our share of any losses from, or commitments to contribute additional capital to, such partnerships may adversely affect our results of operations or financial position.
A limited number of suppliers of components, production capacity and R&D and IT services
Our ability to deliver according to market demands and contractual commitments depends significantly on obtaining timely and adequate supply of materials, components and production capacity and other employmentvital services on competitive terms. Although we strive to avoid single-source supplier solutions, this is not always possible. Failure by any of our suppliers could interrupt our product supply or operations and significantly limit our sales or increase our costs. To find an alternative supplier or re-design products to replace components may take significant time. If we fail to anticipate customer demand properly, an over/under-supply of components and production capacity could occur. In many cases, some of our competitors utilize the same contract manufacturers and if they have purchased capacity ahead of us we could be blocked from acquiring the needed products. This factor could limit our ability to supply our customers or could increase our costs. At the same time, we commit to certain capacity levels or component quantities, which, if unused, will result in charges for unused capacity or scrapping costs. We are also exposed to financial counterpart risks to suppliers where we pay in advance. We conduct regular supplier audits and evaluations to mitigate the risks mentioned as well as brand risks related to the suppliers’ compliance with e.g. labor and environmental regulations.
Product or service quality issues
Sales contracts normally include warranty undertakings for faulty products and often also provisions regarding penalties and/or termination rights in the event of a failure to deliver ordered products or services on time or with required quality. Although we undertake a number of quality assurance measures to reduce such risks, product quality or service performance issues may affect our results negatively.
Significant foreign exchange exposures
With the majority of our cost base in SEK and a very large share of sales in other currencies, and significant operations outside Sweden, our foreign exchange exposures are significant. Currency exchange rate fluctuations affect our consolidated income statement, balance sheet and cash flows when foreign currencies are exchanged or translated to SEK, which increases volatility in reported results.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
As market prices are predominantly established in USD or EUR, and with a net revenue exposure in foreign currencies, a stronger SEK exchange rate would generally have a negative effect on our reported results. Our attempts to reduce the effects of exchange rate fluctuations through a variety of hedging activities may not be sufficient or successful, resulting in an adverse impact on our results.
Intellectual property rights (IPR)
Although we have a large number of patents, there can be no assurance that they will not be challenged, invalidated, or circumvented, or that any rights granted in relation to our patents will in fact provide competitive advantages to us.
In 2005, the European Union considered placing restrictions on the patentability of software. Although the European Union ultimately rejected this proposal, we cannot guarantee that they will not revisit this issue in the future. We rely on many software patents, and any limitations on the patentability of software may materially affect our business.
We utilize a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements in addition to relying on patent, copyright and trademark laws to protect our intellectual property rights. However, these measures may not be adequate to prevent or deter infringement or other misappropriation. Moreover, we may not be able to detect unauthorized use or take appropriate and timely steps to establish and enforce our proprietary rights. In fact, existing laws of some countries in which we conduct business offer only limited protection of intellectual property rights, if at all.
Our solutions may also require us to license technologies from third parties. It may be necessary in the future to seek or renew licenses and there can be no assurance that they would be available on acceptable terms, or at all. Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a non-exclusive basis could limit our ability to protect proprietary rights in our products.
Many key aspects of telecommunications and data network technology are governed by industry-wide standards usable by all market participants. As the number of market entrants and the complexity of technology increases, the possibility of functional overlap and inadvertent infringement of intellectual property rights also increases. Third parties have asserted, and may assert in the future, claims, directly against us or indirectly against our customers, alleging infringement of their intellectual property rights. Defending such claims may be expensive, time-consuming and divert the efforts of our management and/or technical personnel. As a result of litigation, we could be required to pay damages and other compensation directly or indemnifying our customers for Group Managementsuch damages and other compensation, develop non-infringing products/technology or enter into royalty or licensing agreements. However, we cannot be certain that such licenses will be available to us on commercially reasonable terms or at all.
Litigations
In the normal course of our business we are involved in legal proceedings. Litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, reputation, operating results, or financial condition.
As a publicly listed company, Ericsson may be exposed to lawsuits, in which plaintiffs allege that the Company or its officers have failed to comply with securities laws, stock market regulation or other laws, regulations or requirements. Whether or not there is merit to such claims, the time and costs incurred to defend the Company and its officers and the potential settlement or compensation to the plaintiffs may have significant impact on our reported results and reputation. For additional information regarding certain of the lawsuits in which we are involved, see “Legal and Tax Proceedings” in the Board of Directors’ Report.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Business interruption
Our business operations rely on complex IT operations and communications networks, which are vulnerable to damage or disturbance from a variety of sources. Having outsourced a significant portion of our IT operations, we depend partly on security and reliability measures of external companies. Regardless of protection measures, essentially all IT systems and communications networks are susceptible to disruption from equipment failure, vandalism, computer viruses, security breaches, natural disasters, power outages and other events. We also have a concentration of operations on certain sites, e.g. for production, R&D, network operation centers, logistic centers, shared services centers, where business interruptions could cause material damage and costs. Although we have assessed these risks, implemented controls, performed business continuity planning and selected reputable companies for outsourced services, we cannot be sure that interruptions with material adverse effects will not occur.
Attract and retain highly qualified employees
We believe that our future success largely depends on our continued ability to hire, develop, motivate and retain engineers and other qualified personnel needed to develop successful new products, support our existing product range and provide services to our customers. Competition for skilled personnel and highly qualified managers in the telecommunications industry remains intense. We are continuously developing our corporate culture, remuneration, promotion and benefit policies as well as other measures aimed at empowering our employees and reducing employee turnover. However, there are no guarantees that we will be successful in attracting and retaining employees with appropriate skills in the future.
Access to short-term and long-term capital
If we do not generate sufficient amounts of capital to support our operations, service our debt and continue our research and development and customer finance programs, or if we cannot raise sufficient amounts of capital at the times and on the terms required by us, our business is likely to be adversely affected. Access to short-term funding may decrease or become more expensive as a result of our operational and financial condition and market conditions or due to deterioration in our credit rating. We cannot assure that additional sources of funds that we from time to time may need will be available or available on reasonable terms.
Regulatory, Compliance and Corporate Governance Risks
Regulatory environment changes
Telecommunications is an industry subject to particular regulation and regulatory changes affect both our customers’ and our own operations. For example, regulations imposing more stringent, time-consuming or costly planning and zoning requirements or building approvals for radio base stations and other network infrastructure could adversely affect the timing and costs of network construction or expansion, and ultimately the commercial launch and success of these networks. Similarly, tariff and roaming regulations or rules on network neutrality could also affect operators’ ability or willingness to invest in network infrastructure, which in turn could affect the sales of our systems and services. Also radio frequency spectrum allocation between different types of usage may affect operator spending adversely or force us to develop new products to be able to compete.
License fees, environmental, health and safety, privacy and other regulatory changes, in general or particular to our industry, may increase costs and restrict operations for network operators and service providers or us. Also indirect impacts of such changes could affect our business adversely even though the specific regulations may not apply directly to our products or us.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Country-specific political, economic and regulatory risks
We conduct business throughout the world and are subject to the effects of general global economic conditions as well as conditions unique to a specific country or region. We conduct business in more than 170 countries, with a significant proportion of our sales to emerging markets in Asia Pacific, Latin America, Eastern Europe, the Middle East and Africa. We expect that sales to such emerging markets will represent an increasing portion of total sales, as developing nations and regions around the world increase their investments in telecommunications. We already have extensive operations in many of these countries, which involve certain risks, including volatility in gross domestic product, civil disturbances, economic and political instability, nationalization of private assets and the imposition of exchange controls.
Changes in regulatory requirements, tariffs and other trade barriers, price or exchange controls or other governmental policies in the countries where we do business could limit our operations and make the repatriation of profits difficult. In addition, the uncertainty of the legal environment in some regions could limit our ability to enforce our rights. In addition we must comply with the export control regulations of the countries and any trade embargoes in force at the time of sale and/or delivery. Although we seek to comply with all such regulations, even unintentional violations could have material adverse effects on our business, operational results and brand.
Compliance with high standards of corporate governance
Ericsson applies mandatory corporate governance statutes and rules, such as the Swedish Code of Corporate Governance and is also committed to several corporate responsibility and environmental initiatives. To ensure that our operations are executed in accordance with these requirements, our management system includes a robust corporate culture and a Code of Business Ethics as well as policies and directives to govern our processes and operations. We regularly perform communication and training in these areas, and we monitor and audit internal compliance with the policies and directives as well as our suppliers’ adherence to our Supplier Code of Conduct. There is however no guarantee that violations will not occur, which could have material adverse effects on our brand, reputation and business.
Compliance with a environmental, health and safety regulations
We are subject to certain environmental, health and safety laws and regulations that affect our operations, facilities and products in each of the jurisdictions in which we operate. We believe that we are in compliance with all material laws and regulations. However, there is a risk that we may have to incur expenditures to cover environmental and health liabilities to maintain compliance with current or future laws and regulations or to undertake any necessary remediation. It is difficult to reasonably estimate the future impact of environmental matters, including potential liabilities. This is due to several factors, particularly the length of time often involved in resolving such matters.
Potential health risks related to electromagnetic fields
The mobile telecommunications industry is subject to claims that mobile handsets and other devices that generate electromagnetic fields expose users to health risks. At present, a substantial number of scientific studies conducted by various independent research bodies have indicated that electromagnetic fields, at levels within the limits prescribed by public health authority safety standards and recommendations, cause no adverse effects to human health. However, any perceived risk or new scientific findings of adverse health effects of mobile communication devices and equipment could adversely affect us through a reduction in sales or through liability claims. Although Ericsson’s products are designed to comply with all current safety standards and recommendations regarding electromagnetic fields, we cannot guarantee that we or the jointly owned Sony Ericsson Mobile Communications or ST-Ericsson will not become the subject of product liability claims or be held liable for such claims or be required to comply with future regulatory changes that may have an adverse effect on our business.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Risks associated with owning Ericsson shares
Our share price has been and may continue to be volatile
Our share price has been volatile partly due to the high volatility in the securities markets generally and for telecommunications and technology companies in particular. The share price is also likely to be affected by the development in our market, our reported financial results and the expectations of financial analysts, as well as statements and market speculation regarding our future prospects. or the timing or content of any profit warning by us or our competitors.
Factors other than our financial results that may affect our share price include, but are not limited to:
A weakening of our brand name or other circumstances with adverse effects on our reputation.
Announcements by our customers, competitors or us regarding capital spending plans of network operators.
Financial difficulties for our customers.
Awards of large supply or service contracts.
Speculation in the press or investment community about the business level or growth in the market for mobile communications.
Technical problems, in particular those relating to the introduction and viability of new network systems like LTE/4G.
Actual or expected results of ongoing or potential litigation.
Announcements concerning bankruptcy or investigations into the accounting procedures of other telecommunications companies, even if we are not involved.
Our ability to forecast and communicate our future results in a manner consistent with investor expectations.
Currency fluctuations may adversely affect share value or value of dividends
Because our shares are quoted in SEK on NASDAQ OMX Stockholm (our primary stock exchange), but in USD on NASDAQ (ADSs), fluctuations in exchange rates between SEK and USD may affect the value of your investment. In addition, because we pay cash dividends in SEK, fluctuations in exchange rates may affect the value of distributions if arrangements with your bank, broker or depositary call for distributions to you in currencies other than SEK. An increasing part of the trade in our shares is carried out on alternative exchanges or markets, which may lead to less accurate share price information on NASDAQ OMX Stockholm or NASDAQ.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
This Annual Report includes forward-looking statements, including statements reflecting management’s current views relating to the growth of the market, future market conditions, future events and expected operational and financial performance. The words “believe”, “expect”, “foresee”, “anticipate”, “assume”, “intend”, “may”, “could”, “plan”, “estimate”, “will”, “should”, “could”, “aim”, “target”, “might” or, in each case, their negative, and similar words are intended to help identify forward-looking statements. Forward-looking statements may be found throughout this document, but in particular in the chapters “Board of Directors’ Report” and “Information on the Company”, and include statements regarding:
our goals, strategies and operational or financial performance expectations;
development of corporate governance standards, stock market regulations and related legislation;
the growth of the markets in which we operate;
our liquidity, capital resources, capital expenditures, our credit ratings and the development in the capital markets, affecting our industry or us;
the expected demand for our existing as well as new products and services;
the expected operational or financial performance of our joint ventures and other strategic cooperation activities;
the time until acquired entities will be accretive to income;
technology and industry trends including regulatory and standardization environment, competition and our customer structure;
our plans for new products and services including research and development expenditures.
Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we cannot assure you that these expectations will materialize. Because forward-looking statements are based on assumptions, judgments and estimates, and are subject to risks and uncertainties, actual results could differ materially from those described or implied herein. Important factors that could affect whether and to what extent any of our forward-looking statements materialize include, but are not limited to:
our ability to respond to changes in the telecommunications market and other general market conditions in a cost effective and timely manner;
developments in the political, economic or regulatory environment affecting the markets in which we operate, including trade embargoes, changes in tax rates, changes in patent protection regulations, allegations of health risks from electromagnetic fields, cost of radio licenses for our customers, allocation of radio frequencies for different purposes and results of standardization activities;
the effectiveness of our strategies and their execution, including partnerships, acquisitions and divestments;
financial risks, including changes in foreign exchange rates or interest rates, lack of liquidity or access to financing, changes in tax liabilities, credit risks in relation to counterparties, customer defaults under significant customer finance arrangements and risks of confiscation of assets in foreign countries;
the impact of the consolidation in the industry, and the resulting (i) reduction in the number of customers, and adverse consequences of a loss of, or significant decline in, our business with a major customer; (ii) increased strength of a competitor or the establishment of new competitors;
the impact of changes in product demand, price erosion, competition from existing or new competitors or new technologies or alliances between vendors of different types of technology and the risk that our products and services may not sell at the rates or levels we anticipate;
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
the product mix and margins of our sales;
the volatility of market demand and difficulties to forecast such demand;
our ability to develop commercially viable products, systems and services, to acquire licenses of necessary technology, to protect our intellectual property rights through patents and trademarks and to license them to others and defend them against infringement, and results of patent litigation;
supply constraints, including component or production capacity shortages, suppliers’ abilities to cost effectively deliver quality products on time and in sufficient volumes, and risks related to concentration of proprietary or outsourced production in a single facility or sole source situations with a single vendor;
our ability to successfully manage operators’ networks to their satisfaction with satisfactory margins;
our ability to maintain a strong brand and good reputation and to be acknowledged for good corporate governance;
our ability to recruit and retain qualified management and other key employees.
Certain of these risks and uncertainties are described further in “Risk Factors”. We undertake no obligation to publicly update or revise any forward-looking statements included in this Annual Report, whether as a result of new information, future events or otherwise, except as required by applicable law or stock exchange regulation.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
STOCK EXCHANGE TRADING
The Ericsson Class A and Class B shares are listed on NASDAQ OMX Stockholm. In the United States, the Class B shares are listed on NASDAQ in the form of American Depositary Shares (ADS) evidenced by American Depositary Receipts (ADR) under the symbol ERIC. Each ADS represents one Class B share.
In 2009, approximately 7 (20) billion shares were approvedtraded on NASDAQ OMX Stockholm and NASDAQ, of which about 74 (84) percent were on NASDAQ OMX Stockholm and about 26 (16) percent were on NASDAQ. Trading volume in Ericsson shares decreased by approximately 71 percent on NASDAQ OMX Stockholm and increased by approximately 7 percent on NASDAQ as compared to 2008. (Note: Ericsson had a reversed split of shares of 1:5 for the B-share on June 2, 2008 and a 10:1 to 1:1 change in the ADS ratio from June 10, 2008 which affects the comparative figures above.)
SHARE PRICE TREND
In 2009, Ericsson’s total market value increased by about 13 (–22) percent to approximately SEK 215 billion (SEK 191 billion in 2008). The OMXSP Index on NASDAQ OMX Stockholm increased by 47 percent, the NASDAQ telecom index (CUTL) increased by approximately 48 percent and the NASDAQ composite index (CCMP) increased by approximately 44 percent.
SHARE DATA
2009 | 2008 | 2007 | 2006 | 2005 | ||||||
Earnings per share, diluted (SEK) | 1.14 | 3.52 | 6.84 | 8.23 | 7.64 | |||||
Operating income per share (SEK)2) | 5.80 | 7.50 | 9.64 | 11.29 | 10.44 | |||||
Cash flow from operating activities per share (SEK) | 7.67 | 7.54 | 6.04 | 5.82 | 5.26 | |||||
Stockholders’ equity per share, basic, end of period (SEK) | 43.79 | 44.21 | 42.17 | 37.82 | 32.03 | |||||
P/E ratio | 57 | 17 | 11 | 17 | 18 | |||||
Total shareholder return % | 15 | –20 | –43 | 3 | 31 | |||||
Dividend per share (SEK)1)2) | 2.00 | 1.85 | 2.50 | 2.50 | 2.25 |
1) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
2) | For 2009 and 2008 excluding restructuring charges. |
3) | For 2009 as proposed by the Board of Directors. |
All share based performance indicators except Earnings per share and Stockholders’ equity per share are calculated based on average number of shares outstanding, basic. Comparison periods has been restated for consistency.
SHARE PRICES ON NASDAQ OMX STOCKHOLM
(SEK) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||
Class A at last day of trading1) | 65.00 | 59.30 | 76.80 | 138.00 | 137.50 | |||||
Class A high for year (April 17, 2009)1) | 78.80 | 83.60 | 148.50 | 154.50 | 143.50 | |||||
Class A low for year (January 20, 2009)1) | 55.40 | 40.60 | 73.00 | 104.50 | 99.00 | |||||
Class B at last day of trading1) | 65.90 | 58.80 | 75.90 | 138.25 | 136.50 | |||||
Class B high for year (April 17, 2009)1) | 79.60 | 83.70 | 149.50 | 155.00 | 145.00 | |||||
Class B low for year (January 20, 2009)1) | 55.50 | 40.60 | 72.65 | 104.50 | 97.00 |
1) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
OFFER AND LISTING DETAILS
Principal trading market—NASDAQ OMX Stockholm—share prices
The table to the right states the high and low sales prices for our Class A and Class B shares as reported by NASDAQ OMX Stockholm for the last five years. The equity securities listed on the NASDAQ OMX Stockholm Official Price List of Shares currently comprise the shares of 258 companies. Trading on the exchange generally continues until 5:30 p.m. (CET) each business day. In addition to official trading on the exchange, there is also trading off the exchange during official trading hours and also after 5:30 p.m. (CET). Trading on the exchange tends to involve a higher percentage of retail clients, while trading off the exchange often involves larger Swedish institutions, banks arbitraging between the Swedish market and foreign markets, and foreign buyers and sellers purchasing shares from or selling shares to Swedish institutions.
NASDAQ OMX Stockholm publishes a daily Official Price List of Shares which includes the volume of recorded transactions in each listed stock, together with the prices of the highest and lowest recorded trades of the day. The Official Price List of Shares reflects price and volume information for trades completed by the members.
Host market NASDAQ—ADS prices
The table to the right states the high and low sales prices quoted for our ADSs on NASDAQ for the last five years. The NASDAQ quotations represent prices between dealers, not including retail mark-ups, markdowns or commissions, and do not necessarily represent actual transactions.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
MARKET PRICES ON NASDAQ OMX STOCKHOLM AND NASDAQ
NASDAQ OMX Stockholm | NASDAQ | |||||||||||
SEK per Class A share | SEK per Class B share | USD per ADS1) | ||||||||||
Period | High | Low | High | Low | High | Low | ||||||
Annual high and low | ||||||||||||
20052) | 143.50 | 99.00 | 145.00 | 97.00 | 18.60 | 13.89 | ||||||
20062) | 154.50 | 104.50 | 155.00 | 104.50 | 20.57 | 14.44 | ||||||
20072) | 148.50 | 73.00 | 149.50 | 72.65 | 21.71 | 11.12 | ||||||
2008 | 83.60 | 40.60 | 83.70 | 40.60 | 14.00 | 5.49 | ||||||
2009 | 78.80 | 55.40 | �� | 79.60 | 55.50 | 10.92 | 6.60 | |||||
Quarterly high and low | ||||||||||||
2008 | ||||||||||||
First Quarter | 79.50 | 51.10 | 78.90 | 50.25 | 12.28 | 8.52 | ||||||
Second Quarter | 83.60 | 58.70 | 83.70 | 57.50 | 14.00 | 9.76 | ||||||
Third Quarter | 75.80 | 61.60 | 75.80 | 61.20 | 12.65 | 9.03 | ||||||
Fourth Quarter | 66.60 | 40.60 | 65.90 | 40.60 | 9.15 | 5.49 | ||||||
2009 | ||||||||||||
First Quarter | 78.00 | 55.40 | 78.70 | 55.50 | 9.65 | 6.60 | ||||||
Second Quarter | 78.80 | 64.10 | 79.60 | 64.00 | 9.92 | 8.10 | ||||||
Third Quarter | 78.60 | 65.80 | 79.50 | 66.10 | 10.84 | 9.10 | ||||||
Fourth Quarter | 76.25 | 64.70 | 76.95 | 65.25 | 10.92 | 8.94 | ||||||
Monthly high and low | ||||||||||||
August 2009 | 70.60 | 65.80 | 71.20 | 66.10 | 10.04 | 9.10 | ||||||
September 2009 | 74.30 | 67.10 | 74.70 | 67.50 | 10.84 | 9.29 | ||||||
October 2009 | 76.25 | 67.00 | 76.95 | 67.30 | 10.92 | 9.73 | ||||||
November 2009 | 75.40 | 65.65 | 76.00 | 66.30 | 10.74 | 9.56 | ||||||
December 2009 | 68.35 | 64.70 | 68.90 | 65.25 | 9.96 | 8.94 | ||||||
January 2010 | 72.20 | 65.20 | 73.30 | 65.90 | 10.31 | 9.46 | ||||||
February 2010 | 73.50 | 69.20 | 74.65 | 70.15 | 10.28 | 9.84 | ||||||
March 2010 | 78.70 | 69.90 | 80.00 | 70.95 | 11.33 | 9.84 |
1) | One ADS = 1 Class B share. |
2) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CHANGES IN NUMBER OF SHARES AND CAPITAL STOCK 2005–2009
Number of shares | Share capital | |||||
2005 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2006 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2007 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2008 | June 2, reverse split 1:5 | 3,226,451,735 | 16,132,258,678 | |||
2008 | July 23, new issue. (Class C shares, later converted to Class B) | 19,900,000 | 99,500,000 | |||
2008 | December 31 | 3,246,351,735 | 16,231,758,678 | |||
2009 | June 8, new issue (Class C-shares, later converted to Class B) | 27,000,000 | 135,000,000 | |||
2009 | December 31 | 3,273,351,735 | 16,366,758,678 |
SHARE CAPITAL
In the second quarter, as decided by the Board of Directors with authorization from the Annual General Meeting, a stock issue and a subsequent repurchase was made for the share-based employee remuneration program. 27 million Class C shares were issued and later repurchased as treasury stock. The shares were converted into Class B shares. The quotient value of the repurchased shares was SEK 135.0 million, representing less than 1 percent of capital stock, and the acquisition cost was SEK 135.1 million.
As of December 31, 2009, the Parent Company’s share capital was SEK 16,366,758,678 (16,231,758,678) represented by 3,273,351,735 (3,246,351,735) shares. The quotient value of each share is SEK 5.00 (SEK 5.00). As of December 31, 2009, the shares were divided into 261,755,983 (261,755,983) Class A shares, each carrying one vote, and 3,011,595,752 (2,984,595,752) Class B shares, each carrying one-tenth of one vote. As of December 31, 2009, Ericsson held 78 978 533 Class B shares as treasury shares.
TEN LARGEST COUNTRIES, OWNERSHIP
As of December 31, | ||||||
Percent of capital | 2009 | 2008 | ||||
Sweden | 47.9 | % | 47.2 | % | ||
United States | 24.2 | % | 25.0 | % | ||
United Kingdom | 7.9 | % | 8.9 | % | ||
Norway | 1.9 | % | 1.3 | % | ||
Canada | 1.2 | % | 1.1 | % | ||
Japan | 1.2 | % | 1.3 | % | ||
Switzerland | 1.1 | % | 1.7 | % | ||
France | 1.1 | % | 1.1 | % | ||
Netherlands | 0.8 | % | 0.8 | % | ||
Denmark | 0.8 | % | 0.8 | % | ||
Other countries | 11.9 | % | 10.8 | % |
Source: | Capital Precision, December 31, 2009. |
The information from Capital Precision is based on the shareholders’ domicile or in case of funds, areas of operation.
SHAREHOLDERS
As of December 31, 2009, the Parent Company had 690,726 shareholders registered at Euroclear Sweden AB (the Central Securities Depository—CSD), of which 1,421 holders had a US address. According to
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
information provided by Citibank, there were 242,229,433 ADSs outstanding as of December 31, 2009, and 5,068 registered holders of such ADSs. A significant number of the ADSs are held of record by banks, brokers and/ or nominees for the accounts of their customers. As of year end 2009, banks, brokers and/or nominees held ADSs on behalf of 240,915 accounts.
According to information known at year-end 2009, almost 77 percent of our Class A and Class B shares were owned by institutions, Swedish and international.
Our major shareholders do not have different voting rights than other shareholders holding the same classes of shares.
As far as we know, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person(s) separately or jointly.
TOP EXECUTIVES AND DIRECTORS, OWNERSHIP
Number of Class A shares | Number of Class B shares | Voting rights, percent | ||||
Top executives and directors as a group (28 persons) | 2,416 | 3,844,472 | 0.07 |
For individual holdings, see “Corporate Governance Report”.
The table shows the total number of shares in the Parent Company owned by top executives and directors as a group as of December 31, 2009.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The following table shows share information, as of December 31, 2009, with respect to our 15 largest shareholders, ranked by voting rights, as well as percentage of voting rights as of December 31, 2009, 2008 and 2007.
LARGEST SHAREHOLDERS, DECEMBER 31, 2009 AND PERCENTAGE OF VOTING RIGHTS, DECEMBER 31, 2009, 2008 AND 2007
Identity of person or group1) | Number of Class A shares | Percentage of total Class A shares | Number of Class B shares | Percentage of total Class B shares | 2009 Voting rights percent | 2008 Voting rights percent | 2007 Voting rights percent | |||||||
Investor AB | 102,664,038 | 39.22 | 61,414,664 | 2.04 | 19.33 | 19.42 | 19.49 | |||||||
AB Industrivärden | 76,680,600 | 29.29 | 0 | 0.00 | 13.62 | 13.28 | 13.36 | |||||||
Handelsbankens Pensionsstiftelse | 19,800,000 | 7.56 | 0 | 0.00 | 3.52 | 3.00 | 3.01 | |||||||
Swedbank Robur Fonder AB | 1,510,466 | 0.58 | 157,785,431 | 5.24 | 3.07 | 2.44 | 1.67 | |||||||
Skandia Liv AB | 15,270,077 | 5.83 | 17,079,591 | 0.57 | 3.02 | 2.89 | 2.75 | |||||||
Pensionskassan SHB Försäkringsföreningen | 12,672,000 | 4.84 | 0 | 0.00 | 2.25 | 2.26 | 2.27 | |||||||
BlackRock Advisors, Inc. | 0 | 0.00 | 101,632,540 | 3.38 | 1.81 | 0.00 | 0.06 | |||||||
Brandes Investment Partners LP | 0 | 0.00 | 55,603,761 | 2.54 | 1.36 | 2.08 | 1.73 | |||||||
AMF Pensionsforsakring AB | 800,000 | 0.31 | 65,104,680 | 2.16 | 1.30 | 1.55 | 0.89 | |||||||
OppenheimerFunds, Inc. | 0 | 0.00 | 72,541,045 | 2.41 | 1.29 | 1.31 | 1.57 | |||||||
Dodge & Cox, Inc. | 0 | 0.00 | 29,149,700 | 1.96 | 1.05 | 0.98 | 0.00 | |||||||
Gamla Livförsäkringsbolaget SEB Trygg Liv | 4,675,919 | 1.79 | 8,475,600 | 0.28 | 0.98 | 1.04 | 1.04 | |||||||
Handelsbanken Fonder AB | 2,335 | 0.00 | 52,894,889 | 1.76 | 0.94 | 1.02 | 1.08 | |||||||
Norges Bank Investment Management | 0 | 0.00 | 50,368,857 | 1.67 | 0.89 | 0.46 | 0.35 | |||||||
SEB Investment Management AB | 480,909 | 0.18 | 45,030,567 | 1.50 | 0.89 | 0.98 | 0.78 | |||||||
Others | 27,199,639 | 10.40 | 2,294,514,427 | 74.49 | 44.68 | 47.29 | 49.95 | |||||||
Total | 261,755,983 | 100.00 | 3,011,595,752 | 100.00 | 100.00 | 100.00 | 100.00 | |||||||
1) | Sources: Capital Precision, December 2009 and 2008. Euroclear Sweden AB, December 31, 2007. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Telecommunications plays a central role in the daily life of practically every person on earth. It is fundamental to the global economy and increasingly important to the environment. Over the last decade, mobile became a ubiquitous communications service, enabling people from all regions and walks of life to connect at an unprecedented level.
With the widespread adoption of mobile communications for voice and text messaging, the impetus to add more voice subscribers has started to diminish. Growth will continue with more than two billion new mobile voice subscriptions expected over the coming years but these will mainly come from low-usage customers in developing areas or users with multiple subscriptions. This dilutes average revenue per subscription but the underlying growth in minutes of use per user is stronger than the subscription dilution. Thus the total voice traffic continues to grow.
Mobile broadband is fast becoming the main growth driver for operators and equipment suppliers globally. Consumer behavior is changing with the introduction of mobile broadband prompting innovation in a number of areas and driving the need for ever greater bandwidth and data speeds. The industry focus is shifting from connecting places and people to connecting devices and applications.
There are many devices whose utility is enabled by mobile broadband, including mobile phones, personal computers and a growing number of electronic devices and software applications. Wireless connectivity will make broadband mobile and affordable to the majority of people. Particularly in the case of machine-to-machine communications, it will also enable applications for a variety of industries and uses (e.g. smart grids, transportation, financial services and healthcare.) This is far beyond the capability and scope of today’s networks.
We envision 50 billion network connections over the next decade, compared with some 5 billion currently. The underlying network technologies must be enhanced to accommodate such a vast number of connections. We expect Ericsson to benefit from this as network operators and service providers:
Accelerate the transition from legacy technologies to IP- based technologies.
Respond to rising demands for services that aid economic, societal and environmental development.
Invest in mobile and fixed broadband access, multi-service edge routing, IP multimedia subsystems (IMS) based services and Metro optical and/or radio transport.
Prioritize suppliers that combine technology with services for lower total cost, faster time-to-market and reduced project risks.
Outsource more of their network-related activities and operations for increased flexibility and focus more on the consumer experience.
These are all areas where the Company is well positioned and continues to invest heavily. Ericsson is now focused exclusively on serving network operators and service providers while device manufacturers and consumers are addressed via two joint venture companies, i.e. ST-Ericsson and Sony Ericsson.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
ICT, especially mobile, positively affects GDP levels as well as the environment
Even though the benefits of a connected society are difficult to precisely quantify, telecommunications has become as essential to any nation’s infrastructure as water, transportation or electricity. As already well demonstrated by telephony, there is clear evidence that the ubiquitous availability of affordable ICT services has a positive effect on any country’s economy. The ICT industry generates approximately 2 percent of global CO2emissions. However, ICT could potentially reduce the other 98 percent by 15 percent or more.
A higher GDP level obviously enables more broadband adoption but studies of the relationship between broadband penetration and economic development indicate that broadband plays an even more fundamental role than telephony in accelerating the economic and social development of a country. Mobile broadband networks, along with suitable devices and appropriate applications, can accelerate broadband penetration by avoiding the relatively more expensive and time-consuming deployments of fixed networks.
Mobile communications market
Mobile communication is the service of choice for consumers across the world and we believe there is considerable potential for further growth with the introduction of mobile broadband. During 2010, Ericsson expects mobile subscriptions to grow to more than 5.2 billion, mainly driven by voice in developing markets and broadband in more developed markets.
Although at a slower pace than in previous years, mobile communications continued to grow in 2009 with over 600 (670) million new subscriptions added. The number of mobile phones shipped was approximately 1,100 (1,190) million, mainly due to less subscriber additions and longer replacement intervals. Based on vendor reports and Ericsson estimates, the mobile systems market is estimated to have declined by more than 10 percent due to the economic slowdown and weaker demand for GSM. However, we believe investments in mobile communications are below optimal levels—suggesting the possibility of increased spending once the economy recovers.
At the end of 2009, the 4.6 (4.0) billion mobile subscriptions worldwide represented a global subscription penetration of 64 (59) percent (the actual number of mobile users is probably some 20-25 percent less due to inactive and multiple subscriptions). The High Speed Packet Access (HSPA) version of 3G/WCDMA is now deployed in 303 (247) commercial networks across 130 (110) countries. Ericsson supplies 144 (115) of these networks, serving the majority of mobile broadband subscribers.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The number of subscribers covered by commercial 3G/ WCDMA networks remains well below half that of 2G/GSM. Subscribers to mobile broadband services worldwide reached 360 (180) million by the end of 2009. The vast majority of the 360 million are handheld devices and the figure is set to soar with the mass consumer adoption of mobile internet devices such as smartphones and netbooks. This additional demand presents a significant opportunity for network infrastructure and systems integration, areas in which Ericsson has a market-leading position.
Fixed and mobile broadband main market drivers
The number of fixed and mobile broadband subscriptions is expected to increase five times between 2009 and 2015 to approximately 4 billion, of which the vast majority will be subscriptions for mobile broadband. Broadband internet access revenues for fixed operators (including cable operators) are expected to grow from around 25 to around 30 percent of total revenues in the next five years. Similarly, data’s share of mobile operators’ revenue, which is currently some 25 percent, is expected to account for a progressively larger portion of global mobile revenues over the next five years.
These projections assume the cost for mobile data services aligns with subscriber expectations, i.e. data must be priced lower than voice when comparing the amount of bandwidth consumed. Hence, operators may implement cost-efficient solutions for delivering more network capacity with revenues based on service value rather than the amount of capacity. This motivates a next-generation network that offers fixed and mobile convergence and leverages IP technology for a lower cost, higher performance broadband service.
However, operators’ willingness to invest in modernizing their networks can be inhibited by governmental regulations on how they can monetize their investments. For example, open access policies seek to facilitate the entrance into broadband markets for new competitors by requiring existing operators to lease access to their networks at regulated wholesale rates. The basic idea is that the more competitive consumer broadband markets are, the better the service offering, i.e. at lower prices, to more consumers. The alternative approach is to avoid forcing operators to lease network assets to competitors as it can undermine the incentive to invest.
The major challenge is identifying regulatory policies and practices that promote ubiquitous availability without undermining competition by mandating how an operator can monetize usage and capacity consumption.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Mobile broadband creates bottlenecks in parts of the network
The deployment of access nodes that connect devices at ever faster speeds increases subscriber uptake which can quickly create bottlenecks in other parts of the network especially on the backhaul part of the transport network.
Backhaul capacity needs to be provided more dynamically and efficiently than is possible with traditional backhaul solutions. Support of multiple services is required to ensure continuity for existing services as well as allowing new services. Operators want to maximize investments in existing infrastructure while leveraging the capabilities of new technologies.
Roughly two-thirds of backhaul globally is provided via microwave radio with the notable exception of the US and China where fiber is the preferred method. The dynamic nature of multi-service broadband access requires changes in the network technology used—a change from TDM/STM/ATM structures to IP/Ethernet. Ericsson already has a market-leading position in microwave radio systems and with the acquisitions of Marconi and Redback, the Company is well positioned with optical transmission systems and IP/Ethernet products.
Convergence and network transformation in focus
Placing greater emphasis on smarter networks and bundled service offerings, operators are starting the conversion to all-IP broadband networks. An increase in broadband access, routing and transmission deployments, combined with next-generation service delivery and revenue management systems, means operators will be able to offer a broader range of services to key customer segments. Each segment (business, consumer and wholesale) requires a different and varying mix of fixed, mobile and converged services.
Ericsson has developed a network architecture that meets consumer desires and operator requirements for converged services, covering the device ecosystems, fixed and mobile broadband access, transport, control, applications, revenue management, services and operations management. All the components have been integrated for a high performance and scalable end-to-end solution.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Ericsson’s full-service broadband solution has been built from in-house development, e.g. mobile broadband and IMS, and is complemented by the acquisitions of IP-routing products (Redback), optical transport (Marconi), deep fiber access systems (Entrisphere) and IPTV (Tandberg). The Company has also developed a comprehensive network transformation service that leverages professional services such as consulting and systems integration.
The internet is changing TV
The vision of the television industry is a simple one: to let you watch whatever, whenever and wherever you want and to help you discover other interesting programs and share your favorites and comments with other people. We believe that the best way to achieve this is to use internet technology enhanced with telecom-grade performance.
Consumers are already using the internet to find new ways of accessing TV, with interactive on-demand capabilities now a basic expectation. Despite this trend, we do not expect operators to become marginalized as bit pipe providers. Efficient bit pipes will be needed, but to differentiate their services, operators will need to continue to leverage their network capabilities. This is where IMS comes into play to provide the reliability and combination of services required for a portfolio of applications which differentiates from the competition.
Today some 1.2 billion (850 million) households have television services, of which only 25 (20) million are currently served by IPTV. This number is expected to grow to above 130 million by end of 2015. In the same time period, DSL-based broadband access is forecasted to grow from some 300 million to 400 million households and cable-TV-based broadband access is estimated to grow from 90 million to more than 100 million households. FTTx-based broadband access is estimated to increase from 35 million to some 100 million households. Building on the acquisitions of Tandberg Television and Entrisphere, the Company continues to invest in a leading position in IPTV and FTTx broadband access.
Mobility is changing the internet
Today, less than 40 percent of mobile subscribers are also internet users. However, the increasing use of high-speed applications in the fixed environment is stimulating a parallel expectation on the mobile side. When people become accustomed to using bandwidth-intensive applications at home or in the office, they tend to want them everywhere they go.
Multimedia-capable mobile internet devices and affordable mobile broadband access are driving a change in usage. Users will be able to create and discover content of personal interest and instantaneously share ideas and information with friends and colleagues. We see mobile internet devices helping to accelerate consumer demand for wireless internet access. This will have the greatest impact on emerging markets, where household PC penetration is only about 10 percent compared with well over 60 percent in developed markets. This is particularly significant as there are more than three times as many households in emerging markets as there are in more developed markets.
The Company has established a product unit to provide mobile broadband connectivity for notebook PCs and other mobile internet devices. Three of the world’s largest notebook manufacturers are already using Ericsson embedded modules. In addition, Intel, among others, has signed an agreement to use Ericsson’s mobile broadband technology.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operator consolidation and network sharing
Operator consolidation continues in all regions globally. In the Americas, consolidation has substantially reduced the number of operators. In Europe, mergers continue along with other collaborations such as network sharing and outsourcing of network operations. In other regions, operator consolidation has led to the emergence of rapidly growing pan-regional operators, particularly in the CEMA markets (Central and Eastern Europe, Middle East and Africa). Western European-based operators continue to invest in operators in developing markets such as Brazil and India. There have also been attempts to combine certain Indian operators with African operators but with little progress so far.
Despite the trend for operator consolidation, the number of mobile operators has actually increased in many regions over the past few years, with the notable exception of the Americas. The introduction of mobile number portability in many markets has simplified service substitution, leading to fierce competition and declining market share for the top two players in each market. Consequently, mobile operator margins are under pressure from the more intense competition which requires lower costs to compensate.
Network sharing offers potentially significant capex and opex savings to operators. However, the overall impact of network sharing should ultimately be neutral for mobile equipment vendors. To a certain extent, short-term disruption of capital expenditure plans or re-negotiation of contracts with the network sharing companies may be offset by faster coverage buildout, an earlier entry into expansion phases and increased sales of professional services, particularly network integration and managed operations. Over the longer term, the majority of savings come from shared plant and property rather than equipment as the equipment has to be dimensioned for the total traffic load of the combined networks.
Ericsson is well positioned to benefit from operator consolidation with a suite of solutions for network sharing and a well proven capability for outsourcing network operations, consulting and systems integration as well as a strong presence with consolidating companies.
Opportunities in Professional Services
Outsourcing of network operations is another form of consolidation. Operators are able to tap into the global scale and efficiency offered by a company like Ericsson via managed services. Ericsson is well positioned to benefit from this trend for operator consolidation with a suite of professional services and a well proven capability for outsourcing network operations.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Demand for professional services (i.e., managed services, consulting, systems integration, network optimization and modernization) is growing rapidly. The demand for professional services is increasing, driven by operators’ desire to optimize capex investments, take out unnecessary costs and deliver a competitive end-user experience.
The potential market for managed services is larger than the market for network equipment and related deployment services. A mature operator is estimated to typically spend some 5–6 percent of revenues on network equipment and 10–12 percent on operating its network.
More than two-thirds of network operational expenses today are believed to be handled in-house by operators but network operations are increasingly being outsourced as operators realize the competitive advantages and potential cost savings. Therefore, the available market for managed services is expected to continue to show good growth prospects.
Over time, as networks evolve, grow and become more versatile, their complexity increases and so does the number of operations and business support systems. This creates many opportunities to help operators streamline both networks and operations. One aspect of streamlining is reducing the number of support systems needed for the network. The other aspect of streamlining comes from outsourcing operations. Operators may also ask for advice and best-practice to create efficiency in their own operations. An indicator of this streamlining or efficiency trend is the increasing demand for consulting and systems integration services like revenue assurance, operations and business support systems transformation and service assurance.
Replacement rates affect mobile handset sales
With subscriber additions slowing, mobile phone replacements have increasingly become the key market driver, now accounting for roughly two-thirds of shipments and an even higher proportion of sales.
Mobile phone replacement tends to go in tandem with contract renewal. In mature markets, this is often operator driven via subsidies that lower or eliminate the upfront cost of buying a new phone in exchange for multi-year subscription commitments. Many operators are now pushing SIM card only plans to reduce phone subsidies for lower value subscriptions and prioritizing subsidies for smartphones and mobile internet devices that carry much higher value subscriptions. This is slowing the demand for replacement phones, especially in the low- to mid-end price range, as consumers postpone upgrading their mobile phones.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
In emerging markets, operators often subsidize multi SIM card plans rather than handsets. This has stimulated the market for ultra low priced phones rather than curtailing subscription growth or mobile phone usage. With inflationary and other economic pressures rising in these markets, consumers are buying more refurbished or unlicensed phones. Manufacturers of illicit phones enjoy cost advantages because they do not pay for licenses, test their products for safety or provide warranties or offer sales support. Some countries, such as India, are especially concerned about personal safety and national security of unlicensed phones, but enforcement is far less strict in most other emerging markets.
Sony Ericsson has refined its product portfolio and value proposition to target an increased share of the replacement market.
Effects of the macro-economic slowdown
While not a trend, the economic recession affected Ericsson’s business development for networks, but with improving operational efficiency, a market leading position, scale and a solid balance sheet, the Company is in a good position to meet continued tough market conditions.
The macro-economic developments are externally driven and beyond the control or the influence of the Company. But the Company does control the cost structure and is adjusting to a more challenging market environment including the effects of a global recession.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONTENTS
167 | ||
170 | ||
171 | ||
173 |
COMPANY HISTORY AND DEVELOPMENT
Innovating to empower people, business and society
Our origins date back to 1876 when Alexander Graham Bell filed a patent application in the United States for the telephone. The same year, Lars Magnus Ericsson opened a small workshop in Stockholm to repair telegraph instruments and sell his own telephone equipment.
Today, Ericsson is a leading provider of communications equipment, professional services and multimedia solutions. Our customers are operators of mobile and fixed networks worldwide. Over 1,000 networks in more than 175 countries utilize our equipment. More than 40 percent of all mobile traffic goes through Ericsson equipment.
We invest heavily in R&D and promote standardization and open systems. We have a long history of innovation and pioneering future telecommunications technologies. We have one of the industry’s most comprehensive intellectual property portfolios with approximately 25,000 patents.
Ericsson’s vision is “to be the prime driver in an all-communicating world”—a world in which any person can use voice, text, images and video to share ideas and access information whenever and wherever they want. Within a few years, we foresee communications extending beyond places and people to devices. Then everything that benefits from being connected will be. We strongly believe that affordable and generally available telecommunications are a prerequisite for social and economic development, and that the ICT industry is a key enabler for a sustainable and prosperous society and for bridging the digital divide.
Our strategy to realize our vision and reach our goals is to:
Excel with a leading portfolio in mobile and converged networks.
Expand in services by enabling world-class operations and network evolution.
Extend in multimedia, with leading applications and business support solutions.
Successful execution of the strategy is built on (1) close customer relations; (2) technology and services leadership and (3) operational excellence in all we do.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Close customer relations
The foundation for our business is our strong, long-term customer relationships. We have been present in most of our markets for more than 100 years. We work closely with the operators to understand their business, their objectives and technology needs.
We are a major supplier to most of the world’s leading mobile operators and many leading wireline operators. We believe that our ability to offer superior end-to-end solutions and services makes us well positioned to assist operators with their network development and operations. With our significant scale advantage, custom-tailored end-to-end solutions and local presence, we are able to serve as a true partner—providing fast time-to-market and competitive total cost of ownership—helping our customers reach their business objectives.
Ericsson has 82,500 employees across the world, close to our customers. Local operations have strong technical, commercial and administrative support from specialist functions in R&D, supply, network operations centra and Group functions.
Technology and services leadership
Innovation is an important element of our corporate culture. It is key to our competitiveness and future success. We have a long tradition of developing innovative communication technologies. By early involvement in creating new standards we are often first to market with new solutions—a distinct competitive advantage.
We are a market leader in GSM, WCDMA/HSPA, LTE, packet core networks, microwave transmission, revenue management applications and managed services. We are growing in the area of wireline access, metro Ethernet solutions and optical transport, and we are a provider of multimedia solutions and brokering services for both wireless and wireline operators and TV broadcasters. We have recently acquired Nortel’s CDMA and LTE operations in North America.
Within our ambitious R&D program, we have approximately 18,300 (19,800) employees in 17 (17) countries worldwide and in 2009 we invested SEK 27 billion (excluding SEK 6 billion restructuring charges) or 13 percent of sales. Most of this is invested in product development, of which the greater part is in network infrastructure. We have continued to invest in strategically important areas of broadband access, converged core networks, IP technology and multimedia. Our ability to generate world-class innovations is enhanced through cooperation with a variety of partners, including customers, universities and research institutes.
Through many years of development of new technologies we have built up a considerable portfolio of intellectual property rights (IPR). As of December 31, 2009, we held approximately 25,000 (24,000) patents worldwide, including patents essential to the standards GSM, GPRS, EDGE, WCDMA, HSPA, MBMS, TD-SCDMA, cdma2000, WiMAX and LTE. We also hold essential patents for many other areas, e.g. IMS, Voice-over-IP, ATM, Messaging, WAP, Bluetooth, SDH/SONET, WDM and Carrier Ethernet.
Our intellectual property rights are valuable business assets. We license these rights to many other companies (infrastructure equipment suppliers, embedded module suppliers, handset suppliers and mobile application developers) in return for royalty payments and/or access to their intellectual property rights. We believe that we have access to all essential patents that are material to our business in part or in whole.
For more information, please see also Risk Factors, “Market, Technology and Business Risks”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operational excellence in all we do
Ericsson is focused mainly on infrastructure solutions and services for telecom operators. This focus enables us to have a functional organization and leverage our scale to gain competitive advantage. The Group is organized in some 200 legal entities, aligned to a common functional structure, using standardized processes.
Group functions coordinate the Company’s strategies, operations and resource allocation and establish the necessary directives, processes and organization for the effective governance of the Group. They also manage support units, such as Ericsson Research, IT and shared service centers.
The main operational functions/processes are:
Business units:
product management
product/service and solution development
sourcing, manufacturing and supply of products
sales of spare parts and repair.
Market units:
marketing and sales
service delivery
customer support.
Operational excellence is an important competitive advantage. and we focus on three areas:
Speed—to reduce time to market and working capital and to increase flexibility and responsiveness.
Scale—to leverage our market-leading position, enabling us to afford developing best-in-class solutions.
Skills—to work according to standardized processes with highly educated employees and partners.
We continuously focus on improving processes, support systems and our ways of working. Our mission, to empower people, business and society, requires strong change capabilities and efficient and effective processes, delivering innovative, high-quality solutions with low cost of ownership.
The Company culture of innovation and competitiveness and continuous competence development of our employees are key enablers for success. Ericsson Academy is one of our vehicles to achieve this—a new, innovative forum for learning and sharing of ideas and knowledge, open to our employees and available to our customers during 2010. We believe this will sharpen our employees’ skills, enhance performance for our customers, and give us a competitive edge in the new business and technology landscape.
To further increase flexibility and efficiency and reduce cost, we have several partnerships with strong players in outsourced manufacturing, IT services and certain areas of R&D and services. Examples are: Flextronics, HP, IBM and Tieto.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Legal name of the Parent Company:
Telefonaktiebolaget LM Ericsson (publ)
Organization number:
556016-0680
Legal form of the Parent Company:
A Swedish limited liability company, organized under the Swedish Companies Act. The terms “Ericsson”, “the Company”, “the Group”, “us”, “we”, and “our” all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries.
Country of incorporation:
Sweden.
Date of incorporation:
The Parent Company was incorporated on August 18, 1918, as a result of a merger between AB LM Ericsson & Co. and Stockholms Allmänna Telefon AB.
Domicile:
Our registered office is Telefonaktiebolaget LM Ericsson, SE–164 83 Stockholm, Sweden. Our headquarters are located at Torshamnsgatan 23, Kista, Sweden.
Telephone number:
+46 10 719 0000
Website:
www.ericsson.com
Agent in the US:
Ericsson Inc., Vice President Legal Affairs, 6300 Legacy Drive, Plano, Texas 75024. Telephone number: +1 972 583 0000.
Shares:
Ericsson’s Class A and Class B shares are traded on NASDAQ OMX Stockholm. In the US, our American Depository Shares (ADS), each representing one underlying Class B share, are traded on NASDAQ.
Parent Company operations:
The business of the Parent Company, Telefonaktiebolaget LM Ericsson, consists mainly of corporate management, holding company functions and internal banking activities. Parent Company operations also include customer credit management activities performed by Ericsson Credit AB on a commission basis.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Subsidiaries and associated companies:
For a listing of our significant subsidiaries, please see Notes to the Parent Company Financial Statements—Note P9, “Investments”. In addition to our joint ventures Sony Ericsson and ST-Ericsson, we are engaged in a number of other minor joint ventures, cooperative arrangements and venture capital initiatives. For more information regarding risks associated with joint ventures, strategic alliances and third-party agreements please see Risk Factors, “Market, Technology and Business Risks”.
Documents on display:
We file annual reports and other information (normally in Swedish only) for certain domestic legal entities with Bolagsverket (Swedish Companies Registration Office) pursuant to Swedish rules and regulations.
You may order any of these reports from their website www.bolagsverket.se. If you access these reports, please be aware that the information included may not be indicative of our published consolidated results in all aspects. Other than information related to the Parent Company, only consolidated numbers for the Group totals are included in our reports.Filing in the US:Annual reports and other information are filed with the Securities and Exchange Commission (SEC) in the United States, pursuant to the rules and regulations that apply to foreign private issuers. Electronic access to these documents may be obtained from the SEC’s website, www.sec.gov/edgar/searchedgar/webusers.htm, where they are stored in the EDGAR database.
Ericsson has evolved with the changes in the industry:
from equipment driven, to services driven, with close to 40 percent of sales and almost 50 percent of employees now related to services
from hardware to software, with more and more of the functionality in our solutions being software-based
from narrow-band voice to all-IP broadband, with strong focus on converged networks and services capabilities.
Customers
We supply equipment, integrated solutions, multimedia applications and services to almost all major operators globally. We derive most of our sales from large, multi-year agreements with a limited number of significant customers. Out of a customer base of more than 425 network operators, the 10 largest customers account for 42 (42) percent of our net sales and the 20 largest customers account for 57 (61) percent of our net sales. Our largest customer accounted for approximately 5 (6) percent of sales in 2009. For more information, see Risk Factors, “Market, Technology and Business Risks”
Our customers have different needs and demands when interacting with us:
Strategy and business model development in an increasingly complex environment.
Network expansion and evolution in response to subscriber and traffic growth and new technology.
Support, training and spare parts.
Efficient operations to keep operating expenses competitive.
Our own market units are our primary sales channel. They perform most of the sales where the customer is a fixed or mobile telecommunications operator.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
For certain products or solutions we also use other channels:
TV solutions are sold through other equipment vendors as resellers as well as directly by business unit Multimedia to cable-TV operators.
Mobile broadband modules are sold directly by business unit Networks to PC/netbook manufacturers.
For newly acquired entities, certain market channels normally prevail during a transition period, e.g. LHS has maintained its market channels for billing solutions until it is fully owned and integrated.
A central IPR unit is managing sales of licenses to equipment vendors or others who wish to use our patented technology.
Our two joint ventures are the channels to the handset and mobile platform/chipset markets.
Our sales to network operators is normally based on multi-year frame agreements after an initial tender with a system and supplier selection.
During the frame agreement, equipment, software, services and spare parts are called off according to price lists. On a highly selective basis we occasionally provide customer financing. The vast majority of customer financing is provided by third parties, often guaranteed by Swedish export credit agencies. Various types of services, such as training or consulting, are often ordered separately as needed. Managed services contracts are normally also multi-year contracts and negotiated separately as they require extensive scoping and planning for transfer of employees and operations.
We have implemented a strict trade compliance program throughout the Company in order to comply with foreign and domestic laws and regulations, trade embargoes and sanctions in force. Our business activities should not be construed as supporting a particular political agenda or regime in any way.
Seasonality
Our quarterly sales, income and cash flow from operations are seasonal in nature and generally lowest in the first quarter of the year and highest in the fourth quarter. This is mainly a result of the seasonal purchase patterns of network operators. The table below illustrates the average seasonal effect on sales for the five-year period 2005 through 2009.
MOST RECENT 5-YEAR AVERAGE SEASONALITY
First quarter | Second quarter | Third quarter | Fourth quarter | |||||||||
Sequential Change | –20 | % | 13 | % | –6 | % | 29 | % | ||||
Share of annual sales | 22 | % | 25 | % | 23 | % | 30 | % |
Competitors
In the Networks segment, we compete mainly with large and well-established communication equipment suppliers. Our most significant competitors include Alcatel/Lucent, Huawei, Nokia/Siemens, Cisco, ZTE and Juniper. We also compete with numerous local and regional manufacturers and providers of communication equipment and services.
We believe the most important competitive factors in this industry include; existing customer relationships, superior network performance and subscriber experience, technological innovation, product design and cost, and the ability to scale/ upgrade/migrate existing network investments, and the systems integration capability.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Competition in the Professional Services segment includes not only many of the suppliers mentioned above, but also large companies from other industry sectors, such as Accenture, HP/ EDS, IBM, and several India-based off-shore companies, e.g. Tata Consultancy Services and Tech Mahindra, as well as a large number of smaller but specialized companies operating on a local or regional basis.
As this segment grows, we expect to see additional competitors emerge, possibly as a result of network sharing or of network operators attempting to expand their business.
In the Multimedia segment we face significant competition. As the market is rather fragmented, our competitors vary widely depending on the product or service being offered. Competitors include many of the traditional communication equipment and IT suppliers as well as companies from other industries, such as Acision, Amdocs, Comverse, Harmonic, Oracle and Thomson.
Within the handset market, Sony Ericsson’s primary competitors include Nokia, Motorola, Samsung, LG, NEC and Sharp, as well as companies like Apple, HTC and RIM for smartphones. We believe that our joint venture with SONY Corporation creates a distinctive competitive advantage by combining our telecom expertise with their media, content and consumer equipment know-how.
We also compete in the mobile platform/wireless chipset market through our joint venture ST-Ericsson. Here, the largest competitor is Qualcomm. This market is growing in complexity as several new software platforms for handsets and other devices are being launched, e.g. Google’s Android, Microsoft’s Windows and Samsung’s Bada.
For more information on competitive risks, see Risk Factors, “Market, Technology and Business Risks”.
Operating segments
Ericsson is a vendor of solutions and services to telecom operators of fixed and mobile networks. We also provide TV solutions and managed services for television broadcast companies and mobile access modules to netbook manufacturers. Through two joint ventures we address the mobile handset and mobile platform/wireless chipset markets.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
When determining our operating segments, we have looked at which markets and what type of customers our products and services aim to attract as well as what distribution channels they are sold through. We have also considered commonality regarding technology, research and development. To best reflect our business focus and to facilitate comparability with peers, we report five operating segments:
Networks
Professional Services
Multimedia
Sony Ericsson
ST-Ericsson
Segment Networks
Networks includes products/solutions for:
wireless and wireline access
IP core networks
transmission/backhaul
network management
network rollout services
In 2009, we acquired Nortel’s CDMA and LTE operations. Services, other than network rollout, are reported under Professional Services. In 2009, segment Networks accounted for 66 percent of total sales.
Wireless and wireline access
Ericsson provides market-leading wireless access solutions to network operators for reliable, efficient and cost-effective mobile telephony networks. Ericsson also has a strong product portfolio for wireline access. Our
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
leadership in GSM, WCDMA/ HSPA and LTE technologies and now also CDMA enables us to offer tailored solutions regardless of the existing network standard used, delivering superior performance and consumer experience.
We provide wireline access solutions, for both fiber and copper, such as GPON and DSL. In 2009, AT&T appointed Ericsson as a domain vendor for wireline access solutions.
IP core network (switching, routing and control)
Our core network solutions include industry-leading softswitches, IP infrastructure for edge and core routing (Ericsson SmartEdge), IP-based Multimedia Subsystem (IMS) and gateways. GSM and WCDMA/HSPA share a common core network. Therefore operators’ previous investments are preserved as they migrate from voice-centric to multimedia networks. Our switching products have industry-leading scalability and capacity.
Transmission/backhaul
Our MINI-LINK microwave system is one of the world’s most widely deployed mobile backhaul solutions. Transport networks (e.g. MINI-LINK, metro optical networks) are essential elements of our end-to-end solutions.
Network management
Ericsson offers a portfolio of network management tools, supporting vital operator activities for management of existing networks as well as for introduction of new network architectures, technologies and services, such as: configuration, performance monitoring, security management, inventory management and software upgrades. The tools are applicable for fixed and mobile access, transport and core. They are often capable of managing also multi-vendor networks.
Network rollout services
Fast rollout of large networks involves a heavy ramp-up of resources. Ericsson’s Global Services organization uses a mix of local, in-house capabilities, authorized service providers and central specialist resources. We manage our capabilities in a way that has proven to be highly successful, resulting in successful projects and satisfied customers.
Sourcing, manufacturing and supply and availability of materials
Our hardware products largely consist of electronics, such as circuit boards, radio frequency (RF) modules, antennas etc. For manufacturing of products we purchase customized and standardized equipment, components and services from several global providers as well as from numerous local and regional suppliers. We produce certain types of components in-house, such as power modules and cables.
The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies (EMS), of which the vast majority is in low-cost countries. Node production, i.e. assembly, integration and testing of modules into complete radio base stations, mobile switching centers etc., is largely done in-house and on-demand.
Where possible, we rely on alternative supply sources for the purchased elements of our products. This avoids sole source situations and secures sufficient supply at competitive prices. When selecting a new supplier, we try to ensure that our technical standards and other requirements are met, including our supplier code of conduct. Assuming there will only be a moderate increase in near-term market demand, we do not foresee any
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
supply constraints to meet our expected production requirements during 2010. Variations in market prices for copper, aluminum, steel, precious metals, plastics and other raw materials generally have a limited effect on our total cost of goods sold. For more information related to sourcing, see Risk Factors, “Market, Technology and Business Risks”.
We continuously adjust our production capacity to meet expected demand. At year-end 2009, our overall capacity utilization was close to 100 percent. The table “Primary manufacturing and assembly facilities” summarizes where we have major sites as well as the total floor space at year-end. In Sweden, the majority of the floor space within our production facilities is used for node assembly and verification.
Segment Professional Services
Ericsson’s professional services capabilities include expertise in managed services, systems integration, consulting, education and customer support services.
Segment Professional Services accounted for 27 percent of total sales in 2009, up from 23 percent in 2008.
Managed services
We are the industry leader in managed services, managing networks with more than 370 million subscribers. We offer the most comprehensive managed services capabilities within the telecom industry:
Network design and planning.
Network operations; including networks without any Ericsson equipment installed, such as Sprint’s fixed and mobile CDMA/IDEN networks in the US.
Field operations and maintenance of sites.
Shared solutions; e.g. managed backhaul or hosting of platforms like pre-paid or real time billing/charging.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Systems integration
Operators can minimize risk by engaging Ericsson to:
integrate equipment from multiple suppliers
manage technology change programs
design and integrate new solutions.
More and more operators who introduce multimedia services or face challenging technology transformations ask us to serve as prime integrator, ensuring successful deployment of the total solution.
Consulting
With expertise in business, strategy and technology, our consultants support customers in decision-making, planning and execution in order to improve and grow their business. Our Industry Programs package the expertise into end-to-end solutions in the key areas of multimedia, 3G rollout, broadband, value creation and revenue assurance.
Education
We provide our customers with tailored education programs to ensure their employees have the skills and competences necessary for managing today’s and tomorrow’s complex technologies.
Customer support
Having experienced professionals available around-the-clock to provide customer support is a crucial part of our service offering. We support operators across the world with over one billion customers in total.
PRIMARY MANUFACTURING AND ASSEMBLY FACILITIES
2009 | 2008 | 2007 | ||||||||||
Sites | Thousands of sq meters | Sites | Thousands of sq meters | Sites | Thousands of sq meters | |||||||
Sweden | 8 | 224.7 | 8 | 226.0 | 8 | 244.3 | ||||||
China | 4 | 46.4 | 4 | 38.5 | 4 | 33.9 | ||||||
Estonia | 1 | 26.6 | — | — | — | — | ||||||
Italy | 2 | 20.1 | 2 | 20.1 | 2 | 20.1 | ||||||
Brazil | 1 | 23.3 | 1 | 18.0 | 1 | 25.9 | ||||||
India | 1 | 13.6 | 1 | 9.0 | 1 | 6.4 | ||||||
USA | — | — | 1 | 5.0 | 1 | 5.0 | ||||||
Other | — | — | 1 | 0.3 | 1 | 0.3 | ||||||
Total | 17 | 354.7 | 18 | 316.9 | 18 | 335.9 | ||||||
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
2008Segment Multimedia
Sales in segment Multimedia were 6 percent of total sales excluding mobile platforms and PBX business.
Consumer and Business Applications
We provide our operator customers with multimedia solutions for the consumer and business markets. For the consumer segment, we offer Rich Communication Suite (RCS), mobile TV solutions, messaging, a social media portal, and location-based services. In the business communication segment, we provide converged, fixed-mobile, business communication solutions for enterprise needs. Ericsson Business Communication Suite (BCS) is a network operator application for business users.
Multimedia Brokering
Ericsson Multimedia Brokering offers a range of payment, messaging and location-based services solutions: e.g. IPX Payment, IPX Messaging and IPX Subscriber Information services. We offer multimedia brokering solutions, to help network operators monetize their network assets by facilitating payment and distribution of content through interconnection of network operators with content and media companies, information and search services, consumer brands and a variety of enterprises.
Service delivery and provisioning
Our service delivery platforms and provisioning solutions enable operators and service providers to create, sell, and manage multimedia services and multi-play offerings. By combining products, solutions, systems integration and business consulting into one offering, we create a multimedia marketplace for each customer’s specific needs.
Revenue management
We provide revenue management solutions, enabling new business models, utilizing our unique combined competence in prepaid and postpaid. Our convergent charging and billing offering helps operators reduce cost and increase revenues by creating one unified solution to manage all their customers and services.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
TV
We have an industry-leading IMS-enabled middleware in the IPTV market, and also offer a full system integration and solutions delivery role. We have strengthened our compression market leadership through the launch of the next-generation encoding platforms. In the Video on Demand and Content Management area, we extended our product range.
Segment Sony Ericsson
Sony Ericsson delivers innovative and feature-rich mobile phones, and accessories, which allow us to provide end-to-end solutions to our customers. The joint venture, formed in October 2001, combines the mobile communications expertise of Ericsson with the consumer electronic devices and content expertise of SONY Corporation. It forms an essential part of our end-to-end capability for mobile multimedia services.
Sony Ericsson’s results are reported according to the equity method under “Share in earnings of joint ventures and associated companies” in the income statement.
Please also see Notes to the Consolidated Financial Statements—Note C3, “Segment Information”.
Segment ST-Ericsson
Ericsson and STMicroelectronics formed ST-Ericsson as a 50/50 joint venture in February 2009. The combined company has one of the industry’s strongest product offerings in semiconductors and platforms for mobile devices for GSM/ EDGE, WCDMA/HSPA and TD-SCDMA as well as LTE. ST-Ericsson is a leading supplier to the top handset vendors, and its products and technologies enable more than half of all handsets in use today.
ST-Ericsson’s results are reported according to the equity method under “Share in earnings of joint ventures and associated companies” in the income statement.
Please see also Notes to the Consolidated Financial Statements—Note C3, “Segment Information”.
Geographical areas
Sales are reported in five geographical areas; Western Europe, CEMA (Central and Eastern Europe, Middle East and Africa), Asia Pacific, Latin America and North America. The areas have different characteristics in terms of penetration of fixed and mobile telephony, network traffic, sophistication of services, average country GDP and other economic factors. The distribution of sales between the areas mitigates volatility, as a decrease in one area is often offset by an increase in another. No individual country accounts for more than 10 percent of sales. However, due to our improved market position there, the US is expected to account for between 10 and 15 percent of sales next year.
SALES PERRE GIONAN D SEGMENT 2009
SEK billion | Networks | Professional Services | Multi- media | Total | ||||
Western Europe | 23.8 | 18.3 | 2.4 | 44.6 | ||||
CEMA1) | 32.7 | 12.9 | 5.1 | 50.7 | ||||
Asia Pacific | 50.5 | 12.2 | 3.1 | 65.8 | ||||
Latin America | 13.0 | 5.9 | 1.1 | 20.0 | ||||
North America | 17.1 | 6.7 | 1.6 | 25.4 | ||||
Total | 137.1 | 56.1 | 13.3 | 206.5 | ||||
1) | Central and Eastern Europe, Middle East and Africa. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONTENTS
180 | ||
182 | ||
182 | ||
183 |
The Remuneration PolicyCommittee advises the Board of Directors on an ongoing basis on the remuneration of Group Management. This includes fixed salaries, pensions, other benefits and short-term and long-term variable remuneration, all in the context of pay and employment conditions throughout Ericsson. The Remuneration Committee also approves variable remuneration outcomes, prepares remuneration related proposals for Board and shareholder approval and develops and monitors the remuneration policy, strategies and general guidelines for employee remuneration.
During 2009, as the financial crisis hit the world with its full force, there was an increased public focus on compensation and benefits matters. In its work the Remuneration Committee has followed the debate closely. The Committee met seven times during the year. The winter meetings were primarily dedicated to reviewing and implementing a zero salary increase for senior management, the vesting of variable compensation awards and proposals to shareholders at the Annual General Meeting (AGM). In 2009 the policy for senior management remuneration and the Long-Term Variable share-based plans were brought to the AGM with no major changes proposed. During the summer the Committee reviewed short-term targets to ensure that they remained appropriate and challenging. In the fall it began the cycle again with a review of the remuneration strategy, the variable compensation plans and levels of fixed compensation. As is illustrated below, the Committee has also considered market trends, existing and potential remuneration risks, target setting, its working arrangements and investor consultations.
Activities during the second half of 2009 resulted in an updated remuneration policy being brought to the AGM which better demonstrates the basic remuneration principles within Ericsson.
This chapter outlines how the remuneration policy is implemented throughout Ericsson in line with corporate governance best practice, with specific references to senior management. To begin with, the work of the Remuneration Committee and our remuneration policy are explained, followed by descriptions of plans and approaches. More details of the remuneration of senior management and Board members’ fees can be found in the Notes to the Consolidated Financial Statements—Note C29, “Information regarding Members of the Board of Directors, the Management and Employees” (“Note C29”). Senior management comprises the Group Management Team, including the CEO, and will hereafter be referred to as “Group Management”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
SUMMARIES OF 2009 SHORT- AND LONG-TERM VARIABLE REMUNERATION
What we call it | What is it? | What is the objective? | Who participates? | How is it earned? | ||||
Short-term: Remuneration delivered over 12 months or less | ||||||||
Fixed salary | Fixed remuneration paid at set times | Attract and retain employees, delivering part of annual remuneration in a predictable format | All employees | Market appropriate levels set according to position and evaluated according to individual performance | ||||
Short-Term Variable compensation (STV) | A variable plan that is measured and paid over a single year | Align employees with clear and relevant targets, providing an earnings opportunity in return for variable cost and performance | Managers, including Group Management | Achievements against set targets. Reward can increase to up to twice the target level and decrease to zero, depending on performance | ||||
Local and Sales Incentive Plans | Tailored versions of the STV | As for STV, tailored for local or business requirements, such as sales | Most employees | Similar to STV. All plans have maximum award and vesting limits | ||||
Long-term: Remuneration delivered over 3 years or more | ||||||||
Stock Purchase Plan (SPP) | All-employee stock- based plan | Reinforce a “One Ericsson” and align employees’ interests with those of shareholders | All employees are eligible | Buy one share and it will be matched by one share after 3 years if still employed | ||||
Key Contributor Retention Plan (KC) | Share-based plan for selected individuals | Recognize, retain and motivate key contributors for performance, critical skills and potential | Up to 10 percent of employees | If selected, get one more matching share in addition to the SPP one | ||||
Executive Performance Stock Plan (EPSP) | Share-based plan for senior executives | Remuneration for long-term commitment and earnings performance | Senior executives, including Group Management | Get up to 4, 6 or, for CEO, 8 further matching shares to the SPP one for EPS growth performance |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The Remuneration Committee’s work is the foundation for the governance of our remuneration processes together with our internal systems and audit controls. The Committee is chaired by Michael Treschow and its other members are Nancy McKinstry, Börje Ekholm and Karin Åberg. Karin Åberg replaced Monica Bergström after the 2009 Annual General Meeting. All the members are non-executive directors, independent (except for the employee representative) as required by the Swedish Code of Corporate Governance and have relevant knowledge and experience of remuneration matters.
The Company’s General Counsel acts as secretary to the Committee. The Chief Executive Officer, the Senior Vice President Human Resources & Organization and the Vice President Compensation & Benefits attend the Remuneration Committee meetings by invitation and assist the Committee in its considerations, except when issues relating to their own remuneration are being discussed.
The Remuneration Committee has appointed an independent expert advisor, Gerrit Aronson, to assist and advise the Committee. Gerrit Aronson provided no other services to the Company during 2009. The Remuneration Committee is also provided with national and international pay data collected from external survey providers and can call on other independent expertise, should it so require. The Chairman continues to ensure that contact is maintained, as necessary and appropriate, with principal shareholders on the subject of remuneration.
The purpose and function of the Remuneration Committee will continue going forward and its terms of reference can be found on the Ericsson website (www.ericsson.com). These terms of reference, together with the remuneration policy, are reviewed annually in light of matters such as changes to corporate governance best practice or changes to accounting, legislation, political opinion or business practices among peers. This helps to ensure that the policy continues to provide Ericsson with a competitive remuneration strategy. The policy for senior management remuneration is, in accordance with Swedish law, brought to shareholders annually for approval.
Remuneration of Group Management inat Ericsson is based on the principles of performance, competitiveness and fairness. DifferentOur remuneration policy together with the mix of remuneration elements are designed to reflect these principles. Therefore a mix of several remuneration elements is applied in order to reflect the remuneration principles inby creating a balanced way.remuneration package. The policy for 2009 can be found in Note C29. The proposed resolution for the 2010 AGM can be found in the Board of Directors’ Report and, together with resolutions relating to the long-term variable remuneration plans, in the Notice of Annual General Meeting on our website. The auditors’ opinion on how we have followed our policy during 2009 is also posted on the website.
TheSHORT-TERM VARIABLE REMUNERATION STRUCTURE
Short-Term Variable remuneration as percentage of Fixed Salary | Percentage of Short-Term Variable remuneration opportunity | |||||||||||||||||
Target level | Maximum level | Actual paid for 2009 | Group Financial Targets | Unit/Functional Financial Targets | Non-Financial Targets | |||||||||||||
CEO 2009 | 40 | % | 80 | % | 39.5 | % | 90 | % | 0 | % | 10 | % | ||||||
CEO 2010 | 40 | % | 80 | % | — | 90 | % | 0 | % | 10 | % | |||||||
Average Group Management 20091) | 31 | % | 62 | % | 39.0 | % | 62 | % | 23 | % | 15 | % | ||||||
Average Group Management 20101) | 34 | % | 68 | % | — | 73 | % | 16 | % | 11 | % |
1) | Excludes CEO—differences in target and maximum levels from year to year are due to changes in the composition of Group Management |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
For Group Management’sManagement, total remuneration consists of fixed salary, variable components in the form of annual short-term variable remuneration and long-term variable remuneration, pension and other benefits.
Together these elements constitute an integral remuneration package. If the size of any one of thethese elements should beis increased or decreased, at least one other element has to be decreased or increased ifchange where the competitive position of the total package should remain unchanged.
The annual report 2008 sets out details on the total remuneration and benefits awarded to the Group Management during 2008 including previously decided long-term variable compensation that has not yet become due for payment.
Relative importance of fixed and variable components of the remuneration of Group Management and the linkage between performance and remunerationFixed salary
Ericsson takes account of global remuneration practice together with the practice of the home country of each member of the Group Management.
Fixed salary issalaries are set to be competitive. Itscompetitive within an individual’s home market. When setting fixed salaries the Remuneration Committee considers the impact on total remuneration, including pension and associated costs. The absolute level islevels are determined by the size and complexity of the jobposition and the year to yearyear-to-year performance of the individual jobholder.
Performance is specifically reflected in the variable components, both inindividual. Together with other elements of remuneration, Group Management salaries are subject to an annual variable component and in a long-term variable part. Although this may vary over timereview by the Remuneration Committee, which considers external pay data to take accountensure that levels of pay trends, currentlyremain competitive and appropriate to the target level of the short-term variable remuneration policy.
For 2009 it was decided that it was strategically appropriate not to increase fixed salaries for Group Management is 30–40 percent ofand other senior executives.
Variable remuneration
At Ericsson we strongly believe that, where possible, we should encourage variable compensation. First and foremost this aligns employees with clear and relevant targets but it also enables more flexible payroll costs and emphasizes the fixed salary. The long-term variable remuneration is set to achieve a target of around 30 percent of the fixed salary. In both cases,
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
the variable pay is measured against the achievement of specific business objectives, reflecting the judgment of the Board of Directors as to the right balancelink between fixedperformance and variable pay and the market practice for compensation of executives.pay. All variable remuneration plans have maximum award and vesting limits.
With the current composition of Group Management, the Company’s cost during 2008 for the short-term variable and the long-term variableShort-Term Variable remuneration of Group Management can, at constant share price, amount to between 0 and 125 percent of the aggregate fixed salary cost, all excluding social security costs.
The principal terms of variable remuneration
The annual variable remuneration is delivered through a cash based program with specificcash-based programs. Specific business targets are derived from the annual business plan approved by the Board of Directors. The exact nature ofDirectors and, in turn, defined by the Company’s long-term strategy. Ericsson strives to grow faster than the market with best-in-class margins and strong cash conversion and therefore the starting point is to have these as three core targets:
Sales Growth
Operating Income
Cash Flow
For Group Management, targets are thus predominantly financial targets at either Group level or at the individual unit level and may also include operational targets like customer satisfaction and employee motivation. Targets are cascaded to all managers and will vary depending on the specific job but may include financial targets at either corporate level or at a specific business unit level, operational targets, employee motivation targets and customer satisfaction targets.
Pension
Pension benefits shall follow the competitive level in the home country. For Group Management in Sweden, the Company applies a defined contribution scheme for old age pension in addition to the basic pension plans on the Swedish labor market.
The retirement age is normally 60 years but can be different in individual cases.
Additional remuneration arrangements
By way of exception, additional arrangements can be made when deemed required in order to attract or retain key competences or skills, or to make individuals move to new locations or positions. Such additional arrangement shall be limited in time and shall not exceed a period of 36 months and two times the compensation the individual concerned would have received had no additional arrangement been made.
Notice of termination and severance pay
For Group Management in Sweden the mutual notice period is six months. Upon termination of employment by the Company, severance pay amounting to a maximum of 18 months fixed salary is paid. Notice of termination given by the employee due to significant structural changes or other events occurred that, in a determining manner, affect the content of work or the condition for the position is equated with notice of termination served by the Company.position.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)2009
Remuneration
All variable remuneration targets have to be objective and measurable and typically refer to a result that is achieved on a collective basis. Each target is, in accordance with our strict governance instructions, defined in a “target specification” and measured over the calendar year. The target setting process is fully integrated with the strategy work and target levels are tested against plans and forecasts up until they are finalized around the turn of the year. The Board of Directors
REMUNERATION TO MEMBERS OF THE BOARD OF DIRECTORS DURING 2008
SEK | Amount of Board fee | Commit- tee fee | Employee represen- tative fee | Total fees paid out | Portion of Board fee in synthetic shares | Number of synthetic shares | Effect of changed market price1) | Accounted debt for synthetic shares2) | Total costs recognized | ||||||||||
Board member | |||||||||||||||||||
Michael Treschow | 3,750,000 | 250,000 | — | 1,187,500 | 75 | % | 38,323.80 | -567,145 | 2,245,355 | 3,432,855 | |||||||||
Marcus Wallenberg | 750,000 | 125,000 | — | 687,500 | 25 | % | 2,554.80 | -37,817 | 149,683 | 837,183 | |||||||||
Sverker Martin-Löf | 750,000 | 250,000 | — | 1,000,000 | 0 | % | — | — | — | 1,000,000 | |||||||||
Roxanne S. Austin | 750,000 | — | — | 187,500 | 75 | % | 7,664.60 | -113,438 | 449,062 | 636,562 | |||||||||
Peter L. Bonfield | 750,000 | 250,000 | — | 812,500 | 25 | % | 2,554.80 | -37,817 | 149,683 | 962,183 | |||||||||
Börje Ekholm | 750,000 | 125,000 | — | 312,500 | 75 | % | 7,664.60 | -113,438 | 449,062 | 761,562 | |||||||||
Ulf J. Johansson | 750,000 | 350,000 | — | 537,500 | 75 | % | 7,664.60 | -113,438 | 449,062 | 986,562 | |||||||||
Nancy McKinstry | 750,000 | 125,000 | — | 312,500 | 75 | % | 7,664.60 | -113,438 | 449,062 | 761,562 | |||||||||
Anders Nyrén | 750,000 | 125,000 | — | 875,000 | 0 | % | — | — | — | 875,000 | |||||||||
Carl-Henric Svanberg | — | — | — | — | — | — | — | — | — | ||||||||||
Jan Hedlund | — | — | 16,500 | — | — | — | — | — | 16,500 | ||||||||||
Monica Bergström | — | — | 15,000 | — | — | — | — | — | 15,000 | ||||||||||
Karin Åberg | — | — | 16,500 | — | — | — | — | — | 16,500 | ||||||||||
Anna Guldstrand | — | — | 15,000 | — | — | — | — | — | 15,000 | ||||||||||
Kristina Davidsson | — | — | 15,000 | — | — | — | — | — | 15,000 | ||||||||||
Pehr Claesson | — | — | 12,000 | — | — | — | — | — | 12,000 | ||||||||||
Torbjörn Nyman | — | — | 4,500 | — | — | — | — | — | 4,500 | ||||||||||
Total | 9,750,000 | 1,600,000 | 94,500 | 6,007,000 | 74,091.80 | -1,096,531 | 4,340,969 | 10,347,969 | |||||||||||
Social security fees | 1,706,764 | 1,232,388 | 2,939,152 | ||||||||||||||||
Total | 7,713,764 | 5,573,357 | 13,287,121 | ||||||||||||||||
Comments and the Remuneration Committee decide on all Ericsson Group targets, which are cascaded to unit-related targets throughout the table
The Chairman of the Board was entitledCompany, always subject to a Board feetwo levels of SEK 3,750,000.management approval process. The Chairman also received SEK 125,000Remuneration Committee monitors the appropriateness and fairness of Group target levels throughout the performance year and has the authority to revise them should they cease to be relevant, stretching and/or enhance shareholder value.
During 2009, approximately 65,000 employees participated in short-term variable plans. Of these 6,000 were in the global Short-Term Variable remuneration plan (“STV”) for each Board committee on which he served.management, including Group Management, and 4,000 were in the global Sales Incentive Plan. Local plans vary in design according to local competitive practice.
The other Directors appointedchart above illustrates how payouts to Group Management have varied with performance over the past five years.
Long-Term Variable remuneration
Share-based long-term variable remuneration plans are submitted each year for approval by shareholders at the Annual General Meeting were entitledMeeting. All long-term variable remuneration plans are designed to form part of a feewell-balanced total remuneration and span over a minimum of SEK 750,000 each. In addition, each Director servingthree years. As these are variable plans, outcomes are unknown and rewards depend on a Board committee received a feelong-term personal investment, corporate performance and resulting share price performance. During 2009, share-based remuneration was made up of SEK 125,000 for each committee. However,three different but linked plans: The all-employee Stock Purchase Plan, the Chairman of the Audit Committee received a fee of SEK 350,000Key Contributor Retention Plan and the other two members of the Audit Committee receivedExecutive Performance Stock Plan.
The Stock Purchase Plan
The all-employee Stock Purchase Plan is designed to offer, where practicable, an incentive for all employees to participate, reinforcing a fee of SEK 250,000 each.
Members of the Board, who are not employees of the Company, have not received any remuneration other than the fees and synthetic shares as above.
Members and Deputy Members of the Board who are Ericsson employees received no remuneration or benefits other than their entitlements as employees. However, a fee of SEK 1,500 per attended Board meeting was paid“One Ericsson” aligned with shareholder interests. Employees can save up to each employee representative on the Board.7.5
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Annual General Meeting 2008 resolved that non-employed Directors can choose to receive the fee in respect of the Board assignment (exclusive of committee work) as follows: i) 25 percent of the fee in cash and a number of synthetic shares, the value of which at the time of allocation corresponds to 75 percent of the fee, ii) 50 percent of the fee in cash and 50 percent in the form of synthetic shares, or iii) 75 percent in cash and 25 percent in the form of synthetic shares. Directors may also choose not to participate in the synthetic share program.
The number of synthetic shares is based on a volume weighed average of the market price of Ericsson Class B shares on the NASDAQ OMX Stockholm exchange during the five trading days immediately following the publication of the Company’s interim report for the first quarter of 2008 (April 28–May 5): SEK 14.6775 (after the reversed split SEK 73.3875). Following the reverse split of shares 1:5, the number of synthetic shares was recalculated by an independent accounting firm appointed by the Stockholm Chamber of Commerce in accordance with the terms and conditions for the synthetic shares resolved by the Annual General Meeting 2008.
The Directors’ right to receive payment with regard to the allocated synthetic shares occurs after the publication of the Company’s year-end financial statement during the fifth year following the Annual General Meeting which resolved on the allocation of the synthetic shares, i.e. in 2013.
The amount payable shall be determined based on the volume weighed average price for shares of Class B during the five trading days immediately following the publication of the year-end financial statement.
The total accounted debt for the synthetic share program per December 31, 2008, is SEK 5,573,357.
Remuneration to the Group Management
REMUNERATION PAID TO THE PRESIDENT AND CEO AND OTHER MEMBERS OF GROUP MANAGEMENT DURING 2008
SEK | The President | Other Members of Group Management | Total | |||
Salary | 15,886,500 | 59,759,989 | 75,646,489 | |||
Annual variable remuneration earned 2007 and paid 2008 | 1,216,000 | 8,652,714 | 9,868,714 | |||
Long-term variable remuneration | 3,264,551 | 7,901,861 | 11,166,412 | |||
Other benefits | 56,340 | 2,294,217 | 2,350,557 | |||
Total | 20,423,391 | 78,608,781 | 99,032,172 | |||
Comments to the table
The annual fixed salary for the President and CEO was adjusted from SEK 15,200,000 to SEK 15,750,000 from January 1, 2008. The salary amount stated in the table includes vacation salary.
The Board of Directors has appointed four Executive Vice Presidents, of whom two have resigned during the year. No one of these executives has during the year acted as deputy to the President and CEO. All Executive Vice Presidents are included in the group “Other members of Group Management”.
The group “Other members of Group Management” comprises the following persons: Hans Vestberg, Kurt Jofs, Bert Nordberg, Björn Olsson, Carl Olof Blomqvist, Håkan Eriksson, Jan Frykhammar, Marita
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
“Long-term variable remuneration” refers for the President and CEO to the value of matching shares received during 2008 (45,003 Class B shares) under the Stock Purchase Plans 2003 and 2005 and under the Executive Performance Stock Plan 2004 (three of four quarterly matchings). For other members of Group Management “Long-term variable remuneration” refers to the value of exercised stock options during 2008 ( 22,000 options) under the Stock Option Plan 2002 and to the value of matching shares received during 2008 (100,948 Class B shares) under the Stock Purchase Plans 2003 and 2005 and under the Executive Performance Stock Plan 2004.
The values are based on the share price at matching respectively at exercise.
REMUNERATION COSTS INCURRED DURING 2008 FOR THE PRESIDENT AND CEO AND OTHER MEMBERS OF GROUP MANAGEMENT
SEK | The President | Other Members of Group Management | Total | |||
Salary | 15,886,500 | 59,759,989 | 75,646,489 | |||
Provisions for annual variable remuneration earned 2008 to be paid 2009 | 630,000 | 16,287,601 | 16,917,601 | |||
Long-term variable remuneration provision | 7,458,319 | 12,905,987 | 20,364,306 | |||
Other benefits | 56,340 | 2,294,217 | 2,350,557 | |||
Pension costs | 8,815,150 | 33,831,233 | 42,646,383 | |||
Social security fees | 9,004,627 | 35,581,309 | 44,585,936 | |||
Total | 41,850,936 | 160,660,336 | 202,511,272 | |||
Comments to the table
The provisions for the annual variable remuneration 2008 correspond to 4 percent of the fixed salary for the President and CEO and to 34 percent for other members of the Group Management
“Long-term variable remuneration provision” includes the compensation cost during 2008 for share based programs, which represent Group Management’s part of total compensation costs as disclosed under “Shares for all plans”.
Under IFRS, a company shall recognize costs for share based compensation plans to employees, being a measure of the value to the company of services received from the employees under the plans.
For the President and CEO and other members of Group Management a defined contribution plan is applied. They were also entitled to pension in accordance with the occupational pension plan for salaried staff on the Swedish labor market (ITP) from 60 years. These pension plans are not conditional upon future employment at Ericsson.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In the defined contribution plan, the Company pays a contribution of between 25 and 35 percent per year of the executive’s pensionable salary in excess of 20 base amounts (during 2008, one base amount was SEK 48,000). For the President and CEO, the annual pension contribution is 35 percent of the pensionable salary above 20 base amounts. During 2008, this contribution was SEK 7,510,125 and the fee in the ITP plan SEK 1,305,025. Included in the pension premiums are also changes of commitments made to the President and CEO and the other members of Group Management for benefit based temporary disability and survivor’s pensions until retirement age.
The pensionable salary consists of the annual fixed salary including vacation and the target value of the annual variable remuneration.
Ericsson’s commitments for benefit based pensions per December 31, 2008, under IAS 19 amounted to SEK 1,984,193 for the President and CEO which refers to the ITP plan. For other members of Group Management the Company’s commitments amounted to SEK 44,093,845, of which SEK 34,575,648 refers to the ITP plan and the remaining SEK 9,518,197 to temporary disability and survivor’s pensions until retirement age.
Social security fees include payroll tax on pension premiums.
For previous Presidents, the Company has made provisions for defined benefit pension plans in connection with their active service periods within the Company.
OUTSTANDING STOCK OPTIONS AND MATCHING RIGHTS
As per December 31, 2008 Number of Class B shares | The President | Other Members of Group Management | ||
Stock Option Plan 2002 | — | 88,000 | ||
Stock Purchase Plans 2005, 2006, 2007 and 2008 | ||||
Executive Performance Stock Plans 2006, 2007 and 2008 | 320,321 | 574,552 |
Comments to the tables
For the definition of matching rights, see description under “Long-term variable remuneration”.
The number of options presumes full exercise under the applicable plan.
For strike price for the option plan, see “Long-term variable remuneration”.
The number of matching rights presumes maximum performance matching under Executive Performance Stock Plans 2006, 2007 and 2008.
LONG-TERM VARIABLE REMUNERATION
Stock Purchase Plan
The first Stock Purchase Plan was introduced in 2002. The plans are designed to offer an incentive for all employees to participate in the Company where practicable, which is consistent with industry practice and with our ways of working. Employees can save up to 7.5 percent (CEO 9 percent) of gross fixed salary for purchase of Classclass B contribution shares at market price on the NASDAQ OMX Stockholm or ADSs aton NASDAQ (contribution shares) duringover a twelve-month period (contribution period).period. If the contribution shares are retained by the employee for three years after the investment and the employment with the Ericsson Group continues during that time, the employee’s shares will be matched with a corresponding number of class B shares or ADSs free of consideration. EmployeesADSs. The plan was introduced in 2002 and employees in 94 countries participateparticipate. In December 2009 the number of participants was in the plans.excess of 18,000 or approximately 25 percent of eligible employees.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The below table shows the contribution periods and participation details for ongoing plans.
Plan | Contribution period | Number of participants at launch | Take-up rate – % of all employees | ||||
Stock Purchase plan 2005 | August 2005 – July 2006 | 16,000 | 29 | % | |||
Stock Purchase plan 2006 | August 2006 – July 2007 | 17,000 | 29 | % | |||
Stock Purchase plan 2007 | August 2007 – July 2008 | 19,000 | 26 | % | |||
Stock Purchase plan 2008 | August 2008 – July 2009 | 19,000 | 25 | % |
Participants save each month, beginning with August payroll, towards quarterly investments. These investments (in November, February, May and August) are matched on the third anniversary of each such investment subject to continued employment, and hence the matching spans over two financial years and two tax years.
The Key Contributor Retention Plan
The Key Contributor Retention Plan was introduced in 2004. The plan is part of EricssonEricsson’s talent management strategy and is designed to give individuals recognition for performance, critical skills and potential as well as encourage retention of key employees. Under the program, up tooperating units around the world are given quotas that total no more than 10 percent of employees (2008: 6,717 employees) are selected through a nominations processworld-wide. Each unit nominates individuals that identifies individualshave been identified according to performance, critical skills and potential. The nominations are calibrated in management teams locally and reviewed by both local and corporate Human Resources to ensure that there is a minimum of bias and a strong belief in the system. Participants selected obtain one extra matching share in addition to the ordinary one matching share for each contribution share purchased under the Stock Purchase Plan during a twelve-month program period. The plan was introduced in 2004.
Plan (million shares) | Originally designated1) A | Outstanding beginning of 2009 B | Awarded during 2009 C | Exercised/ matched during 2009 D | Forfeited/ expired during 2009 E | Outstanding end of 2009 F=B+C-D-E | Compensation costs charged during 2009 (MSEK) G | |||||||||
2002 Stock Option Plan | 10.8 | 3.8 | — | 3.4 | 0.4 | — | 2) | — | ||||||||
2005 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 6.3 | 3.2 | — | 2.7 | 0.5 | — | 25 | 4) | ||||||||
2006 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 6.4 | 4.6 | — | 1.2 | 0.1 | 3.3 | 126 | 4) | ||||||||
2007 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 9.7 | 9.4 | — | 0.5 | 0.3 | 8.6 | 3) | 189 | 4) | |||||||
2008 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 16.5 | 3.7 | 8.3 | 0.4 | 0.3 | 11.3 | 3) | 183 | 4) | |||||||
2009 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 22.4 | — | 2.5 | — | — | 2.5 | 3) | 6 | 4) | |||||||
Total | 72.1 | 24.7 | 10.8 | 8.2 | 1.6 | 25.7 | 529 | 5) | ||||||||
1) | Adjusted for rights offering and reverse split when applicable. |
2) | All outstanding options in the 2002 Stock Option Plan expired during 2009 and no options therefore remain exercisable. |
3) | Presuming maximum performance matching under the Executive Performance Stock Plans. The 2005 and 2006 plans have lapsed. |
4) | Fair value is calculated as the share price on the investment date, reduced by the net present value of the dividend expectations during the three-year vesting period. Net present value calculations are based on data from external party. Fair value is also adjusted for participants failing to keep hold of their contribution shares during the vesting period. For shares under the Executive Performance Stock Plans, the Company assesses the probability of meeting the performance targets when calculating the compensation cost. Fair value of the Class B share at each investment date during 2009 was: February 15 SEK 68.11, May 15 SEK 60.00, August 15 SEK 60.88 and November 15 SEK 65.83. |
5) | Total compensation costs charged during 2008: SEK 572 million, 2007: SEK 496 million. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Employee numbers, wages and salaries
AVERAGE NUMBER OF EMPLOYEES
2009 | 2008 | |||||||||||
Men | Women | Total | Men | Women | Total | |||||||
Western Europe1) | 30,676 | 9,493 | 40,169 | 32,289 | 9,167 | 41,456 | ||||||
Central and Eastern Europe, Middle East and Africa | 8,168 | 1,831 | 9,999 | 7,028 | 1,723 | 8,751 | ||||||
Asia Pacific | 13,513 | 3,825 | 17,338 | 12,111 | 3,343 | 15,454 | ||||||
Latin America | 5,876 | 1,254 | 7,130 | 6,151 | 1,335 | 7,486 | ||||||
North America | 9,366 | 2,358 | 11,724 | 4,556 | 1,286 | 5,842 | ||||||
Total2) | 67,599 | 18,761 | 86,360 | 62,135 | 16,854 | 78,989 | ||||||
| ||||||||||||
1) Of which Sweden | 13,930 | 4,591 | 18,521 | 14,685 | 4,990 | 19,675 | ||||||
2) Of which EU | 32,970 | 10,055 | 43,025 | 34,100 | 9,633 | 43,733 |
NUMBER OF EMPLOYEES AT YEAR END
Employees by region | 2009 | 2008 | ||
Western Europe1) | 38,305 | 41,618 | ||
Central and Eastern Europe, Middle East and Africa | 10,145 | 7,976 | ||
Asia Pacific | 16,766 | 15,165 | ||
Latin America | 6,055 | 8,247 | ||
North America | 11,222 | 5,734 | ||
Total2) | 82,493 | 78,740 | ||
�� | ||||
| ||||
1) Of which Sweden | 18,217 | 20,155 | ||
2) Of which EU | 41,396 | 43,093 | ||
Employees per segment | ||||
Networks | 49,874 | 45,823 | ||
Professional Services | 24,570 | 23,244 | ||
Multimedia | 8,049 | 9,673 | ||
Total | 82,493 | 78,740 | ||
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
EMPLOYEES BY GENDER AND AGE AT YEAR END 2009
Female | Male | Percent of total | |||||||
Under 25 years old | 1,228 | 3,321 | 5 | % | |||||
26–35 years old | 6,778 | 23,022 | 36 | % | |||||
36–45 years old | 6,918 | 23,749 | 37 | % | |||||
46–55 years old | 2,908 | 10,768 | 17 | % | |||||
Over 55 years old | 784 | 3,017 | 5 | % | |||||
Percent of total | 23 | % | 77 | % | 100 | % | |||
NUMBER OF EMPLOYEES RELATED TO COST OF SALES AND OPERATING EXPENSES
2009 | 2008 | 2007 | ||||
Cost of sales | 41,521 | 35,717 | 33,904 | |||
Operating expenses | 40,972 | 43,023 | 40,107 | |||
Total | 82,493 | 78,740 | 74,011 | |||
EMPLOYEE MOVEMENTS
2009 | 2008 | |||
Head count at year-end | 82,493 | 78,740 | ||
Employees who have left the Company | 9,147 | 3,415 | ||
Employees who have joined the Company | 12,900 | 8,144 | ||
Temporary employees | 693 | 1,124 |
WAGES AND SALARIES AND SOCIAL SECURITY EXPENSES
2009 | 2008 | |||
Wages and salaries | 41,247 | 38,607 | ||
Social security expenses | 13,630 | 12,690 | ||
Of which pension costs | 3,588 | 3,206 |
Amounts related to the President and CEO and the Group Management Team are included.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
WAGES AND SALARIES PER REGION
2009 | 2008 | |||
Western Europe1) | 23,039 | 24,138 | ||
Central and Eastern Europe, Middle East and Africa | 4,323 | 3,354 | ||
Asia Pacific | 5,346 | 4,594 | ||
Latin America | 2,181 | 1,879 | ||
North America2) | 6,358 | 4,642 | ||
Total3) | 41,247 | 38,607 | ||
| ||||
1) Of which Sweden | 10,324 | 11,825 | ||
2) Of which United States | 4,928 | 3,296 | ||
3) Of which EU | 23,734 | 24,699 |
Remuneration in foreign currency has been translated to SEK at average exchange rates for the year.
REMUNERATION TO BOARD MEMBERS AND PRESIDENTS IN SUBSIDIARIES
2009 | 2008 | |||
Salary and other remuneration | 315 | 316 | ||
Of which annual variable remuneration | 42 | 41 | ||
Pension costs | 34 | 36 |
BOARD MEMBERS, PRESIDENTS AND GROUP MANAGEMENT BY GENDER AT YEAR END
2009 | 2008 | |||||||||||
Females | Males | Females | Males | |||||||||
Parent Company | ||||||||||||
Board members and President | 38 | % | 62 | % | 38 | % | 62 | % | ||||
Group Management | 8 | % | 92 | % | 9 | % | 91 | % | ||||
Subsidiaries | ||||||||||||
Board members and Presidents | 10 | % | 90 | % | 12 | % | 88 | % |
C30 RELATED PARTY TRANSACTIONS
During 2009, various related party transactions were executed pursuant to contracts based on terms customary in the industry and negotiated on an arm’s length basis. For information regarding equity and Ericsson’s share of assets, liabilities and income in joint ventures and associated companies, see Note C12, “Financial Assets, Non-Current”.
Sony Ericsson Mobile Communications AB (SEMC)
In October 2001, SEMC was established as a joint venture between Sony Corporation and Ericsson, and a substantial portion of Ericsson’s handset operations was sold to SEMC. The joint venture is headquartered in London, United Kingdom. As part of the formation of the joint venture, contracts were entered into between Ericsson and SEMC.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Major transactions are as follows:
License revenues.Both owners of SEMC, Sony Corporation and Ericsson, receive license revenues for SEMC’s usage of trademarks and intellectual property rights. The decline in license revenues during 2009 is a consequence of the formation of ST-Ericsson.
Purchases.Ericsson purchases mobile phones from SEMC to support contracts with a number of customers for mobile systems which also include limited quantities of phones.
Dividends.Both owners of SEMC receive dividends, when so decided by the board of directors. During 2009 Ericsson received no dividends from SEMC.
2009 | 2008 | 2007 | ||||
Related party transactions | ||||||
License revenues | 1,746 | 5,856 | 5,743 | |||
Purchases | 164 | 261 | 333 | |||
Ericsson’s share of dividends | — | 3,627 | 3,949 | |||
Related party balances | ||||||
Receivables | 369 | 1,002 | 932 | |||
Liabilities | 14 | 176 | 204 |
SEMC has been granted a long-term loan with a maximum amount of SEK 3,606 million. The parent companies of Ericsson and Sony Corporation have issued guarantees for this loan on a 50/50 basis, without joint responsibility. Ericsson’s part thus amounted to SEK 1,803 million. As of December 31, 2009, Ericsson’s part of the principal amount outstanding amounted to SEK 779 million inclusive of accrued interest SEK 6 million. Maturity date for the maximum amount of the issued guarantees occurs in 2011 (SEK 1,030 million) and 2010 (SEK 773 million).
ST-Ericsson
ST-Ericsson, the joint venture between Ericsson and STMicroelectronics, was formed on February 2, 2009, by merging Ericsson Mobile Platforms with ST-NXP Wireless. The joint venture is equally owned by Ericsson and STMicroelectronics. ST-Ericsson is an industry leader in design, development and the creation of cutting-edge mobile platforms and wireless semiconductors. ST-Ericsson is a key supplier to four of the industry’s top five handset manufacturers, who together represent about 80 percent of global handset shipments, as well as to other leading companies in the industry. The joint venture is headquartered in Geneva, Switzerland, and employs approximately 8,000 persons.
Major transactions are as follows:
Sales. Ericsson provides ST-Ericsson with services in the areas of R&D, HR, IT and facilities.
Purchases.Major part of Ericsson’s purchases from ST-Ericsson consists of chipsets and R&D services.
Dividends.Both owners of ST-Ericsson receive dividends, when so decided by the board of directors. During 2009 Ericsson received no dividends from ST-Ericsson.
2009 | ||
Related party transactions | ||
Sales | 740 | |
Purchases | 624 | |
Ericsson’s share of dividends | — | |
Related party balances | ||
Receivables | 244 | |
Liabilities | 365 |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees toward ST-Ericsson.
Ericsson Nikola Tesla d.d.
Ericsson Nikola Tesla d.d. is a joint stock company for design, sales and service of telecommunication systems and equipment, and an associated member of the Ericsson Group. Ericsson Nikola Tesla d.d. is located in Zagreb, Croatia. Ericsson holds 49.07 percent of the shares.
Major transactions are as follows:
Sales.Ericsson sells telecommunication equipment to Ericsson Nikola Tesla d.d.
License revenues.Ericsson receives license revenues for Ericsson Nikola Tesla d.d.’s usage of trademarks.
Purchases.Ericsson purchases development resources from Ericsson Nikola Tesla d.d.
Dividends.Ericsson received dividends from Ericsson Nikola Tesla d.d. during 2009.
2009 | 2008 | 2007 | ||||
Related party transactions | ||||||
Sales | 654 | 1,020 | 1,010 | |||
License revenues | 7 | 9 | 9 | |||
Purchases | 569 | 547 | 506 | |||
Ericsson’s share of dividends | 66 | 227 | 267 | |||
Related party balances | ||||||
Receivables | 93 | 85 | 103 | |||
Liabilities | 70 | 58 | 55 |
Ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees toward Ericsson Nikola Tesla d.d.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Price- waterhouse- Coopers | Others | Total | ||||
2009 | ||||||
Audit fees | 98 | 3 | 101 | |||
Audit related fees | 10 | — | 10 | |||
Tax services fees | 16 | 2 | 18 | |||
Other fees | 1 | 2 | 3 | |||
Total | 125 | 7 | 132 | |||
2008 | ||||||
Audit fees | 97 | 4 | 101 | |||
Audit related fees | 7 | — | 7 | |||
Tax services fees | 14 | 2 | 16 | |||
Other fees | 1 | 5 | 6 | |||
Total | 119 | 11 | 130 | |||
2007 | ||||||
Audit fees | 102 | 7 | 109 | |||
Audit related fees | 4 | — | 4 | |||
Tax services fees | 13 | 12 | 25 | |||
Other fees | — | 6 | 6 | |||
Total | 119 | 25 | 144 | |||
All services provided by the auditors were pre-approved prior to the engagement.
During the period 2007–2009, in addition to audit services, PricewaterhouseCoopers provided certain audit related services and tax services to the Company. The audit related services include consultation on financial accounting, services related to acquisitions and assessments of internal control. The tax services include general expatriate services and corporate tax compliance work.
Audit fees to other auditors largely consist of local statutory audits for minor companies.
C32 EVENTS AFTER THE BALANCE SHEET DATE
In a November 25 auction, 2009, Ericsson acquired certain assets relating to Nortel’s GSM business in North America for a cash purchase price of USD 70 million. Closing is expected by March 31, 2010, subject to approval by US and Canadian bankruptcy courts and satisfying normal regulatory conditions.
On January 12, 2010, Ericsson announced agreement to acquire Pride Spa, an Italian systems integration company with approximately 1,000 employees.
In January 2010, the Company made an employer contribution payment of SEK 730 million to the Swedish pension trust fund due to funding requirements.
On March 31, 2010, Ericsson announced that Marita Hellberg, Senior Vice President and Head of Group Function Human Resources and Organization will take over as Head of Human Resources of Ericsson’s new region China and North East Asia from July 1st.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On April 1, 2010 Ericsson announced that the acquisition of substantially all the assets of Nortel’s GSM business had been completed, effective March 31. The closing follows the announcement on November 25, 2009, that Ericsson had entered into an asset purchase agreement for the assets of Nortel’s GSM business in North America.
On April 21, 2010, the Company announced that it had entered into a share purchase agreement to acquire Nortel’s majority shareholding (50%+1 share) in LG-Nortel, the joint venture of LG Electronics and Nortel Networks. Purchase price is USD 242 million on a cash and debt free basis. The transaction is subject to customary regulatory approvals.
CONTRACTUAL OBLIGATIONS 2009
Payment due by period | Total | |||||||||
(SEK billion) | <1 year | 1–3 years | 3–5 years | >5 years | 2009 | |||||
Long-term debt1)2) | 1.2 | 4.2 | 10.8 | 14.2 | 30.4 | |||||
Finance lease obligations3) | 0.2 | 0.3 | 0.4 | 1.2 | 2.1 | |||||
Operating leases3) | 3.2 | 4.7 | 2.2 | 2.4 | 12.5 | |||||
Other non-current liabilities | — | 0.3 | 0.1 | 1.6 | 2.0 | |||||
Purchase obligations4) | 7.1 | — | — | — | 7.1 | |||||
Trade Payables | 18.9 | — | — | — | 18.9 | |||||
Commitments for customer financing5) | 3.0 | — | — | — | 3.0 | |||||
Total | 33.6 | 9.5 | 13.5 | 19.4 | 76.0 | |||||
1) | Including interest payments. |
2) | See also Note C20, “Financial Risk Management and Financial Instruments”. |
3) | See also Note C27, “Leasing”. |
4) | The amounts of purchase obligations are gross, before deduction of any related provisions. |
5) | See also Note C14, “Trade Receivables and Customer Financing”. |
For information about financial guarantees, see Note C24, “Contingent Liabilities”
Except for those transactions described in this report, Ericsson has not been a party to any material contracts over the past three years other than those entered into during the ordinary course of business.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
You should carefully consider all the information in this Annual Report and in particular the risks and uncertainties outlined below. Any of the factors described below, or any other risk factors discussed elsewhere in this report, could have a material negative effect on our business, operational and after-tax results, financial position, cash flow, liquidity, credit rating, brand and/or our share price. Furthermore, our operational results may have a greater variability than in the past and we may have difficulties in accurately predicting future developments. See also “Forward-Looking Statements”.
CONTENTS
142 | ||
147 | ||
149 |
Market, Technology and Business Risks
Demand is difficult to predict
Adverse economic conditions could cause network operators to postpone investments or initiate other cost-cutting initiatives to improve their financial position. This could result in significantly reduced expenditures for network infrastructure and services, in which case our operating results would suffer. We have established flexibility to cost-effectively accommodate fluctuations in demand. However, if demand were to fall in the future, we may experience material adverse effects on our revenues, cash flow, capital employed and value of our assets and we may even incur operating losses. If demand is significantly weaker or more volatile than expected, this may have a material adverse impact on our credit rating, borrowing opportunities and costs as well as on the trading price of our shares. When deemed necessary, we undertake specific restructuring or cost saving initiatives, however, there are no guarantees that such initiatives are sufficient, successful or executed in time to deliver necessary improvements in earnings.
The extent of the current adverse conditions in the financial markets and global economic downturn may exacerbate some of the risk factors we are exposed to. Most of our customers are financially stable and have networks with good utilization. However, some operators, in particular in markets with weak currencies, may incur borrowing difficulties and lower traffic than expected, which may affect their investment plans. The potential adverse effects of the economic downturn include:
Reduced demand for products and services, resulting in increased price competition or deferrals of purchases, with lower revenues not being possible to compensate with reduced costs.
Risks of excess and obsolete inventories and excess manufacturing capacity and risk of financial difficulties or failures among our suppliers.
Increased demand for customer finance, difficulties in collection of accounts receivable and increased risk of counterpart failures.
Risk of impairment losses related to our intangible assets as a result of lower forecasted sales of certain products.
Increased difficulties in forecasting sales and financial results as well as increased volatility in our reported results.
Decline in the value of the assets in the Company’s pension plans.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Short-term volatility has an impact
Our sales to network operators represent a mix of equipment, software and services, which normally generate different gross margins. Third party products normally have lower margins than own products. As a consequence, reported gross margin in a specific period will be affected by the overall mix of products and services as well as the relative content of third party products. Network expansions and upgrades have much shorter lead times for delivery than initial network buildouts. Such orders are normally placed with short notice by customers, i.e. less than a month, and consequently variations in demand are difficult to forecast. As a result, changes in our product and service mix may affect our ability to accurately forecast sales and margins or detect in advance whether actual results will deviate from market consensus.
Convergence brings opportunity and risk
We are affected by market conditions within the telecom industry, including the convergence of the telecom, data and media industries. The convergence is largely driven by technological development related to IP-based communications. This change increases our addressable market, changes the competitive landscape, and affects our objective setting, risk assessment and strategies. If we fail to understand the market development, acquire the necessary competence or develop and market products, services and solutions that are competitive in this changing market, our future results will suffer.
We depend on growth and the success of new services
Most of our business depends on continued growth in mobile communications in terms of both number of subscriptions and usage per subscriber, which in turn requires the continued deployment and evolution of our network systems by customers. If operators are not successful in their attempts to increase the number of subscribers and/or stimulate increased usage, our business and operational results could be materially adversely affected.
Fixed and mobile networks converge and new technologies, such as IP and broadband, enable operators to deliver a range of new types of services in both fixed and mobile networks. We are dependent upon the market acceptance of such services, e.g. music, internet and navigation in the handset, and on the outcome of regulatory and standardization activities in this field, such as spectrum allocation. If delays in standardization or market acceptance occur, this could adversely affect our business and operational results.
We operate in a highly competitive industry
The markets we operate in are highly competitive in price, functionality and service quality as well as in the timing of development and introduction of new products and services.
We face intense competition from significant competitors and Chinese companies in particular have become relatively stronger in recent years. Our competitors may implement new technologies before we do, offer more attractively priced or enhanced products, services or solutions, or they may offer other incentives that we do not provide. Some of our competitors may have greater resources in certain business segments or geographic markets than we do. We may also encounter increased competition from new market entrants, alternative technologies or evolving industry standards. The rapid technological change also results in shorter life-cycles for products, increasing the risk in all product investments.
Continuous price erosion is a symptom of this rapid technological change and we must counteract this by introducing new products to the market and by continuously enhancing the functionality while reducing the cost of new and existing products. Our operating results depend largely on our ability to compete in this market environment.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Vendor consolidation may lead to a new competitive landscape
Industry convergence and consolidation among equipment suppliers could potentially result in stronger competitors that are competing as end-to-end suppliers as well as competitors more specialized in particular areas. Consolidation may also result in competitors with greater resources than we have or in reduction of our current scale advantages. This could have a material adverse effect on our business, operating results, and financial condition.
Operator consolidation may increase our dependence on a limited number of customers
We derive most of our business from large, multi-year agreements with a limited number of significant customers. Although no single customer currently represents more than 5 percent of sales, a loss of or a reduced role with a key customer could have a significant adverse impact on sales, profit and market share for an extended period.
In recent years, network operators have undergone significant consolidation, resulting in a large number of operators with activities in several countries. This trend is expected to continue, and also intra-country consolidation is likely to accelerate as a result of competitive pressure.
A market with fewer and larger operators will increase our reliance on key customers and may negatively impact our bargaining position and profit margins. Moreover, if the combined companies operate in the same geographic market, networks may be shared and less network equipment and associated services will be required. Another possible consequence of customer consolidation could be a delay in network investments pending negotiations of e.g. merger/acquisition agreements, securing necessary approvals, or integration of their businesses. Recently, network operators have started to share parts of their network infrastructure through cooperation agreements rather than legal consolidations, which may adversely affect demand for network equipment.
Long-term frame agreements can expose us to risk
Long-term agreements are typically awarded on a competitive bidding basis. In some cases, such agreements also include commitments to future price reductions. In order to maintain the gross margin with such price reductions, we continuously strive to reduce the costs of our products. We reduce costs through design improvements, negotiation of better purchase prices, allocation of more production to low-cost countries and increased productivity in our own production. However, there can be no assurance that our actions to reduce costs will be sufficient or quick enough to maintain our gross margin in such contracts.
Transforming into a more service-based company
Operators are increasingly outsourcing parts of their operations as a way to reduce cost and focus on new services. This has opened up a market which we have addressed. The growth rate is difficult to forecast and each new contract carries a risk that transformation and integration of the operations is not as fast or smooth as planned. Early contract margins are generally lower and the mix of new/old contracts may affect reported results negatively in a given period. Contracts normally cover several years and revenues are of a recurring nature. However, sometimes contract scopes are reduced with negative impact on sales and earnings. Ericsson is the market leader in managed services but competition in this area is increasing, which may have adverse effects on growth and profitability.
Success of R&D investments is uncertain
To be a player in our industry requires large investments in technology and creates exposure to rapid technological and market changes. We spend significant amounts and resources in innovation work for new
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
technology, products and solutions. In order for us to be successful, those technologies, products and solutions must be accepted by relevant standardization bodies and by the industry as a whole. If we invest in the development of technologies, products and solutions that do not function as expected, are not adopted by the industry, are not ready in time or are not successful in the marketplace our sales and earnings may suffer.
Acquisitions and divestments
In addition to in-house innovation efforts, we make strategic acquisitions in order to obtain various benefits, e.g. to reduce time-to-market, to gain access to technology and/or competence, to increase our scale or to broaden our product portfolio or expand our customer base. From time to time we also divest parts of our operations to optimize our product portfolio or operations. There are no guarantees that such acquisitions or divestments are successful or that we will succeed in integrating the acquired entities to gain the expected benefits within the time frame we expect or at all.
Joint ventures and partnerships
If our partnering arrangements fail to perform as expected (whether through an incorrect assessment of our needs or the capabilities or financial stability of our strategic partners), our ability to work with these partners or develop new products and solutions may be constrained and this may harm our competitive position in the market. Additionally, our share of any losses from, or commitments to contribute additional capital to, such partnerships may adversely affect our results of operations or financial position.
A limited number of suppliers of components, production capacity and R&D and IT services
Our ability to deliver according to market demands and contractual commitments depends significantly on obtaining timely and adequate supply of materials, components and production capacity and other vital services on competitive terms. Although we strive to avoid single-source supplier solutions, this is not always possible. Failure by any of our suppliers could interrupt our product supply or operations and significantly limit our sales or increase our costs. To find an alternative supplier or re-design products to replace components may take significant time. If we fail to anticipate customer demand properly, an over/under-supply of components and production capacity could occur. In many cases, some of our competitors utilize the same contract manufacturers and if they have purchased capacity ahead of us we could be blocked from acquiring the needed products. This factor could limit our ability to supply our customers or could increase our costs. At the same time, we commit to certain capacity levels or component quantities, which, if unused, will result in charges for unused capacity or scrapping costs. We are also exposed to financial counterpart risks to suppliers where we pay in advance. We conduct regular supplier audits and evaluations to mitigate the risks mentioned as well as brand risks related to the suppliers’ compliance with e.g. labor and environmental regulations.
Product or service quality issues
Sales contracts normally include warranty undertakings for faulty products and often also provisions regarding penalties and/or termination rights in the event of a failure to deliver ordered products or services on time or with required quality. Although we undertake a number of quality assurance measures to reduce such risks, product quality or service performance issues may affect our results negatively.
Significant foreign exchange exposures
With the majority of our cost base in SEK and a very large share of sales in other currencies, and significant operations outside Sweden, our foreign exchange exposures are significant. Currency exchange rate fluctuations affect our consolidated income statement, balance sheet and cash flows when foreign currencies are exchanged or translated to SEK, which increases volatility in reported results.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
As market prices are predominantly established in USD or EUR, and with a net revenue exposure in foreign currencies, a stronger SEK exchange rate would generally have a negative effect on our reported results. Our attempts to reduce the effects of exchange rate fluctuations through a variety of hedging activities may not be sufficient or successful, resulting in an adverse impact on our results.
Intellectual property rights (IPR)
Although we have a large number of patents, there can be no assurance that they will not be challenged, invalidated, or circumvented, or that any rights granted in relation to our patents will in fact provide competitive advantages to us.
In 2005, the European Union considered placing restrictions on the patentability of software. Although the European Union ultimately rejected this proposal, we cannot guarantee that they will not revisit this issue in the future. We rely on many software patents, and any limitations on the patentability of software may materially affect our business.
We utilize a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements in addition to relying on patent, copyright and trademark laws to protect our intellectual property rights. However, these measures may not be adequate to prevent or deter infringement or other misappropriation. Moreover, we may not be able to detect unauthorized use or take appropriate and timely steps to establish and enforce our proprietary rights. In fact, existing laws of some countries in which we conduct business offer only limited protection of intellectual property rights, if at all.
Our solutions may also require us to license technologies from third parties. It may be necessary in the future to seek or renew licenses and there can be no assurance that they would be available on acceptable terms, or at all. Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a non-exclusive basis could limit our ability to protect proprietary rights in our products.
Many key aspects of telecommunications and data network technology are governed by industry-wide standards usable by all market participants. As the number of market entrants and the complexity of technology increases, the possibility of functional overlap and inadvertent infringement of intellectual property rights also increases. Third parties have asserted, and may assert in the future, claims, directly against us or indirectly against our customers, alleging infringement of their intellectual property rights. Defending such claims may be expensive, time-consuming and divert the efforts of our management and/or technical personnel. As a result of litigation, we could be required to pay damages and other compensation directly or indemnifying our customers for such damages and other compensation, develop non-infringing products/technology or enter into royalty or licensing agreements. However, we cannot be certain that such licenses will be available to us on commercially reasonable terms or at all.
Litigations
In the normal course of our business we are involved in legal proceedings. Litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, reputation, operating results, or financial condition.
As a publicly listed company, Ericsson may be exposed to lawsuits, in which plaintiffs allege that the Company or its officers have failed to comply with securities laws, stock market regulation or other laws, regulations or requirements. Whether or not there is merit to such claims, the time and costs incurred to defend the Company and its officers and the potential settlement or compensation to the plaintiffs may have significant impact on our reported results and reputation. For additional information regarding certain of the lawsuits in which we are involved, see “Legal and Tax Proceedings” in the Board of Directors’ Report.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Business interruption
Our business operations rely on complex IT operations and communications networks, which are vulnerable to damage or disturbance from a variety of sources. Having outsourced a significant portion of our IT operations, we depend partly on security and reliability measures of external companies. Regardless of protection measures, essentially all IT systems and communications networks are susceptible to disruption from equipment failure, vandalism, computer viruses, security breaches, natural disasters, power outages and other events. We also have a concentration of operations on certain sites, e.g. for production, R&D, network operation centers, logistic centers, shared services centers, where business interruptions could cause material damage and costs. Although we have assessed these risks, implemented controls, performed business continuity planning and selected reputable companies for outsourced services, we cannot be sure that interruptions with material adverse effects will not occur.
Attract and retain highly qualified employees
We believe that our future success largely depends on our continued ability to hire, develop, motivate and retain engineers and other qualified personnel needed to develop successful new products, support our existing product range and provide services to our customers. Competition for skilled personnel and highly qualified managers in the telecommunications industry remains intense. We are continuously developing our corporate culture, remuneration, promotion and benefit policies as well as other measures aimed at empowering our employees and reducing employee turnover. However, there are no guarantees that we will be successful in attracting and retaining employees with appropriate skills in the future.
Access to short-term and long-term capital
If we do not generate sufficient amounts of capital to support our operations, service our debt and continue our research and development and customer finance programs, or if we cannot raise sufficient amounts of capital at the times and on the terms required by us, our business is likely to be adversely affected. Access to short-term funding may decrease or become more expensive as a result of our operational and financial condition and market conditions or due to deterioration in our credit rating. We cannot assure that additional sources of funds that we from time to time may need will be available or available on reasonable terms.
Regulatory, Compliance and Corporate Governance Risks
Regulatory environment changes
Telecommunications is an industry subject to particular regulation and regulatory changes affect both our customers’ and our own operations. For example, regulations imposing more stringent, time-consuming or costly planning and zoning requirements or building approvals for radio base stations and other network infrastructure could adversely affect the timing and costs of network construction or expansion, and ultimately the commercial launch and success of these networks. Similarly, tariff and roaming regulations or rules on network neutrality could also affect operators’ ability or willingness to invest in network infrastructure, which in turn could affect the sales of our systems and services. Also radio frequency spectrum allocation between different types of usage may affect operator spending adversely or force us to develop new products to be able to compete.
License fees, environmental, health and safety, privacy and other regulatory changes, in general or particular to our industry, may increase costs and restrict operations for network operators and service providers or us. Also indirect impacts of such changes could affect our business adversely even though the specific regulations may not apply directly to our products or us.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Country-specific political, economic and regulatory risks
We conduct business throughout the world and are subject to the effects of general global economic conditions as well as conditions unique to a specific country or region. We conduct business in more than 170 countries, with a significant proportion of our sales to emerging markets in Asia Pacific, Latin America, Eastern Europe, the Middle East and Africa. We expect that sales to such emerging markets will represent an increasing portion of total sales, as developing nations and regions around the world increase their investments in telecommunications. We already have extensive operations in many of these countries, which involve certain risks, including volatility in gross domestic product, civil disturbances, economic and political instability, nationalization of private assets and the imposition of exchange controls.
Changes in regulatory requirements, tariffs and other trade barriers, price or exchange controls or other governmental policies in the countries where we do business could limit our operations and make the repatriation of profits difficult. In addition, the uncertainty of the legal environment in some regions could limit our ability to enforce our rights. In addition we must comply with the export control regulations of the countries and any trade embargoes in force at the time of sale and/or delivery. Although we seek to comply with all such regulations, even unintentional violations could have material adverse effects on our business, operational results and brand.
Compliance with high standards of corporate governance
Ericsson applies mandatory corporate governance statutes and rules, such as the Swedish Code of Corporate Governance and is also committed to several corporate responsibility and environmental initiatives. To ensure that our operations are executed in accordance with these requirements, our management system includes a robust corporate culture and a Code of Business Ethics as well as policies and directives to govern our processes and operations. We regularly perform communication and training in these areas, and we monitor and audit internal compliance with the policies and directives as well as our suppliers’ adherence to our Supplier Code of Conduct. There is however no guarantee that violations will not occur, which could have material adverse effects on our brand, reputation and business.
Compliance with a environmental, health and safety regulations
We are subject to certain environmental, health and safety laws and regulations that affect our operations, facilities and products in each of the jurisdictions in which we operate. We believe that we are in compliance with all material laws and regulations. However, there is a risk that we may have to incur expenditures to cover environmental and health liabilities to maintain compliance with current or future laws and regulations or to undertake any necessary remediation. It is difficult to reasonably estimate the future impact of environmental matters, including potential liabilities. This is due to several factors, particularly the length of time often involved in resolving such matters.
Potential health risks related to electromagnetic fields
The mobile telecommunications industry is subject to claims that mobile handsets and other devices that generate electromagnetic fields expose users to health risks. At present, a substantial number of scientific studies conducted by various independent research bodies have indicated that electromagnetic fields, at levels within the limits prescribed by public health authority safety standards and recommendations, cause no adverse effects to human health. However, any perceived risk or new scientific findings of adverse health effects of mobile communication devices and equipment could adversely affect us through a reduction in sales or through liability claims. Although Ericsson’s products are designed to comply with all current safety standards and recommendations regarding electromagnetic fields, we cannot guarantee that we or the jointly owned Sony Ericsson Mobile Communications or ST-Ericsson will not become the subject of product liability claims or be held liable for such claims or be required to comply with future regulatory changes that may have an adverse effect on our business.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Risks associated with owning Ericsson shares
Our share price has been and may continue to be volatile
Our share price has been volatile partly due to the high volatility in the securities markets generally and for telecommunications and technology companies in particular. The share price is also likely to be affected by the development in our market, our reported financial results and the expectations of financial analysts, as well as statements and market speculation regarding our future prospects. or the timing or content of any profit warning by us or our competitors.
Factors other than our financial results that may affect our share price include, but are not limited to:
A weakening of our brand name or other circumstances with adverse effects on our reputation.
Announcements by our customers, competitors or us regarding capital spending plans of network operators.
Financial difficulties for our customers.
Awards of large supply or service contracts.
Speculation in the press or investment community about the business level or growth in the market for mobile communications.
Technical problems, in particular those relating to the introduction and viability of new network systems like LTE/4G.
Actual or expected results of ongoing or potential litigation.
Announcements concerning bankruptcy or investigations into the accounting procedures of other telecommunications companies, even if we are not involved.
Our ability to forecast and communicate our future results in a manner consistent with investor expectations.
Currency fluctuations may adversely affect share value or value of dividends
Because our shares are quoted in SEK on NASDAQ OMX Stockholm (our primary stock exchange), but in USD on NASDAQ (ADSs), fluctuations in exchange rates between SEK and USD may affect the value of your investment. In addition, because we pay cash dividends in SEK, fluctuations in exchange rates may affect the value of distributions if arrangements with your bank, broker or depositary call for distributions to you in currencies other than SEK. An increasing part of the trade in our shares is carried out on alternative exchanges or markets, which may lead to less accurate share price information on NASDAQ OMX Stockholm or NASDAQ.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
This Annual Report includes forward-looking statements, including statements reflecting management’s current views relating to the growth of the market, future market conditions, future events and expected operational and financial performance. The words “believe”, “expect”, “foresee”, “anticipate”, “assume”, “intend”, “may”, “could”, “plan”, “estimate”, “will”, “should”, “could”, “aim”, “target”, “might” or, in each case, their negative, and similar words are intended to help identify forward-looking statements. Forward-looking statements may be found throughout this document, but in particular in the chapters “Board of Directors’ Report” and “Information on the Company”, and include statements regarding:
our goals, strategies and operational or financial performance expectations;
development of corporate governance standards, stock market regulations and related legislation;
the growth of the markets in which we operate;
our liquidity, capital resources, capital expenditures, our credit ratings and the development in the capital markets, affecting our industry or us;
the expected demand for our existing as well as new products and services;
the expected operational or financial performance of our joint ventures and other strategic cooperation activities;
the time until acquired entities will be accretive to income;
technology and industry trends including regulatory and standardization environment, competition and our customer structure;
our plans for new products and services including research and development expenditures.
Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we cannot assure you that these expectations will materialize. Because forward-looking statements are based on assumptions, judgments and estimates, and are subject to risks and uncertainties, actual results could differ materially from those described or implied herein. Important factors that could affect whether and to what extent any of our forward-looking statements materialize include, but are not limited to:
our ability to respond to changes in the telecommunications market and other general market conditions in a cost effective and timely manner;
developments in the political, economic or regulatory environment affecting the markets in which we operate, including trade embargoes, changes in tax rates, changes in patent protection regulations, allegations of health risks from electromagnetic fields, cost of radio licenses for our customers, allocation of radio frequencies for different purposes and results of standardization activities;
the effectiveness of our strategies and their execution, including partnerships, acquisitions and divestments;
financial risks, including changes in foreign exchange rates or interest rates, lack of liquidity or access to financing, changes in tax liabilities, credit risks in relation to counterparties, customer defaults under significant customer finance arrangements and risks of confiscation of assets in foreign countries;
the impact of the consolidation in the industry, and the resulting (i) reduction in the number of customers, and adverse consequences of a loss of, or significant decline in, our business with a major customer; (ii) increased strength of a competitor or the establishment of new competitors;
the impact of changes in product demand, price erosion, competition from existing or new competitors or new technologies or alliances between vendors of different types of technology and the risk that our products and services may not sell at the rates or levels we anticipate;
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
the product mix and margins of our sales;
the volatility of market demand and difficulties to forecast such demand;
our ability to develop commercially viable products, systems and services, to acquire licenses of necessary technology, to protect our intellectual property rights through patents and trademarks and to license them to others and defend them against infringement, and results of patent litigation;
supply constraints, including component or production capacity shortages, suppliers’ abilities to cost effectively deliver quality products on time and in sufficient volumes, and risks related to concentration of proprietary or outsourced production in a single facility or sole source situations with a single vendor;
our ability to successfully manage operators’ networks to their satisfaction with satisfactory margins;
our ability to maintain a strong brand and good reputation and to be acknowledged for good corporate governance;
our ability to recruit and retain qualified management and other key employees.
Certain of these risks and uncertainties are described further in “Risk Factors”. We undertake no obligation to publicly update or revise any forward-looking statements included in this Annual Report, whether as a result of new information, future events or otherwise, except as required by applicable law or stock exchange regulation.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
STOCK EXCHANGE TRADING
The Ericsson Class A and Class B shares are listed on NASDAQ OMX Stockholm. In the United States, the Class B shares are listed on NASDAQ in the form of American Depositary Shares (ADS) evidenced by American Depositary Receipts (ADR) under the symbol ERIC. Each ADS represents one Class B share.
In 2009, approximately 7 (20) billion shares were traded on NASDAQ OMX Stockholm and NASDAQ, of which about 74 (84) percent were on NASDAQ OMX Stockholm and about 26 (16) percent were on NASDAQ. Trading volume in Ericsson shares decreased by approximately 71 percent on NASDAQ OMX Stockholm and increased by approximately 7 percent on NASDAQ as compared to 2008. (Note: Ericsson had a reversed split of shares of 1:5 for the B-share on June 2, 2008 and a 10:1 to 1:1 change in the ADS ratio from June 10, 2008 which affects the comparative figures above.)
SHARE PRICE TREND
In 2009, Ericsson’s total market value increased by about 13 (–22) percent to approximately SEK 215 billion (SEK 191 billion in 2008). The OMXSP Index on NASDAQ OMX Stockholm increased by 47 percent, the NASDAQ telecom index (CUTL) increased by approximately 48 percent and the NASDAQ composite index (CCMP) increased by approximately 44 percent.
SHARE DATA
2009 | 2008 | 2007 | 2006 | 2005 | ||||||
Earnings per share, diluted (SEK) | 1.14 | 3.52 | 6.84 | 8.23 | 7.64 | |||||
Operating income per share (SEK)2) | 5.80 | 7.50 | 9.64 | 11.29 | 10.44 | |||||
Cash flow from operating activities per share (SEK) | 7.67 | 7.54 | 6.04 | 5.82 | 5.26 | |||||
Stockholders’ equity per share, basic, end of period (SEK) | 43.79 | 44.21 | 42.17 | 37.82 | 32.03 | |||||
P/E ratio | 57 | 17 | 11 | 17 | 18 | |||||
Total shareholder return % | 15 | –20 | –43 | 3 | 31 | |||||
Dividend per share (SEK)1)2) | 2.00 | 1.85 | 2.50 | 2.50 | 2.25 |
1) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
2) | For 2009 and 2008 excluding restructuring charges. |
3) | For 2009 as proposed by the Board of Directors. |
All share based performance indicators except Earnings per share and Stockholders’ equity per share are calculated based on average number of shares outstanding, basic. Comparison periods has been restated for consistency.
SHARE PRICES ON NASDAQ OMX STOCKHOLM
(SEK) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||
Class A at last day of trading1) | 65.00 | 59.30 | 76.80 | 138.00 | 137.50 | |||||
Class A high for year (April 17, 2009)1) | 78.80 | 83.60 | 148.50 | 154.50 | 143.50 | |||||
Class A low for year (January 20, 2009)1) | 55.40 | 40.60 | 73.00 | 104.50 | 99.00 | |||||
Class B at last day of trading1) | 65.90 | 58.80 | 75.90 | 138.25 | 136.50 | |||||
Class B high for year (April 17, 2009)1) | 79.60 | 83.70 | 149.50 | 155.00 | 145.00 | |||||
Class B low for year (January 20, 2009)1) | 55.50 | 40.60 | 72.65 | 104.50 | 97.00 |
1) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
OFFER AND LISTING DETAILS
Principal trading market—NASDAQ OMX Stockholm—share prices
The table to the right states the high and low sales prices for our Class A and Class B shares as reported by NASDAQ OMX Stockholm for the last five years. The equity securities listed on the NASDAQ OMX Stockholm Official Price List of Shares currently comprise the shares of 258 companies. Trading on the exchange generally continues until 5:30 p.m. (CET) each business day. In addition to official trading on the exchange, there is also trading off the exchange during official trading hours and also after 5:30 p.m. (CET). Trading on the exchange tends to involve a higher percentage of retail clients, while trading off the exchange often involves larger Swedish institutions, banks arbitraging between the Swedish market and foreign markets, and foreign buyers and sellers purchasing shares from or selling shares to Swedish institutions.
NASDAQ OMX Stockholm publishes a daily Official Price List of Shares which includes the volume of recorded transactions in each listed stock, together with the prices of the highest and lowest recorded trades of the day. The Official Price List of Shares reflects price and volume information for trades completed by the members.
Host market NASDAQ—ADS prices
The table to the right states the high and low sales prices quoted for our ADSs on NASDAQ for the last five years. The NASDAQ quotations represent prices between dealers, not including retail mark-ups, markdowns or commissions, and do not necessarily represent actual transactions.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
MARKET PRICES ON NASDAQ OMX STOCKHOLM AND NASDAQ
NASDAQ OMX Stockholm | NASDAQ | |||||||||||
SEK per Class A share | SEK per Class B share | USD per ADS1) | ||||||||||
Period | High | Low | High | Low | High | Low | ||||||
Annual high and low | ||||||||||||
20052) | 143.50 | 99.00 | 145.00 | 97.00 | 18.60 | 13.89 | ||||||
20062) | 154.50 | 104.50 | 155.00 | 104.50 | 20.57 | 14.44 | ||||||
20072) | 148.50 | 73.00 | 149.50 | 72.65 | 21.71 | 11.12 | ||||||
2008 | 83.60 | 40.60 | 83.70 | 40.60 | 14.00 | 5.49 | ||||||
2009 | 78.80 | 55.40 | �� | 79.60 | 55.50 | 10.92 | 6.60 | |||||
Quarterly high and low | ||||||||||||
2008 | ||||||||||||
First Quarter | 79.50 | 51.10 | 78.90 | 50.25 | 12.28 | 8.52 | ||||||
Second Quarter | 83.60 | 58.70 | 83.70 | 57.50 | 14.00 | 9.76 | ||||||
Third Quarter | 75.80 | 61.60 | 75.80 | 61.20 | 12.65 | 9.03 | ||||||
Fourth Quarter | 66.60 | 40.60 | 65.90 | 40.60 | 9.15 | 5.49 | ||||||
2009 | ||||||||||||
First Quarter | 78.00 | 55.40 | 78.70 | 55.50 | 9.65 | 6.60 | ||||||
Second Quarter | 78.80 | 64.10 | 79.60 | 64.00 | 9.92 | 8.10 | ||||||
Third Quarter | 78.60 | 65.80 | 79.50 | 66.10 | 10.84 | 9.10 | ||||||
Fourth Quarter | 76.25 | 64.70 | 76.95 | 65.25 | 10.92 | 8.94 | ||||||
Monthly high and low | ||||||||||||
August 2009 | 70.60 | 65.80 | 71.20 | 66.10 | 10.04 | 9.10 | ||||||
September 2009 | 74.30 | 67.10 | 74.70 | 67.50 | 10.84 | 9.29 | ||||||
October 2009 | 76.25 | 67.00 | 76.95 | 67.30 | 10.92 | 9.73 | ||||||
November 2009 | 75.40 | 65.65 | 76.00 | 66.30 | 10.74 | 9.56 | ||||||
December 2009 | 68.35 | 64.70 | 68.90 | 65.25 | 9.96 | 8.94 | ||||||
January 2010 | 72.20 | 65.20 | 73.30 | 65.90 | 10.31 | 9.46 | ||||||
February 2010 | 73.50 | 69.20 | 74.65 | 70.15 | 10.28 | 9.84 | ||||||
March 2010 | 78.70 | 69.90 | 80.00 | 70.95 | 11.33 | 9.84 |
1) | One ADS = 1 Class B share. |
2) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CHANGES IN NUMBER OF SHARES AND CAPITAL STOCK 2005–2009
Number of shares | Share capital | |||||
2005 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2006 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2007 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2008 | June 2, reverse split 1:5 | 3,226,451,735 | 16,132,258,678 | |||
2008 | July 23, new issue. (Class C shares, later converted to Class B) | 19,900,000 | 99,500,000 | |||
2008 | December 31 | 3,246,351,735 | 16,231,758,678 | |||
2009 | June 8, new issue (Class C-shares, later converted to Class B) | 27,000,000 | 135,000,000 | |||
2009 | December 31 | 3,273,351,735 | 16,366,758,678 |
SHARE CAPITAL
In the second quarter, as decided by the Board of Directors with authorization from the Annual General Meeting, a stock issue and a subsequent repurchase was made for the share-based employee remuneration program. 27 million Class C shares were issued and later repurchased as treasury stock. The shares were converted into Class B shares. The quotient value of the repurchased shares was SEK 135.0 million, representing less than 1 percent of capital stock, and the acquisition cost was SEK 135.1 million.
As of December 31, 2009, the Parent Company’s share capital was SEK 16,366,758,678 (16,231,758,678) represented by 3,273,351,735 (3,246,351,735) shares. The quotient value of each share is SEK 5.00 (SEK 5.00). As of December 31, 2009, the shares were divided into 261,755,983 (261,755,983) Class A shares, each carrying one vote, and 3,011,595,752 (2,984,595,752) Class B shares, each carrying one-tenth of one vote. As of December 31, 2009, Ericsson held 78 978 533 Class B shares as treasury shares.
TEN LARGEST COUNTRIES, OWNERSHIP
As of December 31, | ||||||
Percent of capital | 2009 | 2008 | ||||
Sweden | 47.9 | % | 47.2 | % | ||
United States | 24.2 | % | 25.0 | % | ||
United Kingdom | 7.9 | % | 8.9 | % | ||
Norway | 1.9 | % | 1.3 | % | ||
Canada | 1.2 | % | 1.1 | % | ||
Japan | 1.2 | % | 1.3 | % | ||
Switzerland | 1.1 | % | 1.7 | % | ||
France | 1.1 | % | 1.1 | % | ||
Netherlands | 0.8 | % | 0.8 | % | ||
Denmark | 0.8 | % | 0.8 | % | ||
Other countries | 11.9 | % | 10.8 | % |
Source: | Capital Precision, December 31, 2009. |
The information from Capital Precision is based on the shareholders’ domicile or in case of funds, areas of operation.
SHAREHOLDERS
As of December 31, 2009, the Parent Company had 690,726 shareholders registered at Euroclear Sweden AB (the Central Securities Depository—CSD), of which 1,421 holders had a US address. According to
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
information provided by Citibank, there were 242,229,433 ADSs outstanding as of December 31, 2009, and 5,068 registered holders of such ADSs. A significant number of the ADSs are held of record by banks, brokers and/ or nominees for the accounts of their customers. As of year end 2009, banks, brokers and/or nominees held ADSs on behalf of 240,915 accounts.
According to information known at year-end 2009, almost 77 percent of our Class A and Class B shares were owned by institutions, Swedish and international.
Our major shareholders do not have different voting rights than other shareholders holding the same classes of shares.
As far as we know, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person(s) separately or jointly.
TOP EXECUTIVES AND DIRECTORS, OWNERSHIP
Number of Class A shares | Number of Class B shares | Voting rights, percent | ||||
Top executives and directors as a group (28 persons) | 2,416 | 3,844,472 | 0.07 |
For individual holdings, see “Corporate Governance Report”.
The table shows the total number of shares in the Parent Company owned by top executives and directors as a group as of December 31, 2009.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The following table shows share information, as of December 31, 2009, with respect to our 15 largest shareholders, ranked by voting rights, as well as percentage of voting rights as of December 31, 2009, 2008 and 2007.
LARGEST SHAREHOLDERS, DECEMBER 31, 2009 AND PERCENTAGE OF VOTING RIGHTS, DECEMBER 31, 2009, 2008 AND 2007
Identity of person or group1) | Number of Class A shares | Percentage of total Class A shares | Number of Class B shares | Percentage of total Class B shares | 2009 Voting rights percent | 2008 Voting rights percent | 2007 Voting rights percent | |||||||
Investor AB | 102,664,038 | 39.22 | 61,414,664 | 2.04 | 19.33 | 19.42 | 19.49 | |||||||
AB Industrivärden | 76,680,600 | 29.29 | 0 | 0.00 | 13.62 | 13.28 | 13.36 | |||||||
Handelsbankens Pensionsstiftelse | 19,800,000 | 7.56 | 0 | 0.00 | 3.52 | 3.00 | 3.01 | |||||||
Swedbank Robur Fonder AB | 1,510,466 | 0.58 | 157,785,431 | 5.24 | 3.07 | 2.44 | 1.67 | |||||||
Skandia Liv AB | 15,270,077 | 5.83 | 17,079,591 | 0.57 | 3.02 | 2.89 | 2.75 | |||||||
Pensionskassan SHB Försäkringsföreningen | 12,672,000 | 4.84 | 0 | 0.00 | 2.25 | 2.26 | 2.27 | |||||||
BlackRock Advisors, Inc. | 0 | 0.00 | 101,632,540 | 3.38 | 1.81 | 0.00 | 0.06 | |||||||
Brandes Investment Partners LP | 0 | 0.00 | 55,603,761 | 2.54 | 1.36 | 2.08 | 1.73 | |||||||
AMF Pensionsforsakring AB | 800,000 | 0.31 | 65,104,680 | 2.16 | 1.30 | 1.55 | 0.89 | |||||||
OppenheimerFunds, Inc. | 0 | 0.00 | 72,541,045 | 2.41 | 1.29 | 1.31 | 1.57 | |||||||
Dodge & Cox, Inc. | 0 | 0.00 | 29,149,700 | 1.96 | 1.05 | 0.98 | 0.00 | |||||||
Gamla Livförsäkringsbolaget SEB Trygg Liv | 4,675,919 | 1.79 | 8,475,600 | 0.28 | 0.98 | 1.04 | 1.04 | |||||||
Handelsbanken Fonder AB | 2,335 | 0.00 | 52,894,889 | 1.76 | 0.94 | 1.02 | 1.08 | |||||||
Norges Bank Investment Management | 0 | 0.00 | 50,368,857 | 1.67 | 0.89 | 0.46 | 0.35 | |||||||
SEB Investment Management AB | 480,909 | 0.18 | 45,030,567 | 1.50 | 0.89 | 0.98 | 0.78 | |||||||
Others | 27,199,639 | 10.40 | 2,294,514,427 | 74.49 | 44.68 | 47.29 | 49.95 | |||||||
Total | 261,755,983 | 100.00 | 3,011,595,752 | 100.00 | 100.00 | 100.00 | 100.00 | |||||||
1) | Sources: Capital Precision, December 2009 and 2008. Euroclear Sweden AB, December 31, 2007. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Telecommunications plays a central role in the daily life of practically every person on earth. It is fundamental to the global economy and increasingly important to the environment. Over the last decade, mobile became a ubiquitous communications service, enabling people from all regions and walks of life to connect at an unprecedented level.
With the widespread adoption of mobile communications for voice and text messaging, the impetus to add more voice subscribers has started to diminish. Growth will continue with more than two billion new mobile voice subscriptions expected over the coming years but these will mainly come from low-usage customers in developing areas or users with multiple subscriptions. This dilutes average revenue per subscription but the underlying growth in minutes of use per user is stronger than the subscription dilution. Thus the total voice traffic continues to grow.
Mobile broadband is fast becoming the main growth driver for operators and equipment suppliers globally. Consumer behavior is changing with the introduction of mobile broadband prompting innovation in a number of areas and driving the need for ever greater bandwidth and data speeds. The industry focus is shifting from connecting places and people to connecting devices and applications.
There are many devices whose utility is enabled by mobile broadband, including mobile phones, personal computers and a growing number of electronic devices and software applications. Wireless connectivity will make broadband mobile and affordable to the majority of people. Particularly in the case of machine-to-machine communications, it will also enable applications for a variety of industries and uses (e.g. smart grids, transportation, financial services and healthcare.) This is far beyond the capability and scope of today’s networks.
We envision 50 billion network connections over the next decade, compared with some 5 billion currently. The underlying network technologies must be enhanced to accommodate such a vast number of connections. We expect Ericsson to benefit from this as network operators and service providers:
Accelerate the transition from legacy technologies to IP- based technologies.
Respond to rising demands for services that aid economic, societal and environmental development.
Invest in mobile and fixed broadband access, multi-service edge routing, IP multimedia subsystems (IMS) based services and Metro optical and/or radio transport.
Prioritize suppliers that combine technology with services for lower total cost, faster time-to-market and reduced project risks.
Outsource more of their network-related activities and operations for increased flexibility and focus more on the consumer experience.
These are all areas where the Company is well positioned and continues to invest heavily. Ericsson is now focused exclusively on serving network operators and service providers while device manufacturers and consumers are addressed via two joint venture companies, i.e. ST-Ericsson and Sony Ericsson.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
ICT, especially mobile, positively affects GDP levels as well as the environment
Even though the benefits of a connected society are difficult to precisely quantify, telecommunications has become as essential to any nation’s infrastructure as water, transportation or electricity. As already well demonstrated by telephony, there is clear evidence that the ubiquitous availability of affordable ICT services has a positive effect on any country’s economy. The ICT industry generates approximately 2 percent of global CO2emissions. However, ICT could potentially reduce the other 98 percent by 15 percent or more.
A higher GDP level obviously enables more broadband adoption but studies of the relationship between broadband penetration and economic development indicate that broadband plays an even more fundamental role than telephony in accelerating the economic and social development of a country. Mobile broadband networks, along with suitable devices and appropriate applications, can accelerate broadband penetration by avoiding the relatively more expensive and time-consuming deployments of fixed networks.
Mobile communications market
Mobile communication is the service of choice for consumers across the world and we believe there is considerable potential for further growth with the introduction of mobile broadband. During 2010, Ericsson expects mobile subscriptions to grow to more than 5.2 billion, mainly driven by voice in developing markets and broadband in more developed markets.
Although at a slower pace than in previous years, mobile communications continued to grow in 2009 with over 600 (670) million new subscriptions added. The number of mobile phones shipped was approximately 1,100 (1,190) million, mainly due to less subscriber additions and longer replacement intervals. Based on vendor reports and Ericsson estimates, the mobile systems market is estimated to have declined by more than 10 percent due to the economic slowdown and weaker demand for GSM. However, we believe investments in mobile communications are below optimal levels—suggesting the possibility of increased spending once the economy recovers.
At the end of 2009, the 4.6 (4.0) billion mobile subscriptions worldwide represented a global subscription penetration of 64 (59) percent (the actual number of mobile users is probably some 20-25 percent less due to inactive and multiple subscriptions). The High Speed Packet Access (HSPA) version of 3G/WCDMA is now deployed in 303 (247) commercial networks across 130 (110) countries. Ericsson supplies 144 (115) of these networks, serving the majority of mobile broadband subscribers.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The number of subscribers covered by commercial 3G/ WCDMA networks remains well below half that of 2G/GSM. Subscribers to mobile broadband services worldwide reached 360 (180) million by the end of 2009. The vast majority of the 360 million are handheld devices and the figure is set to soar with the mass consumer adoption of mobile internet devices such as smartphones and netbooks. This additional demand presents a significant opportunity for network infrastructure and systems integration, areas in which Ericsson has a market-leading position.
Fixed and mobile broadband main market drivers
The number of fixed and mobile broadband subscriptions is expected to increase five times between 2009 and 2015 to approximately 4 billion, of which the vast majority will be subscriptions for mobile broadband. Broadband internet access revenues for fixed operators (including cable operators) are expected to grow from around 25 to around 30 percent of total revenues in the next five years. Similarly, data’s share of mobile operators’ revenue, which is currently some 25 percent, is expected to account for a progressively larger portion of global mobile revenues over the next five years.
These projections assume the cost for mobile data services aligns with subscriber expectations, i.e. data must be priced lower than voice when comparing the amount of bandwidth consumed. Hence, operators may implement cost-efficient solutions for delivering more network capacity with revenues based on service value rather than the amount of capacity. This motivates a next-generation network that offers fixed and mobile convergence and leverages IP technology for a lower cost, higher performance broadband service.
However, operators’ willingness to invest in modernizing their networks can be inhibited by governmental regulations on how they can monetize their investments. For example, open access policies seek to facilitate the entrance into broadband markets for new competitors by requiring existing operators to lease access to their networks at regulated wholesale rates. The basic idea is that the more competitive consumer broadband markets are, the better the service offering, i.e. at lower prices, to more consumers. The alternative approach is to avoid forcing operators to lease network assets to competitors as it can undermine the incentive to invest.
The major challenge is identifying regulatory policies and practices that promote ubiquitous availability without undermining competition by mandating how an operator can monetize usage and capacity consumption.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Mobile broadband creates bottlenecks in parts of the network
The deployment of access nodes that connect devices at ever faster speeds increases subscriber uptake which can quickly create bottlenecks in other parts of the network especially on the backhaul part of the transport network.
Backhaul capacity needs to be provided more dynamically and efficiently than is possible with traditional backhaul solutions. Support of multiple services is required to ensure continuity for existing services as well as allowing new services. Operators want to maximize investments in existing infrastructure while leveraging the capabilities of new technologies.
Roughly two-thirds of backhaul globally is provided via microwave radio with the notable exception of the US and China where fiber is the preferred method. The dynamic nature of multi-service broadband access requires changes in the network technology used—a change from TDM/STM/ATM structures to IP/Ethernet. Ericsson already has a market-leading position in microwave radio systems and with the acquisitions of Marconi and Redback, the Company is well positioned with optical transmission systems and IP/Ethernet products.
Convergence and network transformation in focus
Placing greater emphasis on smarter networks and bundled service offerings, operators are starting the conversion to all-IP broadband networks. An increase in broadband access, routing and transmission deployments, combined with next-generation service delivery and revenue management systems, means operators will be able to offer a broader range of services to key customer segments. Each segment (business, consumer and wholesale) requires a different and varying mix of fixed, mobile and converged services.
Ericsson has developed a network architecture that meets consumer desires and operator requirements for converged services, covering the device ecosystems, fixed and mobile broadband access, transport, control, applications, revenue management, services and operations management. All the components have been integrated for a high performance and scalable end-to-end solution.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Ericsson’s full-service broadband solution has been built from in-house development, e.g. mobile broadband and IMS, and is complemented by the acquisitions of IP-routing products (Redback), optical transport (Marconi), deep fiber access systems (Entrisphere) and IPTV (Tandberg). The Company has also developed a comprehensive network transformation service that leverages professional services such as consulting and systems integration.
The internet is changing TV
The vision of the television industry is a simple one: to let you watch whatever, whenever and wherever you want and to help you discover other interesting programs and share your favorites and comments with other people. We believe that the best way to achieve this is to use internet technology enhanced with telecom-grade performance.
Consumers are already using the internet to find new ways of accessing TV, with interactive on-demand capabilities now a basic expectation. Despite this trend, we do not expect operators to become marginalized as bit pipe providers. Efficient bit pipes will be needed, but to differentiate their services, operators will need to continue to leverage their network capabilities. This is where IMS comes into play to provide the reliability and combination of services required for a portfolio of applications which differentiates from the competition.
Today some 1.2 billion (850 million) households have television services, of which only 25 (20) million are currently served by IPTV. This number is expected to grow to above 130 million by end of 2015. In the same time period, DSL-based broadband access is forecasted to grow from some 300 million to 400 million households and cable-TV-based broadband access is estimated to grow from 90 million to more than 100 million households. FTTx-based broadband access is estimated to increase from 35 million to some 100 million households. Building on the acquisitions of Tandberg Television and Entrisphere, the Company continues to invest in a leading position in IPTV and FTTx broadband access.
Mobility is changing the internet
Today, less than 40 percent of mobile subscribers are also internet users. However, the increasing use of high-speed applications in the fixed environment is stimulating a parallel expectation on the mobile side. When people become accustomed to using bandwidth-intensive applications at home or in the office, they tend to want them everywhere they go.
Multimedia-capable mobile internet devices and affordable mobile broadband access are driving a change in usage. Users will be able to create and discover content of personal interest and instantaneously share ideas and information with friends and colleagues. We see mobile internet devices helping to accelerate consumer demand for wireless internet access. This will have the greatest impact on emerging markets, where household PC penetration is only about 10 percent compared with well over 60 percent in developed markets. This is particularly significant as there are more than three times as many households in emerging markets as there are in more developed markets.
The Company has established a product unit to provide mobile broadband connectivity for notebook PCs and other mobile internet devices. Three of the world’s largest notebook manufacturers are already using Ericsson embedded modules. In addition, Intel, among others, has signed an agreement to use Ericsson’s mobile broadband technology.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operator consolidation and network sharing
Operator consolidation continues in all regions globally. In the Americas, consolidation has substantially reduced the number of operators. In Europe, mergers continue along with other collaborations such as network sharing and outsourcing of network operations. In other regions, operator consolidation has led to the emergence of rapidly growing pan-regional operators, particularly in the CEMA markets (Central and Eastern Europe, Middle East and Africa). Western European-based operators continue to invest in operators in developing markets such as Brazil and India. There have also been attempts to combine certain Indian operators with African operators but with little progress so far.
Despite the trend for operator consolidation, the number of mobile operators has actually increased in many regions over the past few years, with the notable exception of the Americas. The introduction of mobile number portability in many markets has simplified service substitution, leading to fierce competition and declining market share for the top two players in each market. Consequently, mobile operator margins are under pressure from the more intense competition which requires lower costs to compensate.
Network sharing offers potentially significant capex and opex savings to operators. However, the overall impact of network sharing should ultimately be neutral for mobile equipment vendors. To a certain extent, short-term disruption of capital expenditure plans or re-negotiation of contracts with the network sharing companies may be offset by faster coverage buildout, an earlier entry into expansion phases and increased sales of professional services, particularly network integration and managed operations. Over the longer term, the majority of savings come from shared plant and property rather than equipment as the equipment has to be dimensioned for the total traffic load of the combined networks.
Ericsson is well positioned to benefit from operator consolidation with a suite of solutions for network sharing and a well proven capability for outsourcing network operations, consulting and systems integration as well as a strong presence with consolidating companies.
Opportunities in Professional Services
Outsourcing of network operations is another form of consolidation. Operators are able to tap into the global scale and efficiency offered by a company like Ericsson via managed services. Ericsson is well positioned to benefit from this trend for operator consolidation with a suite of professional services and a well proven capability for outsourcing network operations.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Demand for professional services (i.e., managed services, consulting, systems integration, network optimization and modernization) is growing rapidly. The demand for professional services is increasing, driven by operators’ desire to optimize capex investments, take out unnecessary costs and deliver a competitive end-user experience.
The potential market for managed services is larger than the market for network equipment and related deployment services. A mature operator is estimated to typically spend some 5–6 percent of revenues on network equipment and 10–12 percent on operating its network.
More than two-thirds of network operational expenses today are believed to be handled in-house by operators but network operations are increasingly being outsourced as operators realize the competitive advantages and potential cost savings. Therefore, the available market for managed services is expected to continue to show good growth prospects.
Over time, as networks evolve, grow and become more versatile, their complexity increases and so does the number of operations and business support systems. This creates many opportunities to help operators streamline both networks and operations. One aspect of streamlining is reducing the number of support systems needed for the network. The other aspect of streamlining comes from outsourcing operations. Operators may also ask for advice and best-practice to create efficiency in their own operations. An indicator of this streamlining or efficiency trend is the increasing demand for consulting and systems integration services like revenue assurance, operations and business support systems transformation and service assurance.
Replacement rates affect mobile handset sales
With subscriber additions slowing, mobile phone replacements have increasingly become the key market driver, now accounting for roughly two-thirds of shipments and an even higher proportion of sales.
Mobile phone replacement tends to go in tandem with contract renewal. In mature markets, this is often operator driven via subsidies that lower or eliminate the upfront cost of buying a new phone in exchange for multi-year subscription commitments. Many operators are now pushing SIM card only plans to reduce phone subsidies for lower value subscriptions and prioritizing subsidies for smartphones and mobile internet devices that carry much higher value subscriptions. This is slowing the demand for replacement phones, especially in the low- to mid-end price range, as consumers postpone upgrading their mobile phones.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
In emerging markets, operators often subsidize multi SIM card plans rather than handsets. This has stimulated the market for ultra low priced phones rather than curtailing subscription growth or mobile phone usage. With inflationary and other economic pressures rising in these markets, consumers are buying more refurbished or unlicensed phones. Manufacturers of illicit phones enjoy cost advantages because they do not pay for licenses, test their products for safety or provide warranties or offer sales support. Some countries, such as India, are especially concerned about personal safety and national security of unlicensed phones, but enforcement is far less strict in most other emerging markets.
Sony Ericsson has refined its product portfolio and value proposition to target an increased share of the replacement market.
Effects of the macro-economic slowdown
While not a trend, the economic recession affected Ericsson’s business development for networks, but with improving operational efficiency, a market leading position, scale and a solid balance sheet, the Company is in a good position to meet continued tough market conditions.
The macro-economic developments are externally driven and beyond the control or the influence of the Company. But the Company does control the cost structure and is adjusting to a more challenging market environment including the effects of a global recession.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONTENTS
167 | ||
170 | ||
171 | ||
173 |
COMPANY HISTORY AND DEVELOPMENT
Innovating to empower people, business and society
Our origins date back to 1876 when Alexander Graham Bell filed a patent application in the United States for the telephone. The same year, Lars Magnus Ericsson opened a small workshop in Stockholm to repair telegraph instruments and sell his own telephone equipment.
Today, Ericsson is a leading provider of communications equipment, professional services and multimedia solutions. Our customers are operators of mobile and fixed networks worldwide. Over 1,000 networks in more than 175 countries utilize our equipment. More than 40 percent of all mobile traffic goes through Ericsson equipment.
We invest heavily in R&D and promote standardization and open systems. We have a long history of innovation and pioneering future telecommunications technologies. We have one of the industry’s most comprehensive intellectual property portfolios with approximately 25,000 patents.
Ericsson’s vision is “to be the prime driver in an all-communicating world”—a world in which any person can use voice, text, images and video to share ideas and access information whenever and wherever they want. Within a few years, we foresee communications extending beyond places and people to devices. Then everything that benefits from being connected will be. We strongly believe that affordable and generally available telecommunications are a prerequisite for social and economic development, and that the ICT industry is a key enabler for a sustainable and prosperous society and for bridging the digital divide.
Our strategy to realize our vision and reach our goals is to:
Excel with a leading portfolio in mobile and converged networks.
Expand in services by enabling world-class operations and network evolution.
Extend in multimedia, with leading applications and business support solutions.
Successful execution of the strategy is built on (1) close customer relations; (2) technology and services leadership and (3) operational excellence in all we do.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Close customer relations
The foundation for our business is our strong, long-term customer relationships. We have been present in most of our markets for more than 100 years. We work closely with the operators to understand their business, their objectives and technology needs.
We are a major supplier to most of the world’s leading mobile operators and many leading wireline operators. We believe that our ability to offer superior end-to-end solutions and services makes us well positioned to assist operators with their network development and operations. With our significant scale advantage, custom-tailored end-to-end solutions and local presence, we are able to serve as a true partner—providing fast time-to-market and competitive total cost of ownership—helping our customers reach their business objectives.
Ericsson has 82,500 employees across the world, close to our customers. Local operations have strong technical, commercial and administrative support from specialist functions in R&D, supply, network operations centra and Group functions.
Technology and services leadership
Innovation is an important element of our corporate culture. It is key to our competitiveness and future success. We have a long tradition of developing innovative communication technologies. By early involvement in creating new standards we are often first to market with new solutions—a distinct competitive advantage.
We are a market leader in GSM, WCDMA/HSPA, LTE, packet core networks, microwave transmission, revenue management applications and managed services. We are growing in the area of wireline access, metro Ethernet solutions and optical transport, and we are a provider of multimedia solutions and brokering services for both wireless and wireline operators and TV broadcasters. We have recently acquired Nortel’s CDMA and LTE operations in North America.
Within our ambitious R&D program, we have approximately 18,300 (19,800) employees in 17 (17) countries worldwide and in 2009 we invested SEK 27 billion (excluding SEK 6 billion restructuring charges) or 13 percent of sales. Most of this is invested in product development, of which the greater part is in network infrastructure. We have continued to invest in strategically important areas of broadband access, converged core networks, IP technology and multimedia. Our ability to generate world-class innovations is enhanced through cooperation with a variety of partners, including customers, universities and research institutes.
Through many years of development of new technologies we have built up a considerable portfolio of intellectual property rights (IPR). As of December 31, 2009, we held approximately 25,000 (24,000) patents worldwide, including patents essential to the standards GSM, GPRS, EDGE, WCDMA, HSPA, MBMS, TD-SCDMA, cdma2000, WiMAX and LTE. We also hold essential patents for many other areas, e.g. IMS, Voice-over-IP, ATM, Messaging, WAP, Bluetooth, SDH/SONET, WDM and Carrier Ethernet.
Our intellectual property rights are valuable business assets. We license these rights to many other companies (infrastructure equipment suppliers, embedded module suppliers, handset suppliers and mobile application developers) in return for royalty payments and/or access to their intellectual property rights. We believe that we have access to all essential patents that are material to our business in part or in whole.
For more information, please see also Risk Factors, “Market, Technology and Business Risks”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operational excellence in all we do
Ericsson is focused mainly on infrastructure solutions and services for telecom operators. This focus enables us to have a functional organization and leverage our scale to gain competitive advantage. The Group is organized in some 200 legal entities, aligned to a common functional structure, using standardized processes.
Group functions coordinate the Company’s strategies, operations and resource allocation and establish the necessary directives, processes and organization for the effective governance of the Group. They also manage support units, such as Ericsson Research, IT and shared service centers.
The main operational functions/processes are:
Business units:
product management
product/service and solution development
sourcing, manufacturing and supply of products
sales of spare parts and repair.
Market units:
marketing and sales
service delivery
customer support.
Operational excellence is an important competitive advantage. and we focus on three areas:
Speed—to reduce time to market and working capital and to increase flexibility and responsiveness.
Scale—to leverage our market-leading position, enabling us to afford developing best-in-class solutions.
Skills—to work according to standardized processes with highly educated employees and partners.
We continuously focus on improving processes, support systems and our ways of working. Our mission, to empower people, business and society, requires strong change capabilities and efficient and effective processes, delivering innovative, high-quality solutions with low cost of ownership.
The Company culture of innovation and competitiveness and continuous competence development of our employees are key enablers for success. Ericsson Academy is one of our vehicles to achieve this—a new, innovative forum for learning and sharing of ideas and knowledge, open to our employees and available to our customers during 2010. We believe this will sharpen our employees’ skills, enhance performance for our customers, and give us a competitive edge in the new business and technology landscape.
To further increase flexibility and efficiency and reduce cost, we have several partnerships with strong players in outsourced manufacturing, IT services and certain areas of R&D and services. Examples are: Flextronics, HP, IBM and Tieto.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Legal name of the Parent Company:
Telefonaktiebolaget LM Ericsson (publ)
Organization number:
556016-0680
Legal form of the Parent Company:
A Swedish limited liability company, organized under the Swedish Companies Act. The terms “Ericsson”, “the Company”, “the Group”, “us”, “we”, and “our” all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries.
Country of incorporation:
Sweden.
Date of incorporation:
The Parent Company was incorporated on August 18, 1918, as a result of a merger between AB LM Ericsson & Co. and Stockholms Allmänna Telefon AB.
Domicile:
Our registered office is Telefonaktiebolaget LM Ericsson, SE–164 83 Stockholm, Sweden. Our headquarters are located at Torshamnsgatan 23, Kista, Sweden.
Telephone number:
+46 10 719 0000
Website:
www.ericsson.com
Agent in the US:
Ericsson Inc., Vice President Legal Affairs, 6300 Legacy Drive, Plano, Texas 75024. Telephone number: +1 972 583 0000.
Shares:
Ericsson’s Class A and Class B shares are traded on NASDAQ OMX Stockholm. In the US, our American Depository Shares (ADS), each representing one underlying Class B share, are traded on NASDAQ.
Parent Company operations:
The business of the Parent Company, Telefonaktiebolaget LM Ericsson, consists mainly of corporate management, holding company functions and internal banking activities. Parent Company operations also include customer credit management activities performed by Ericsson Credit AB on a commission basis.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Subsidiaries and associated companies:
For a listing of our significant subsidiaries, please see Notes to the Parent Company Financial Statements—Note P9, “Investments”. In addition to our joint ventures Sony Ericsson and ST-Ericsson, we are engaged in a number of other minor joint ventures, cooperative arrangements and venture capital initiatives. For more information regarding risks associated with joint ventures, strategic alliances and third-party agreements please see Risk Factors, “Market, Technology and Business Risks”.
Documents on display:
We file annual reports and other information (normally in Swedish only) for certain domestic legal entities with Bolagsverket (Swedish Companies Registration Office) pursuant to Swedish rules and regulations.
You may order any of these reports from their website www.bolagsverket.se. If you access these reports, please be aware that the information included may not be indicative of our published consolidated results in all aspects. Other than information related to the Parent Company, only consolidated numbers for the Group totals are included in our reports.Filing in the US:Annual reports and other information are filed with the Securities and Exchange Commission (SEC) in the United States, pursuant to the rules and regulations that apply to foreign private issuers. Electronic access to these documents may be obtained from the SEC’s website, www.sec.gov/edgar/searchedgar/webusers.htm, where they are stored in the EDGAR database.
Ericsson has evolved with the changes in the industry:
from equipment driven, to services driven, with close to 40 percent of sales and almost 50 percent of employees now related to services
from hardware to software, with more and more of the functionality in our solutions being software-based
from narrow-band voice to all-IP broadband, with strong focus on converged networks and services capabilities.
Customers
We supply equipment, integrated solutions, multimedia applications and services to almost all major operators globally. We derive most of our sales from large, multi-year agreements with a limited number of significant customers. Out of a customer base of more than 425 network operators, the 10 largest customers account for 42 (42) percent of our net sales and the 20 largest customers account for 57 (61) percent of our net sales. Our largest customer accounted for approximately 5 (6) percent of sales in 2009. For more information, see Risk Factors, “Market, Technology and Business Risks”
Our customers have different needs and demands when interacting with us:
Strategy and business model development in an increasingly complex environment.
Network expansion and evolution in response to subscriber and traffic growth and new technology.
Support, training and spare parts.
Efficient operations to keep operating expenses competitive.
Our own market units are our primary sales channel. They perform most of the sales where the customer is a fixed or mobile telecommunications operator.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
For certain products or solutions we also use other channels:
TV solutions are sold through other equipment vendors as resellers as well as directly by business unit Multimedia to cable-TV operators.
Mobile broadband modules are sold directly by business unit Networks to PC/netbook manufacturers.
For newly acquired entities, certain market channels normally prevail during a transition period, e.g. LHS has maintained its market channels for billing solutions until it is fully owned and integrated.
A central IPR unit is managing sales of licenses to equipment vendors or others who wish to use our patented technology.
Our two joint ventures are the channels to the handset and mobile platform/chipset markets.
Our sales to network operators is normally based on multi-year frame agreements after an initial tender with a system and supplier selection.
During the frame agreement, equipment, software, services and spare parts are called off according to price lists. On a highly selective basis we occasionally provide customer financing. The vast majority of customer financing is provided by third parties, often guaranteed by Swedish export credit agencies. Various types of services, such as training or consulting, are often ordered separately as needed. Managed services contracts are normally also multi-year contracts and negotiated separately as they require extensive scoping and planning for transfer of employees and operations.
We have implemented a strict trade compliance program throughout the Company in order to comply with foreign and domestic laws and regulations, trade embargoes and sanctions in force. Our business activities should not be construed as supporting a particular political agenda or regime in any way.
Seasonality
Our quarterly sales, income and cash flow from operations are seasonal in nature and generally lowest in the first quarter of the year and highest in the fourth quarter. This is mainly a result of the seasonal purchase patterns of network operators. The table below illustrates the average seasonal effect on sales for the five-year period 2005 through 2009.
MOST RECENT 5-YEAR AVERAGE SEASONALITY
First quarter | Second quarter | Third quarter | Fourth quarter | |||||||||
Sequential Change | –20 | % | 13 | % | –6 | % | 29 | % | ||||
Share of annual sales | 22 | % | 25 | % | 23 | % | 30 | % |
Competitors
In the Networks segment, we compete mainly with large and well-established communication equipment suppliers. Our most significant competitors include Alcatel/Lucent, Huawei, Nokia/Siemens, Cisco, ZTE and Juniper. We also compete with numerous local and regional manufacturers and providers of communication equipment and services.
We believe the most important competitive factors in this industry include; existing customer relationships, superior network performance and subscriber experience, technological innovation, product design and cost, and the ability to scale/ upgrade/migrate existing network investments, and the systems integration capability.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Competition in the Professional Services segment includes not only many of the suppliers mentioned above, but also large companies from other industry sectors, such as Accenture, HP/ EDS, IBM, and several India-based off-shore companies, e.g. Tata Consultancy Services and Tech Mahindra, as well as a large number of smaller but specialized companies operating on a local or regional basis.
As this segment grows, we expect to see additional competitors emerge, possibly as a result of network sharing or of network operators attempting to expand their business.
In the Multimedia segment we face significant competition. As the market is rather fragmented, our competitors vary widely depending on the product or service being offered. Competitors include many of the traditional communication equipment and IT suppliers as well as companies from other industries, such as Acision, Amdocs, Comverse, Harmonic, Oracle and Thomson.
Within the handset market, Sony Ericsson’s primary competitors include Nokia, Motorola, Samsung, LG, NEC and Sharp, as well as companies like Apple, HTC and RIM for smartphones. We believe that our joint venture with SONY Corporation creates a distinctive competitive advantage by combining our telecom expertise with their media, content and consumer equipment know-how.
We also compete in the mobile platform/wireless chipset market through our joint venture ST-Ericsson. Here, the largest competitor is Qualcomm. This market is growing in complexity as several new software platforms for handsets and other devices are being launched, e.g. Google’s Android, Microsoft’s Windows and Samsung’s Bada.
For more information on competitive risks, see Risk Factors, “Market, Technology and Business Risks”.
Operating segments
Ericsson is a vendor of solutions and services to telecom operators of fixed and mobile networks. We also provide TV solutions and managed services for television broadcast companies and mobile access modules to netbook manufacturers. Through two joint ventures we address the mobile handset and mobile platform/wireless chipset markets.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
When determining our operating segments, we have looked at which markets and what type of customers our products and services aim to attract as well as what distribution channels they are sold through. We have also considered commonality regarding technology, research and development. To best reflect our business focus and to facilitate comparability with peers, we report five operating segments:
Networks
Professional Services
Multimedia
Sony Ericsson
ST-Ericsson
Segment Networks
Networks includes products/solutions for:
wireless and wireline access
IP core networks
transmission/backhaul
network management
network rollout services
In 2009, we acquired Nortel’s CDMA and LTE operations. Services, other than network rollout, are reported under Professional Services. In 2009, segment Networks accounted for 66 percent of total sales.
Wireless and wireline access
Ericsson provides market-leading wireless access solutions to network operators for reliable, efficient and cost-effective mobile telephony networks. Ericsson also has a strong product portfolio for wireline access. Our
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
leadership in GSM, WCDMA/ HSPA and LTE technologies and now also CDMA enables us to offer tailored solutions regardless of the existing network standard used, delivering superior performance and consumer experience.
We provide wireline access solutions, for both fiber and copper, such as GPON and DSL. In 2009, AT&T appointed Ericsson as a domain vendor for wireline access solutions.
IP core network (switching, routing and control)
Our core network solutions include industry-leading softswitches, IP infrastructure for edge and core routing (Ericsson SmartEdge), IP-based Multimedia Subsystem (IMS) and gateways. GSM and WCDMA/HSPA share a common core network. Therefore operators’ previous investments are preserved as they migrate from voice-centric to multimedia networks. Our switching products have industry-leading scalability and capacity.
Transmission/backhaul
Our MINI-LINK microwave system is one of the world’s most widely deployed mobile backhaul solutions. Transport networks (e.g. MINI-LINK, metro optical networks) are essential elements of our end-to-end solutions.
Network management
Ericsson offers a portfolio of network management tools, supporting vital operator activities for management of existing networks as well as for introduction of new network architectures, technologies and services, such as: configuration, performance monitoring, security management, inventory management and software upgrades. The tools are applicable for fixed and mobile access, transport and core. They are often capable of managing also multi-vendor networks.
Network rollout services
Fast rollout of large networks involves a heavy ramp-up of resources. Ericsson’s Global Services organization uses a mix of local, in-house capabilities, authorized service providers and central specialist resources. We manage our capabilities in a way that has proven to be highly successful, resulting in successful projects and satisfied customers.
Sourcing, manufacturing and supply and availability of materials
Our hardware products largely consist of electronics, such as circuit boards, radio frequency (RF) modules, antennas etc. For manufacturing of products we purchase customized and standardized equipment, components and services from several global providers as well as from numerous local and regional suppliers. We produce certain types of components in-house, such as power modules and cables.
The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies (EMS), of which the vast majority is in low-cost countries. Node production, i.e. assembly, integration and testing of modules into complete radio base stations, mobile switching centers etc., is largely done in-house and on-demand.
Where possible, we rely on alternative supply sources for the purchased elements of our products. This avoids sole source situations and secures sufficient supply at competitive prices. When selecting a new supplier, we try to ensure that our technical standards and other requirements are met, including our supplier code of conduct. Assuming there will only be a moderate increase in near-term market demand, we do not foresee any
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
supply constraints to meet our expected production requirements during 2010. Variations in market prices for copper, aluminum, steel, precious metals, plastics and other raw materials generally have a limited effect on our total cost of goods sold. For more information related to sourcing, see Risk Factors, “Market, Technology and Business Risks”.
We continuously adjust our production capacity to meet expected demand. At year-end 2009, our overall capacity utilization was close to 100 percent. The table “Primary manufacturing and assembly facilities” summarizes where we have major sites as well as the total floor space at year-end. In Sweden, the majority of the floor space within our production facilities is used for node assembly and verification.
Segment Professional Services
Ericsson’s professional services capabilities include expertise in managed services, systems integration, consulting, education and customer support services.
Segment Professional Services accounted for 27 percent of total sales in 2009, up from 23 percent in 2008.
Managed services
We are the industry leader in managed services, managing networks with more than 370 million subscribers. We offer the most comprehensive managed services capabilities within the telecom industry:
Network design and planning.
Network operations; including networks without any Ericsson equipment installed, such as Sprint’s fixed and mobile CDMA/IDEN networks in the US.
Field operations and maintenance of sites.
Shared solutions; e.g. managed backhaul or hosting of platforms like pre-paid or real time billing/charging.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Systems integration
Operators can minimize risk by engaging Ericsson to:
integrate equipment from multiple suppliers
manage technology change programs
design and integrate new solutions.
More and more operators who introduce multimedia services or face challenging technology transformations ask us to serve as prime integrator, ensuring successful deployment of the total solution.
Consulting
With expertise in business, strategy and technology, our consultants support customers in decision-making, planning and execution in order to improve and grow their business. Our Industry Programs package the expertise into end-to-end solutions in the key areas of multimedia, 3G rollout, broadband, value creation and revenue assurance.
Education
We provide our customers with tailored education programs to ensure their employees have the skills and competences necessary for managing today’s and tomorrow’s complex technologies.
Customer support
Having experienced professionals available around-the-clock to provide customer support is a crucial part of our service offering. We support operators across the world with over one billion customers in total.
PRIMARY MANUFACTURING AND ASSEMBLY FACILITIES
2009 | 2008 | 2007 | ||||||||||
Sites | Thousands of sq meters | Sites | Thousands of sq meters | Sites | Thousands of sq meters | |||||||
Sweden | 8 | 224.7 | 8 | 226.0 | 8 | 244.3 | ||||||
China | 4 | 46.4 | 4 | 38.5 | 4 | 33.9 | ||||||
Estonia | 1 | 26.6 | — | — | — | — | ||||||
Italy | 2 | 20.1 | 2 | 20.1 | 2 | 20.1 | ||||||
Brazil | 1 | 23.3 | 1 | 18.0 | 1 | 25.9 | ||||||
India | 1 | 13.6 | 1 | 9.0 | 1 | 6.4 | ||||||
USA | — | — | 1 | 5.0 | 1 | 5.0 | ||||||
Other | — | — | 1 | 0.3 | 1 | 0.3 | ||||||
Total | 17 | 354.7 | 18 | 316.9 | 18 | 335.9 | ||||||
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Segment Multimedia
Sales in segment Multimedia were 6 percent of total sales excluding mobile platforms and PBX business.
Consumer and Business Applications
We provide our operator customers with multimedia solutions for the consumer and business markets. For the consumer segment, we offer Rich Communication Suite (RCS), mobile TV solutions, messaging, a social media portal, and location-based services. In the business communication segment, we provide converged, fixed-mobile, business communication solutions for enterprise needs. Ericsson Business Communication Suite (BCS) is a network operator application for business users.
Multimedia Brokering
Ericsson Multimedia Brokering offers a range of payment, messaging and location-based services solutions: e.g. IPX Payment, IPX Messaging and IPX Subscriber Information services. We offer multimedia brokering solutions, to help network operators monetize their network assets by facilitating payment and distribution of content through interconnection of network operators with content and media companies, information and search services, consumer brands and a variety of enterprises.
Service delivery and provisioning
Our service delivery platforms and provisioning solutions enable operators and service providers to create, sell, and manage multimedia services and multi-play offerings. By combining products, solutions, systems integration and business consulting into one offering, we create a multimedia marketplace for each customer’s specific needs.
Revenue management
We provide revenue management solutions, enabling new business models, utilizing our unique combined competence in prepaid and postpaid. Our convergent charging and billing offering helps operators reduce cost and increase revenues by creating one unified solution to manage all their customers and services.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
TV
We have an industry-leading IMS-enabled middleware in the IPTV market, and also offer a full system integration and solutions delivery role. We have strengthened our compression market leadership through the launch of the next-generation encoding platforms. In the Video on Demand and Content Management area, we extended our product range.
Segment Sony Ericsson
Sony Ericsson delivers innovative and feature-rich mobile phones, and accessories, which allow us to provide end-to-end solutions to our customers. The joint venture, formed in October 2001, combines the mobile communications expertise of Ericsson with the consumer electronic devices and content expertise of SONY Corporation. It forms an essential part of our end-to-end capability for mobile multimedia services.
Sony Ericsson’s results are reported according to the equity method under “Share in earnings of joint ventures and associated companies” in the income statement.
Please also see Notes to the Consolidated Financial Statements—Note C3, “Segment Information”.
Segment ST-Ericsson
Ericsson and STMicroelectronics formed ST-Ericsson as a 50/50 joint venture in February 2009. The combined company has one of the industry’s strongest product offerings in semiconductors and platforms for mobile devices for GSM/ EDGE, WCDMA/HSPA and TD-SCDMA as well as LTE. ST-Ericsson is a leading supplier to the top handset vendors, and its products and technologies enable more than half of all handsets in use today.
ST-Ericsson’s results are reported according to the equity method under “Share in earnings of joint ventures and associated companies” in the income statement.
Please see also Notes to the Consolidated Financial Statements—Note C3, “Segment Information”.
Geographical areas
Sales are reported in five geographical areas; Western Europe, CEMA (Central and Eastern Europe, Middle East and Africa), Asia Pacific, Latin America and North America. The areas have different characteristics in terms of penetration of fixed and mobile telephony, network traffic, sophistication of services, average country GDP and other economic factors. The distribution of sales between the areas mitigates volatility, as a decrease in one area is often offset by an increase in another. No individual country accounts for more than 10 percent of sales. However, due to our improved market position there, the US is expected to account for between 10 and 15 percent of sales next year.
SALES PERRE GIONAN D SEGMENT 2009
SEK billion | Networks | Professional Services | Multi- media | Total | ||||
Western Europe | 23.8 | 18.3 | 2.4 | 44.6 | ||||
CEMA1) | 32.7 | 12.9 | 5.1 | 50.7 | ||||
Asia Pacific | 50.5 | 12.2 | 3.1 | 65.8 | ||||
Latin America | 13.0 | 5.9 | 1.1 | 20.0 | ||||
North America | 17.1 | 6.7 | 1.6 | 25.4 | ||||
Total | 137.1 | 56.1 | 13.3 | 206.5 | ||||
1) | Central and Eastern Europe, Middle East and Africa. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONTENTS
180 | ||
182 | ||
182 | ||
183 |
The Remuneration Committee advises the Board of Directors on an ongoing basis on the remuneration of Group Management. This includes fixed salaries, pensions, other benefits and short-term and long-term variable remuneration, all in the context of pay and employment conditions throughout Ericsson. The Remuneration Committee also approves variable remuneration outcomes, prepares remuneration related proposals for Board and shareholder approval and develops and monitors the remuneration policy, strategies and general guidelines for employee remuneration.
During 2009, as the financial crisis hit the world with its full force, there was an increased public focus on compensation and benefits matters. In its work the Remuneration Committee has followed the debate closely. The Committee met seven times during the year. The winter meetings were primarily dedicated to reviewing and implementing a zero salary increase for senior management, the vesting of variable compensation awards and proposals to shareholders at the Annual General Meeting (AGM). In 2009 the policy for senior management remuneration and the Long-Term Variable share-based plans were brought to the AGM with no major changes proposed. During the summer the Committee reviewed short-term targets to ensure that they remained appropriate and challenging. In the fall it began the cycle again with a review of the remuneration strategy, the variable compensation plans and levels of fixed compensation. As is illustrated below, the Committee has also considered market trends, existing and potential remuneration risks, target setting, its working arrangements and investor consultations.
Activities during the second half of 2009 resulted in an updated remuneration policy being brought to the AGM which better demonstrates the basic remuneration principles within Ericsson.
This chapter outlines how the remuneration policy is implemented throughout Ericsson in line with corporate governance best practice, with specific references to senior management. To begin with, the work of the Remuneration Committee and our remuneration policy are explained, followed by descriptions of plans and approaches. More details of the remuneration of senior management and Board members’ fees can be found in the Notes to the Consolidated Financial Statements—Note C29, “Information regarding Members of the Board of Directors, the Management and Employees” (“Note C29”). Senior management comprises the Group Management Team, including the CEO, and will hereafter be referred to as “Group Management”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
SUMMARIES OF 2009 SHORT- AND LONG-TERM VARIABLE REMUNERATION
What we call it | What is it? | What is the objective? | Who participates? | How is it earned? | ||||
Short-term: Remuneration delivered over 12 months or less | ||||||||
Fixed salary | Fixed remuneration paid at set times | Attract and retain employees, delivering part of annual remuneration in a predictable format | All employees | Market appropriate levels set according to position and evaluated according to individual performance | ||||
Short-Term Variable compensation (STV) | A variable plan that is measured and paid over a single year | Align employees with clear and relevant targets, providing an earnings opportunity in return for variable cost and performance | Managers, including Group Management | Achievements against set targets. Reward can increase to up to twice the target level and decrease to zero, depending on performance | ||||
Local and Sales Incentive Plans | Tailored versions of the STV | As for STV, tailored for local or business requirements, such as sales | Most employees | Similar to STV. All plans have maximum award and vesting limits | ||||
Long-term: Remuneration delivered over 3 years or more | ||||||||
Stock Purchase Plan (SPP) | All-employee stock- based plan | Reinforce a “One Ericsson” and align employees’ interests with those of shareholders | All employees are eligible | Buy one share and it will be matched by one share after 3 years if still employed | ||||
Key Contributor Retention Plan (KC) | Share-based plan for selected individuals | Recognize, retain and motivate key contributors for performance, critical skills and potential | Up to 10 percent of employees | If selected, get one more matching share in addition to the SPP one | ||||
Executive Performance Stock Plan (EPSP) | Share-based plan for senior executives | Remuneration for long-term commitment and earnings performance | Senior executives, including Group Management | Get up to 4, 6 or, for CEO, 8 further matching shares to the SPP one for EPS growth performance |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The Remuneration Committee’s work is the foundation for the governance of our remuneration processes together with our internal systems and audit controls. The Committee is chaired by Michael Treschow and its other members are Nancy McKinstry, Börje Ekholm and Karin Åberg. Karin Åberg replaced Monica Bergström after the 2009 Annual General Meeting. All the members are non-executive directors, independent (except for the employee representative) as required by the Swedish Code of Corporate Governance and have relevant knowledge and experience of remuneration matters.
The Company’s General Counsel acts as secretary to the Committee. The Chief Executive Officer, the Senior Vice President Human Resources & Organization and the Vice President Compensation & Benefits attend the Remuneration Committee meetings by invitation and assist the Committee in its considerations, except when issues relating to their own remuneration are being discussed.
The Remuneration Committee has appointed an independent expert advisor, Gerrit Aronson, to assist and advise the Committee. Gerrit Aronson provided no other services to the Company during 2009. The Remuneration Committee is also provided with national and international pay data collected from external survey providers and can call on other independent expertise, should it so require. The Chairman continues to ensure that contact is maintained, as necessary and appropriate, with principal shareholders on the subject of remuneration.
The purpose and function of the Remuneration Committee will continue going forward and its terms of reference can be found on the Ericsson website (www.ericsson.com). These terms of reference, together with the remuneration policy, are reviewed annually in light of matters such as changes to corporate governance best practice or changes to accounting, legislation, political opinion or business practices among peers. This helps to ensure that the policy continues to provide Ericsson with a competitive remuneration strategy. The policy for senior management remuneration is, in accordance with Swedish law, brought to shareholders annually for approval.
Remuneration at Ericsson is based on the principles of performance, competitiveness and fairness. Our remuneration policy together with the mix of remuneration elements are designed to reflect these remuneration principles by creating a balanced remuneration package. The policy for 2009 can be found in Note C29. The proposed resolution for the 2010 AGM can be found in the Board of Directors’ Report and, together with resolutions relating to the long-term variable remuneration plans, in the Notice of Annual General Meeting on our website. The auditors’ opinion on how we have followed our policy during 2009 is also posted on the website.
SHORT-TERM VARIABLE REMUNERATION STRUCTURE
Short-Term Variable remuneration as percentage of Fixed Salary | Percentage of Short-Term Variable remuneration opportunity | |||||||||||||||||
Target level | Maximum level | Actual paid for 2009 | Group Financial Targets | Unit/Functional Financial Targets | Non-Financial Targets | |||||||||||||
CEO 2009 | 40 | % | 80 | % | 39.5 | % | 90 | % | 0 | % | 10 | % | ||||||
CEO 2010 | 40 | % | 80 | % | — | 90 | % | 0 | % | 10 | % | |||||||
Average Group Management 20091) | 31 | % | 62 | % | 39.0 | % | 62 | % | 23 | % | 15 | % | ||||||
Average Group Management 20101) | 34 | % | 68 | % | — | 73 | % | 16 | % | 11 | % |
1) | Excludes CEO—differences in target and maximum levels from year to year are due to changes in the composition of Group Management |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
For Group Management, total remuneration consists of fixed salary, short-term and long-term variable remuneration, pension and other benefits. If the size of any one of these elements is increased or decreased, at least one other element has to change where the competitive position should remain unchanged.
Fixed salary
Fixed salaries are set to be competitive within an individual’s home market. When setting fixed salaries the Remuneration Committee considers the impact on total remuneration, including pension and associated costs. The absolute levels are determined by the size and complexity of the position and the year-to-year performance of the individual. Together with other elements of remuneration, Group Management salaries are subject to an annual review by the Remuneration Committee, which considers external pay data to ensure that levels of pay remain competitive and appropriate to the remuneration policy.
For 2009 it was decided that it was strategically appropriate not to increase fixed salaries for Group Management and other senior executives.
Variable remuneration
At Ericsson we strongly believe that, where possible, we should encourage variable compensation. First and foremost this aligns employees with clear and relevant targets but it also enables more flexible payroll costs and emphasizes the link between performance and pay. All variable remuneration plans have maximum award and vesting limits.
Short-Term Variable remuneration
The annual variable remuneration is delivered through cash-based programs. Specific business targets are derived from the annual business plan approved by the Board of Directors and, in turn, defined by the Company’s long-term strategy. Ericsson strives to grow faster than the market with best-in-class margins and strong cash conversion and therefore the starting point is to have these as three core targets:
Sales Growth
Operating Income
Cash Flow
For Group Management, targets are thus predominantly financial targets at either Group level or at the individual unit level and may also include operational targets like customer satisfaction and employee motivation. Targets are cascaded to all managers and will vary depending on the specific position.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
All variable remuneration targets have to be objective and measurable and typically refer to a result that is achieved on a collective basis. Each target is, in accordance with our strict governance instructions, defined in a “target specification” and measured over the calendar year. The target setting process is fully integrated with the strategy work and target levels are tested against plans and forecasts up until they are finalized around the turn of the year. The Board of Directors and the Remuneration Committee decide on all Ericsson Group targets, which are cascaded to unit-related targets throughout the Company, always subject to a two levels of management approval process. The Remuneration Committee monitors the appropriateness and fairness of Group target levels throughout the performance year and has the authority to revise them should they cease to be relevant, stretching and/or enhance shareholder value.
During 2009, approximately 65,000 employees participated in short-term variable plans. Of these 6,000 were in the global Short-Term Variable remuneration plan (“STV”) for management, including Group Management, and 4,000 were in the global Sales Incentive Plan. Local plans vary in design according to local competitive practice.
The chart above illustrates how payouts to Group Management have varied with performance over the past five years.
Long-Term Variable remuneration
Share-based long-term variable remuneration plans are submitted each year for approval by shareholders at the Annual General Meeting. All long-term variable remuneration plans are designed to form part of a well-balanced total remuneration and span over a minimum of three years. As these are variable plans, outcomes are unknown and rewards depend on long-term personal investment, corporate performance and resulting share price performance. During 2009, share-based remuneration was made up of three different but linked plans: The all-employee Stock Purchase Plan, the Key Contributor Retention Plan and the Executive Performance Stock Plan.
The Stock Purchase Plan
The Executive Performanceall-employee Stock Purchase Plan is designed to offer, where practicable, an incentive for all employees to participate, reinforcing a “One Ericsson” aligned with shareholder interests. Employees can save up to 7.5
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
percent (CEO 9 percent) of gross fixed salary for purchase of class B shares at market price on the NASDAQ OMX Stockholm or ADSs on NASDAQ (contribution shares) over a twelve-month period. If the contribution shares are retained by the employee for three years after the investment and employment with the Ericsson Group continues during that time, the employee’s shares will be matched with a corresponding number of class B shares or ADSs. The plan was introduced in 2004. 2002 and employees in 94 countries participate. In December 2009 the number of participants was in excess of 18,000 or approximately 25 percent of eligible employees.
Participants save each month, beginning with August payroll, towards quarterly investments. These investments (in November, February, May and August) are matched on the third anniversary of each such investment and hence the matching spans over two financial years and two tax years.
The planKey Contributor Retention Plan
The Key Contributor Retention Plan is part of Ericsson’s talent management strategy and is designed to focusgive individuals recognition for performance, critical skills and potential as well as encourage retention of key employees. Under the program, operating units around the world are given quotas that total no more than 10 percent of employees world-wide. Each unit nominates individuals that have been identified according to performance, critical skills and potential. The nominations are calibrated in management on driving earningsteams locally and provide competitive remuneration. Senior executives, including Group Management, arereviewed by both local and corporate Human Resources to ensure that there is a minimum of bias and a strong belief in the system. Participants selected to obtain up to four or sixone extra shares (performance matching shares)share in addition to the ordinary one matching share for each contribution share purchased under the Stock Purchase Plan. Up to 0.5 percent of employees (2008: 223 executives) are offered to participatePlan during a twelve-month program period. The plan was introduced in the plan. As from the 2006 program, the CEO has been allowed to invest up to 9 percent of fixed salary in contribution shares and may obtain up to eight performance matching shares in addition to the Stock Purchase Plan matching share for each contribution share. The performance matching is subject to the fulfillment of a performance target of average annual Earnings per Share (EPS) growth.2004.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
EXECUTIVE PERFORMANCE STOCK PLANS
Plan | Base year EPS1) | Target average annual EPS growth range2) | Matching share vesting range3) | Maximum opportunity as percentage of fixed salary4) | Percen- tage vesting | |||||||
Performance Stock Plan 20045) | 3.45 | 5% to 25% | 0 to 4 | 30 | % | 100 | % | |||||
0 to 6 | 45 | % | 100 | % | ||||||||
Performance Stock Plan 20056) | 6.68 | 3% to 15% | 0 to 4 | 30 | % | 0 | % | |||||
0 to 6 | 45 | % | 0 | % | ||||||||
Performance Stock Plan 2006 | 7.58 | 3% to 15% | 0 to 4 | 30 | % | |||||||
0 to 6 | 45 | % | ||||||||||
0 to 8 | 72 | % | ||||||||||
Performance Stock Plan 2007 | 8.83 | 5% to 15% | 0.67 to 4 | 30 | % | |||||||
1 to 6 | 45 | % | ||||||||||
1.33 to 8 | 72 | % | ||||||||||
Performance Stock Plan 2008 | 4.43 | 5% to 15% | 0.67 to 4 | 30 | % | |||||||
1 to 6 | 45 | % | ||||||||||
1.33 to 8 | 72 | % |
STOCK OPTION PLANS
Ongoing plans 2008 | Grant/expiry date | Exercise price1) (SEK) | Vesting period | Number of participants at grant | Number of participants end of 2008 | |||||
Stock Option Plan 2001—May Grant | 14 May 01/14 May 08 | 152.50 | 1/3 after 1 year, | 15,000 | — | |||||
1/3 after 2 years, | ||||||||||
1/3 after 3 years | ||||||||||
Stock Option Plan 2001—November Grant | 19 Nov 01/19 Nov 08 | 128.50 | 1/3 after 1 year, | 900 | — | |||||
1/3 after 2 years, | ||||||||||
1/3 after 3 years | ||||||||||
Stock Option Plan 20022) | 11 Nov 02/11 Nov 09 | 39.00 | 1/3 after 1 year, | 12,800 | 1,324 | |||||
1/3 after 2 years, | ||||||||||
1/3 after 3 years |
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Shares for all plans
All plans are funded with treasury stock. Treasury stock for all plans has been issued in a directed cash issue of Class C shares at the quotient value and purchased under a public offering at the subscription price plus a premium corresponding to the subscribers’ financing costs, and then converted to Class B shares.
For all plans, additional shares have been allocated for financing of social security expenses. Treasury stock is sold on the NASDAQ OMX Stockholm to cover the social security payments when arising due to exercise of options or matching of shares. During 2008, 676,630 shares were sold at an average price of SEK 70.03. Sale of shares is recognized directly in equity.
If all options outstanding as of December 31, 2008, were exercised, all shares allocated for future matching under the Stock Purchase Plan were transferred, and shares designated to cover social security payments were disposed of as a result of the exercise and the matching, approximately 44 million Class B shares would be transferred, corresponding to 1.4 percent of the total number of shares outstanding, 3,185 million. As per December 31, 2008, 61 million Class B shares were held as treasury stock.
The below table shows the number of shares (representing options and matching rights but excluding shares for social security costs) allocated for each ongoing plan and changes during 2008. It also shows compensation cost charged for each plan. The total compensation cost charged for the Long Term Variable compensation plans during 2008 amount to SEK 572 million.
For a description of compensation cost, including accounting treatment, see Note C1, “Significant Accounting Policies, Share-based employee compensation”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SHARES FOR ALL PLANS
Plan (million shares) | Originally designated1) | Outstanding beginning of 2008 | Granted during 2008 | Exercised/ matched during 2008 | Forfeited during 2008 | Expired during 2008 | Outstanding end of 20082) | Number of options charged exercisable | Compensation costs during 2008 | Originally designated1) A | Outstanding beginning of 2009 B | Awarded during 2009 C | Exercised/ matched during 2009 D | Forfeited/ expired during 2009 E | Outstanding end of 2009 F=B+C-D-E | Compensation costs charged during 2009 (MSEK) G | ||||||||||||||||||||
2001 Stock Option Plan—May Grant | 9.0 | 4.5 | — | — | — | 4.5 | — | — | — | |||||||||||||||||||||||||||
2001 Stock Option Plan—November Grant | 0.5 | 0.2 | — | — | — | 0.2 | — | — | — | |||||||||||||||||||||||||||
2002 Stock Option Plan | 10.8 | 4.1 | — | 0.3 | — | — | 3.8 | 3.8 | — | 10.8 | 3.8 | — | 3.4 | 0.4 | — | 2) | — | |||||||||||||||||||
2003 Stock Purchase Plan (2-year plan) and 2004 Key Contributor and Executive Performance Stock Plans | 30.3 | 2.9 | — | 2.8 | 0.1 | — | — | — | 50 | 4) | ||||||||||||||||||||||||||
2005 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 6.3 | 4.4 | — | 1.0 | 0.2 | — | 3.2 | 3) | — | 129 | 4) | 6.3 | 3.2 | — | 2.7 | 0.5 | — | 25 | 4) | |||||||||||||||||
2006 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 6.4 | 4.9 | — | 0.2 | 0.1 | — | 4.6 | 3) | — | 190 | 4) | 6.4 | 4.6 | — | 1.2 | 0.1 | 3.3 | 126 | 4) | |||||||||||||||||
2007 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 9.7 | 2.0 | 7.7 | 0.2 | 0.1 | — | 9.4 | 3) | — | 196 | 4) | 9.7 | 9.4 | — | 0.5 | 0.3 | 8.6 | 3) | 189 | 4) | ||||||||||||||||
2008 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 16.5 | — | 3.7 | — | — | — | 3.7 | 3) | — | 7 | 4) | 16.5 | 3.7 | 8.3 | 0.4 | 0.3 | 11.3 | 3) | 183 | 4) | ||||||||||||||||
2009 Stock Purchase Plan, Key Contributor and Executive Performance Stock Plans | 22.4 | — | 2.5 | — | — | 2.5 | 3) | 6 | 4) | |||||||||||||||||||||||||||
Total | 72.1 | 24.7 | 10.8 | 8.2 | 1.6 | 25.7 | 529 | 5) | ||||||||||||||||||||||||||||
1) | Adjusted for rights offering and reverse split when applicable. |
2) | All outstanding options in the |
3) | Presuming maximum performance matching under the Executive Performance Stock Plans. The 2005 and 2006 plans have lapsed. |
4) | Fair value is calculated as the share price on the investment date, reduced by the net present value of the dividend expectations during the three-year vesting period. Net present value calculations are based on data from external party. Fair value is also adjusted for participants failing to keep hold of their contribution shares during the vesting period. For shares under the Executive Performance Stock Plans, the Company assesses the probability of meeting the performance targets when calculating the compensation cost. Fair value of the Class B share at each investment date during |
5) | Total compensation costs charged during 2008: SEK 572 million, 2007: SEK 496 million. |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Employee numbers, wages and salaries
AVERAGE NUMBER OF EMPLOYEES
2009 | 2008 | |||||||||||
Men | Women | Total | Men | Women | Total | |||||||
Western Europe1) | 30,676 | 9,493 | 40,169 | 32,289 | 9,167 | 41,456 | ||||||
Central and Eastern Europe, Middle East and Africa | 8,168 | 1,831 | 9,999 | 7,028 | 1,723 | 8,751 | ||||||
Asia Pacific | 13,513 | 3,825 | 17,338 | 12,111 | 3,343 | 15,454 | ||||||
Latin America | 5,876 | 1,254 | 7,130 | 6,151 | 1,335 | 7,486 | ||||||
North America | 9,366 | 2,358 | 11,724 | 4,556 | 1,286 | 5,842 | ||||||
Total2) | 67,599 | 18,761 | 86,360 | 62,135 | 16,854 | 78,989 | ||||||
| ||||||||||||
1) Of which Sweden | 13,930 | 4,591 | 18,521 | 14,685 | 4,990 | 19,675 | ||||||
2) Of which EU | 32,970 | 10,055 | 43,025 | 34,100 | 9,633 | 43,733 |
NUMBER OF EMPLOYEES AT YEAR END
Employees by region | 2009 | 2008 | ||
Western Europe1) | 38,305 | 41,618 | ||
Central and Eastern Europe, Middle East and Africa | 10,145 | 7,976 | ||
Asia Pacific | 16,766 | 15,165 | ||
Latin America | 6,055 | 8,247 | ||
North America | 11,222 | 5,734 | ||
Total2) | 82,493 | 78,740 | ||
�� | ||||
| ||||
1) Of which Sweden | 18,217 | 20,155 | ||
2) Of which EU | 41,396 | 43,093 | ||
Employees per segment | ||||
Networks | 49,874 | 45,823 | ||
Professional Services | 24,570 | 23,244 | ||
Multimedia | 8,049 | 9,673 | ||
Total | 82,493 | 78,740 | ||
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
EMPLOYEES BY GENDER AND AGE AT YEAR END 2009
Female | Male | Percent of total | |||||||
Under 25 years old | 1,228 | 3,321 | 5 | % | |||||
26–35 years old | 6,778 | 23,022 | 36 | % | |||||
36–45 years old | 6,918 | 23,749 | 37 | % | |||||
46–55 years old | 2,908 | 10,768 | 17 | % | |||||
Over 55 years old | 784 | 3,017 | 5 | % | |||||
Percent of total | 23 | % | 77 | % | 100 | % | |||
NUMBER OF EMPLOYEES RELATED TO COST OF SALES AND OPERATING EXPENSES
2009 | 2008 | 2007 | ||||
Cost of sales | 41,521 | 35,717 | 33,904 | |||
Operating expenses | 40,972 | 43,023 | 40,107 | |||
Total | 82,493 | 78,740 | 74,011 | |||
EMPLOYEE MOVEMENTS
2009 | 2008 | |||
Head count at year-end | 82,493 | 78,740 | ||
Employees who have left the Company | 9,147 | 3,415 | ||
Employees who have joined the Company | 12,900 | 8,144 | ||
Temporary employees | 693 | 1,124 |
WAGES AND SALARIES AND SOCIAL SECURITY EXPENSES
2009 | 2008 | |||
Wages and salaries | 41,247 | 38,607 | ||
Social security expenses | 13,630 | 12,690 | ||
Of which pension costs | 3,588 | 3,206 |
Amounts related to the President and CEO and the Group Management Team are included.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
WAGES AND SALARIES PER REGION
2009 | 2008 | |||
Western Europe1) | 23,039 | 24,138 | ||
Central and Eastern Europe, Middle East and Africa | 4,323 | 3,354 | ||
Asia Pacific | 5,346 | 4,594 | ||
Latin America | 2,181 | 1,879 | ||
North America2) | 6,358 | 4,642 | ||
Total3) | 41,247 | 38,607 | ||
| ||||
1) Of which Sweden | 10,324 | 11,825 | ||
2) Of which United States | 4,928 | 3,296 | ||
3) Of which EU | 23,734 | 24,699 |
Remuneration in foreign currency has been translated to SEK at average exchange rates for the year.
REMUNERATION TO BOARD MEMBERS AND PRESIDENTS IN SUBSIDIARIES
2009 | 2008 | |||
Salary and other remuneration | 315 | 316 | ||
Of which annual variable remuneration | 42 | 41 | ||
Pension costs | 34 | 36 |
BOARD MEMBERS, PRESIDENTS AND GROUP MANAGEMENT BY GENDER AT YEAR END
2009 | 2008 | |||||||||||
Females | Males | Females | Males | |||||||||
Parent Company | ||||||||||||
Board members and President | 38 | % | 62 | % | 38 | % | 62 | % | ||||
Group Management | 8 | % | 92 | % | 9 | % | 91 | % | ||||
Subsidiaries | ||||||||||||
Board members and Presidents | 10 | % | 90 | % | 12 | % | 88 | % |
C30 RELATED PARTY TRANSACTIONS
During 2008,2009, various related party transactions were executed pursuant to contracts based on terms customary in the industry and negotiated on an arm’s length basis. For information regarding equity and Ericsson’s share of assets, liabilities and income in joint ventures and associated companies, see Note C12, “Financial Assets, Non-Current”.
SONY ERICSSON MOBILE COMMUNICATIONSSony Ericsson Mobile Communications AB (SEMC)
In October 2001, SEMC was organizedestablished as a joint venture between Sony Corporation and Ericsson, and a substantial portion of Ericsson’s handset operations was sold to SEMC. The joint venture is headquartered in London, United Kingdom. As part of the formation of the joint venture, contracts were entered into between Ericsson and SEMC.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Major transactions are as follows:
License revenues.Ericsson receives license revenues regarding mobile phone platform design from SEMC. Both owners of SEMC, Sony Corporation and Ericsson, receive license revenues for SEMC’s usage of trademarks and intellectual property rights. The decline in license revenues during 2009 is a consequence of the formation of ST-Ericsson.
Purchases.Ericsson purchases mobile phones from SEMC to support contracts with a number of customers for mobile systems which also include limited quantities of phones.
Dividends.Both owners of SEMC Sony Corporation andreceive dividends, when so decided by the board of directors. During 2009 Ericsson receive dividends.received no dividends from SEMC.
2008 | 2007 | 2009 | 2008 | 2007 | ||||||
Related party transactions | ||||||||||
License revenues | 5,856 | 5,743 | 1,746 | 5,856 | 5,743 | |||||
Purchases | 261 | 333 | 164 | 261 | 333 | |||||
Ericsson’s share of dividends | 3,627 | 3,949 | — | 3,627 | 3,949 | |||||
Related party balances | ||||||||||
Receivables | 1,002 | 932 | 369 | 1,002 | 932 | |||||
Liabilities | 176 | 204 | 14 | 176 | 204 | |||||
SEMC has been granted a long-term loan with a maximum amount of SEK 3,606 million. The parent companies of Ericsson and Sony Corporation have issued guarantees for this loan on a 50/50 basis, without joint responsibility. Ericsson’s part thus amounted to SEK 1,803 million. As of December 31, 2009, Ericsson’s part of the principal amount outstanding amounted to SEK 779 million inclusive of accrued interest SEK 6 million. Maturity date for the maximum amount of the issued guarantees occurs in 2011 (SEK 1,030 million) and 2010 (SEK 773 million).
ST-Ericsson
ST-Ericsson, the joint venture between Ericsson and STMicroelectronics, was formed on February 2, 2009, by merging Ericsson Mobile Platforms with ST-NXP Wireless. The joint venture is equally owned by Ericsson and STMicroelectronics. ST-Ericsson is an industry leader in design, development and the creation of cutting-edge mobile platforms and wireless semiconductors. ST-Ericsson is a key supplier to four of the industry’s top five handset manufacturers, who together represent about 80 percent of global handset shipments, as well as to other leading companies in the industry. The joint venture is headquartered in Geneva, Switzerland, and employs approximately 8,000 persons.
Major transactions are as follows:
Sales. Ericsson provides ST-Ericsson with services in the areas of R&D, HR, IT and facilities.
Purchases.Major part of Ericsson’s purchases from ST-Ericsson consists of chipsets and R&D services.
Dividends.Both owners of ST-Ericsson receive dividends, when so decided by the board of directors. During 2009 Ericsson received no dividends from ST-Ericsson.
2009 | ||
Related party transactions | ||
Sales | 740 | |
Purchases | 624 | |
Ericsson’s share of dividends | — | |
Related party balances | ||
Receivables | 244 | |
Liabilities | 365 |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees toward Sony Ericsson Mobile Communications AB.ST-Ericsson.
ERICSSON NIKOLA TESLA D.D.Ericsson Nikola Tesla d.d.
Ericsson Nikola Tesla d.d. is a joint stock company for design, sales and service of telecommunication systems and equipment, and an associated member of the Ericsson Group. Ericsson Nikola Tesla d.d. is located in Zagreb, Croatia. Ericsson holds 49.07 percent of the shares.
Major transactions are as follows:
Sales.Ericsson sells telecommunication equipment to Ericsson Nikola Tesla d.d. purchases telecommunication equipment from Ericsson.
License revenues.Ericsson receives license revenues for Ericsson Nikola Tesla d.d.’s usage of trademarks.
Purchases.Ericsson purchases development resources from Ericsson Nikola Tesla d.d.
Dividends.Ericsson receivesreceived dividends from Ericsson Nikola Tesla d.d. during 2009.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2008 | 2007 | 2009 | 2008 | 2007 | ||||||
Related party transactions | ||||||||||
Sales | 1,020 | 1,010 | 654 | 1,020 | 1,010 | |||||
License revenues | 9 | 9 | 7 | 9 | 9 | |||||
Purchases | 547 | 506 | 569 | 547 | 506 | |||||
Dividends | 227 | 267 | ||||||||
Ericsson’s share of dividends | 66 | 227 | 267 | |||||||
Related party balances | ||||||||||
Receivables | 85 | 103 | 93 | 85 | 103 | |||||
Liabilities | 58 | 55 | 70 | 58 | 55 | |||||
Ericsson does not have any contingent liabilities, assets pledged as collateral or guarantees toward Ericsson Nikola Tesla d.d.
OTHER RELATED PARTIES
Ericsson continued the cooperation with Ericsson’s owners Investor AB and AB Industrivärden in the venture capital vehicle Ericsson Venture Partners.
For information regarding the remuneration of the Group Management, see Note C29, “Information regarding employees, members of the Board of Directors and Management”.
Price- waterhouse- Coopers | Others | Total | ||||
2008 | ||||||
Audit fees | 97 | 4 | 101 | |||
Audit related fees | 7 | — | 7 | |||
Tax services fees | 14 | 2 | 16 | |||
Other fees | 1 | 5 | 6 | |||
Total | 119 | 11 | 130 | |||
2007 | ||||||
Audit fees | 102 | 7 | 109 | |||
Audit related fees | 4 | — | 4 | |||
Tax services fees | 13 | 12 | 25 | |||
Other fees | — | 6 | 6 | |||
Total | 119 | 25 | 144 | |||
2006 | ||||||
Audit fees | 98 | 11 | 109 | |||
Audit related fees | 14 | — | 14 | |||
Tax services fees | 19 | 3 | 22 | |||
Other fees | 1 | 3 | 4 | |||
Total | 132 | 17 | 149 | |||
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Price- waterhouse- Coopers | Others | Total | ||||
2009 | ||||||
Audit fees | 98 | 3 | 101 | |||
Audit related fees | 10 | — | 10 | |||
Tax services fees | 16 | 2 | 18 | |||
Other fees | 1 | 2 | 3 | |||
Total | 125 | 7 | 132 | |||
2008 | ||||||
Audit fees | 97 | 4 | 101 | |||
Audit related fees | 7 | — | 7 | |||
Tax services fees | 14 | 2 | 16 | |||
Other fees | 1 | 5 | 6 | |||
Total | 119 | 11 | 130 | |||
2007 | ||||||
Audit fees | 102 | 7 | 109 | |||
Audit related fees | 4 | — | 4 | |||
Tax services fees | 13 | 12 | 25 | |||
Other fees | — | 6 | 6 | |||
Total | 119 | 25 | 144 | |||
All services provided by the auditors were pre-approved prior to the engagement.
During the period 2006–2008,2007–2009, in addition to audit services, PricewaterhouseCoopers provided certain audit related services and tax services to the Company. The audit related services include consultation on financial accounting, services related to acquisitions and assessments of internal control. The tax services include general expatriate services and corporate tax compliance work.
Audit fees to other auditors largely consist of local statutory audits for minor companies.
C32 EVENTS AFTER THE BALANCE SHEET DATE
ERICSSON AND STMICROELECTRONICS COMPLETED THE JV DEALIn a November 25 auction, 2009, Ericsson acquired certain assets relating to Nortel’s GSM business in North America for a cash purchase price of USD 70 million. Closing is expected by March 31, 2010, subject to approval by US and Canadian bankruptcy courts and satisfying normal regulatory conditions.
On February 3, 2009,January 12, 2010, Ericsson and STMicroelectronics announced agreement to acquire Pride Spa, an Italian systems integration company with approximately 1,000 employees.
In January 2010, the closingCompany made an employer contribution payment of their agreement merging Ericsson mobile platforms and ST-NXP Wireless unit into a 50/50 joint venture, to be called ST Ericsson. The deal was completed on the terms originally announced on August 20, 2008.
ST Ericsson will acquire relevant assets from the owner companies. After these acquisitions, the joint venture will have a cash position of about USD 0.4 billion. Ericsson contributed USD 1.1 billion netSEK 730 million to the joint venture, out of which USD 0.7 billion was paidSwedish pension trust fund due to ST. ST Ericsson is expected to become operational during the first quarter of 2009.
ST Ericsson will be accounted for according to the equity method. Ericsson’s share of income before tax will be reported in item “Share in earnings of joint ventures and associated companies” included in Operating income.
ERICSSON TO DIVEST ITS TEMS-BRANDED BUSINESS TO ASCOMfunding requirements.
On March 23, 2009,31, 2010, Ericsson announced that it has entered into an agreement to divest the TEMS-branded product business, tools for air interface monitoringMarita Hellberg, Senior Vice President and radio network planning, to Ascom. The purchase price is CHF 190 million, excluding netHead of assetsGroup Function Human Resources and liabilities.Organization will take over as Head of Human Resources of Ericsson’s new region China and North East Asia from July 1st.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
On April 1, 2010 Ericsson announced that the acquisition of substantially all the assets of Nortel’s GSM business had been completed, effective March 31. The closing follows the announcement on November 25, 2009, that Ericsson had entered into an asset purchase agreement for the assets of Nortel’s GSM business in North America.
On April 21, 2010, the Company announced that it had entered into a share purchase agreement to acquire Nortel’s majority shareholding (50%+1 share) in LG-Nortel, the joint venture of LG Electronics and Nortel Networks. Purchase price is USD 242 million on a cash and debt free basis. The transaction is subject to customary regulatory approvals.
CONTRACTUAL OBLIGATIONS 2009
Payment due by period | Total | |||||||||
(SEK billion) | <1 year | 1–3 years | 3–5 years | >5 years | 2009 | |||||
Long-term debt1)2) | 1.2 | 4.2 | 10.8 | 14.2 | 30.4 | |||||
Finance lease obligations3) | 0.2 | 0.3 | 0.4 | 1.2 | 2.1 | |||||
Operating leases3) | 3.2 | 4.7 | 2.2 | 2.4 | 12.5 | |||||
Other non-current liabilities | — | 0.3 | 0.1 | 1.6 | 2.0 | |||||
Purchase obligations4) | 7.1 | — | — | — | 7.1 | |||||
Trade Payables | 18.9 | — | — | — | 18.9 | |||||
Commitments for customer financing5) | 3.0 | — | — | — | 3.0 | |||||
Total | 33.6 | 9.5 | 13.5 | 19.4 | 76.0 | |||||
1) | Including interest payments. |
2) | See also Note C20, “Financial Risk Management and Financial Instruments”. |
3) | See also Note C27, “Leasing”. |
4) | The amounts of purchase obligations are gross, before deduction of any related provisions. |
5) | See also Note C14, “Trade Receivables and Customer Financing”. |
For information about financial guarantees, see Note C24, “Contingent Liabilities”
Except for those transactions described in this report, Ericsson has not been a party to any material contracts over the past three years other than those entered into during the ordinary course of business.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
You should carefully consider all the information in this annual reportAnnual Report and in particular the risks and uncertainties outlined below. Any of the factors described below, or any other risk factors discussed elsewhere in this report, could have a material negative effect on our business, operational and after-tax results, financial position, cash flows,flow, liquidity, credit rating, reputationbrand and/or our share price. Furthermore, our operational results may have a greater variability than in the past and we may have difficulties in accurately predicting future developments. See also “Forward-looking“Forward-Looking Statements”.
CONTENTS
| ||
| ||
RISK ASSOCIATED WITH THE INDUSTRY AND MARKET CONDITIONSMarket, Technology and Business Risks
Current turmoil in the financial markets and macro-economic downturn may have an impact on our business.
The extent of the current financial market turmoil and the accompanying economic downturn may exacerbate some of the risk factors we are exposedDemand is difficult to although our customers currently have relatively strong financial results and positions. Traffic volumes are increasing and the networks well utilized compared to the industry downturn 2001–2003. The effects of a tighter credit market on consumer and operator spending may have several adverse effects, such as:
reduced demand for products and services, resulting in increased price competition or deferment of purchases and orders by customers;
risk of excess and obsolete inventories and excess manufacturing capacity and risk of financial difficulties or failures among suppliers;
increased demand for customer finance, difficulties in collection of accounts receivable and increased risk of counterparty failures;
decline in the value of the assets in the Company’s pension plans;
increased difficulties to forecast sales and financial results as well as increased volatility in our reported results.
We are subject to political, economic and regulatory risks in the various countries in which we operate.
We conduct business throughout the world and are subject to the effects of general global economic conditions as well as conditions unique to a specific country or region. We conduct business in more than 140 countries, with a significant proportion of our sales to emerging markets in Asia Pacific, Latin America, Eastern Europe, the Middle East and Africa. We expect that sales to such emerging markets will be an increasing portion of total sales, as developing nations and regions around the world increase their investments in telecommunications. We already have extensive operations in many of these countries, which involve certain risks, including volatility in gross domestic product, civil disturbances, economic and political instability, nationalization of private assets and the imposition of exchange controls.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Changes in regulatory requirements, tariffs and other trade barriers, price or exchange controls or other governmental policies in the countries in which we conduct business could limit our operations and make the repatriation of profits difficult. In addition, the uncertainty of the legal environment in some regions could limit our ability to enforce our rights. We also must comply with the export control regulations of the countries in which we operate and trade embargoes in force at the time of sale. Although we seek to comply with all such regulations, even unintentional violations could have material adverse effects on our business, operational results and reputation.
We are subject to the market conditions affecting the capital and operating expenditures of our customers, making demand for our products and services highly unpredictable.predict
Adverse economic conditions could cause network operators to postpone investments or initiate other cost-cutting initiatives to improve their financial position, whichposition. This could result in significantly reduced capital expenditures for network infrastructure. If operator spending for network equipmentinfrastructure and associated rollout services, declines substantially,in which case our business and operating results would suffer. We have established flexibility to cost effectivelycost-effectively accommodate to fluctuations in demand. However, if demand were to fall in the future, we may experience material adverse effects on our revenues, cash flow, capital employed and value of our assets and we may even incur operating losses. If demand is significantly weaker or more volatile than expected, this may have a material adverse impact on our credit rating, borrowing opportunities and costs as well as on the trading price of our shares. When deemed necessary, we undertake specific restructuring or cost saving initiatives, however, there are no guarantees that such initiatives are sufficient, successful or executed in time to deliver necessary improvements in earnings.
The extent of the current adverse conditions in the financial markets and global economic downturn may exacerbate some of the risk factors we are exposed to. Most of our customers are financially stable and have networks with good utilization. However, some operators, in particular in markets with weak currencies, may incur borrowing difficulties and lower traffic than expected, which may affect their investment plans. The potential adverse effects of the economic downturn include:
Reduced demand for products and services, resulting in increased price competition or deferrals of purchases, with lower revenues not being possible to compensate with reduced costs.
Risks of excess and obsolete inventories and excess manufacturing capacity and risk of financial difficulties or failures among our suppliers.
Increased demand for customer finance, difficulties in collection of accounts receivable and increased risk of counterpart failures.
Risk of impairment losses related to our intangible assets as a result of lower forecasted sales of certain products.
Increased difficulties in forecasting sales and financial results as well as increased volatility in our reported results.
Decline in the value of the assets in the Company’s pension plans.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Industry convergence between telecom, dataShort-term volatility has an impact
Our sales to network operators represent a mix of equipment, software and media represents opportunities but also risks.services, which normally generate different gross margins. Third party products normally have lower margins than own products. As a consequence, reported gross margin in a specific period will be affected by the overall mix of products and services as well as the relative content of third party products. Network expansions and upgrades have much shorter lead times for delivery than initial network buildouts. Such orders are normally placed with short notice by customers, i.e. less than a month, and consequently variations in demand are difficult to forecast. As a result, changes in our product and service mix may affect our ability to accurately forecast sales and margins or detect in advance whether actual results will deviate from market consensus.
Convergence brings opportunity and risk
We are affected by market conditions within the telecommunications industry. We are also affected bytelecom industry, including the convergence of the telecom-, data-,telecom, data and media industries, whichindustries. The convergence is largely driven by technological development related to IP-based communications. This change impactsincreases our addressable market, competition,changes the competitive landscape, and affects our objective setting, risk assessment and strategies, as well as the needstrategies. If we fail to consider risks to achieve our set objectives. Should we not succeed in understandingunderstand the market development, or acquire the necessary competence or develop and market products, services and solutions that are competitive in this changing market, our future results will suffer.
Our business essentially depends upon the continuedWe depend on growth of mobile communications and the success of new types of services offered in broadband networks.
Most of our business depends on continued growth in mobile communications in terms of both number of subscriptions and usage per subscriber, which in turn requires the continued deployment and evolution of our network systems by customers. In particular, we are dependent on operators in highly penetrated markets to successfully introduce services that cause a substantial increase in usage for both voice and data. In emerging markets, we are, to a certain extent, dependent on the availability of lower-cost handsets in addition to affordable tariffs by operators to support a continued increase of mobile subscribers. If operators are not successful in their attempts to increase the number of subscribers and/or stimulate increased usage, our business and operational results could be materially adversely affected.
Fixed and mobile networks converge and new technologies, such as IP and broadband, enable operators to deliver a range of new types of services in both fixed and mobile networks. We are dependent upon the market acceptance of such services, e.g. IPTV,music, internet and navigation in the handset, and on the outcome of regulatory and standardization activities in this field, such as spectrum allocation. If delays in standardization or market acceptance occur, this could adversely affect our business and operational results.
Changes in the regulatory environment for telecommunications systems and services could negatively impact our business.
Telecommunications is a regulated industry and regulatory changes affect both our customers’ and our operations. For example, changes in regulations that impose more stringent, time-consuming or costly planning,
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
zoning requirements or building approvals regarding the construction of radio base stations and other network infrastructure could adversely affect the timing and costs of new network construction or expansion and the commercial launch and ultimate commercial success of these networks. Similarly, tariff regulations that affect the pricing of services offered by operators could also affect their ability to invest in network infrastructure, which in turn could affect the sales of our systems and services. Radio frequency spectrum allocation between different types of usage may affect operator spending adversely or force us to develop new products to be able to compete in such market.
License fees, environmental, health and safety, privacy and other regulatory changes may increase costs and restrict operations of network operators and service providers. The indirect impact of such changes could affect our business adversely even though the specific regulations may not directly apply to our products or us.
Consolidation among network operators may increase our dependence on a limited number of key customers.
The market for mobile network equipment is highly concentrated, with the 10 largest operators representing more than 40 percent of the total market. Network operators have undergone significant consolidation, resulting also in a significant number of operators with activities in several countries. This trend is expected to continue, while also intra-country consolidation is likely to accelerate as a result of competitive pressure.
A market with fewer and larger operators will increase our reliance on key customers and, due to the increased size of these companies, may negatively impact our bargaining position and profit margins. Moreover, if the combined companies operate in the same geographic market, networks may be shared and less network equipment and associated services may be required. Another possible consequence of customer consolidation is that it could cause a delay in their network investments while they negotiate merger/acquisition agreements, secure necessary approvals, or are constrained by efforts to integrate the businesses. A recent development is also that network operators, without legal consolidation but through cooperation agreements, share parts of their network infrastructure, which may adversely affect demand for network equipment.
Consolidation among equipment and services suppliers may lead to increased competition and a different competitive landscape.
Industry consolidation among equipment suppliers could potentially result in stronger competitors that are competing as end-to-end suppliers as well as competitors more specialized in particular areas. Consolidation may also result in competitors with greater resources, including technical and engineering resources, than we have or reduce existing scale advantages for us. This could have a material adverse effect on our business, operating results, and financial condition.
We operate in a highly competitive industry which is subject to competitive pricing and rapid technological change.
The markets for our productswe operate in are highly competitive in terms of pricing,price, functionality and service quality as well as in the timing of development and introduction of new products and services and terms of financing. services.
We face intense competition from significant competitors and Chinese companies in particular have become relatively stronger in recent years. Our competitors may implement new technologies before we do, allowing them to offer more attractively priced or enhanced products, services or solutions, or they may offer other incentives that we do not provide. Some of our competitors may have greater resources in certain business segments or geographic markets than we do. We may also encounter increased competition from new market entrants, alternative technologies or evolving industry standards. The rapid technological change also results in shorter life-cycles for products, increasing the risk in all product investments. Our operating results significantly depend on our ability to
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
compete inContinuous price erosion is a symptom of this market environment, in particular on our ability to introducerapid technological change and we must counteract this by introducing new products to the market and toby continuously enhanceenhancing the functionality while reducing the cost of new and existing products, in order to cope with the continuous price erosion that is a result of the rapid technological change.
products. Our current and historical operations are subject to a wide range of environmental, health and safety regulations.
We are subject to certain environmental, health and safety laws and regulations that affect our operations, facilities and products in each of the jurisdictions in which we operate. We believe that we are in compliance with all material environmental, health and safety laws and regulations related to our products, operations and business activities. However, there is a risk that we may have to incur expenditures to cover environmental and health liabilities to maintain compliance with current or future environmental, health and safety laws and regulations or to undertake any necessary remediation. It is difficult to reasonably estimate the future impact of environmental matters, including potential liabilities due to a number of factors especially the lengthy time intervals often involved in resolving them.
Liability claims related to and public perception of the potential health risks associated with electromagnetic fields could negatively affect our business.
The mobile telecommunications industry is subject to claims that mobile handsets and other telecommunications devices that generate electromagnetic fields expose users to health risks. At present, a substantial number of scientific studies conducted by various independent research bodies have indicated that electromagnetic fields, at levels within the limits prescribed by public health authority safety standards and recommendations, cause no adverse effects to human health. However, any perceived risk or new scientific findings of adverse health effects of mobile communication devices and equipment could adversely affect us through a reduction in sales. Although Ericsson’s products are designed to comply with all current safety standards and recommendations regarding electromagnetic fields, we cannot assure you that we or the jointly owned Sony Ericsson Mobile Communications will not become the subject of product liability claims or be held liable for such claims or be required to comply with future regulatory changes that may have an adverse effectoperating results depend largely on our business. See also “Legal and Tax proceedings”ability to compete in the Board of Directors’ Report.
STRATEGIC AND OPERATIONAL RISKS
Short-term volatility in business mix may have impact on sales and gross margins.
Our sales to network operators are a mix of equipment, software and services, which normally generate different gross margins.
Telecom network solutions are delivered in three different ways:
as initial network buildouts, including equipment, software and network rollout services, and often also significant amounts of civil works and/or third-party products with lower gross margins than own products;
as subsequent network expansions (added geographical coverage or increased capacity) and upgrades to higher functionality, where the deliverables include higher shares of software and less rollout services and therefore normally have higher margins; and
as professional services, which have lower gross margins than equipment and software.
As a consequence, reported gross margin in a specific period will be affected by the overall mix of equipment, software and services as well as the relative content of third party products. Network expansions and upgrades have much shorter leadtimes for delivery than initial network buildouts. Such orders are normallythis market environment.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
placed with short notice by customers, i.e. less thanVendor consolidation may lead to a month,new competitive landscape
Industry convergence and consequently, variationsconsolidation among equipment suppliers could potentially result in demandstronger competitors that are difficult to forecast. As a result, changescompeting as end-to-end suppliers as well as competitors more specialized in our product and service mix may affect our ability to forecast andparticular areas. Consolidation may also impact our ability to detectresult in advance whether actual results will deviate from those forecasted.
Mostcompetitors with greater resources than we have or in reduction of our current scale advantages. This could have a material adverse effect on our business, is derived fromoperating results, and financial condition.
Operator consolidation may increase our dependence on a limited number of customers.customers
We derive most of our business from large, multi-year network build-out agreements with a limited number of significant customers. Although no single customer currently represents more than 105 percent of sales, thea loss of or a reduced role with a key customer for any reason could have a significant adverse impact on sales, profit and market share for an extended period.
In recent years, network operators have undergone significant consolidation, resulting in a large number of operators with activities in several countries. This trend is expected to continue, and also intra-country consolidation is likely to accelerate as a result of competitive pressure.
A market with fewer and larger operators will increase our reliance on key customers and may negatively impact our bargaining position and profit margins. Moreover, if the combined companies operate in the same geographic market, networks may be shared and less network equipment and associated services will be required. Another possible consequence of customer consolidation could be a delay in network investments pending negotiations of e.g. merger/acquisition agreements, securing necessary approvals, or integration of their businesses. Recently, network operators have started to share parts of their network infrastructure through cooperation agreements rather than legal consolidations, which may adversely affect demand for network equipment.
Some long-termLong-term frame agreements can expose us to risks related to agreed future price reductions or penalties.risk
Long-term agreements are typically awarded on a competitive bidding basis. In some cases, such agreements also include commitments to future price reductions. In order to maintain the gross margin even with such lower prices,price reductions, we continuously strive to reduce the costs of our products. We reduce costs through design improvements, negotiation of better purchase prices, allocation of more production to low-cost countries and other changes to benefit from new technical development, resulting in for example reduced component prices andincreased productivity in our own production. However, there can be no assurance that our actions to reduce costs will be sufficient or timelyquick enough to maintain our gross margin in such contracts.
Frame agreements often also provide for penaltiesTransforming into a more service-based company
Operators are increasingly outsourcing parts of their operations as a way to reduce cost and termination rightsfocus on new services. This has opened up a market which we have addressed. The growth rate is difficult to forecast and each new contract carries a risk that transformation and integration of the operations is not as fast or smooth as planned. Early contract margins are generally lower and the mix of new/old contracts may affect reported results negatively in a given period. Contracts normally cover several years and revenues are of a recurring nature. However, sometimes contract scopes are reduced with negative impact on sales and earnings. Ericsson is the event of our failure to deliver ordered products on time or if our products do not perform as promised,market leader in managed services but competition in this area is increasing, which may affecthave adverse effects on growth and profitability.
Success of R&D investments is uncertain
To be a player in our results negatively.industry requires large investments in technology and creates exposure to rapid technological and market changes. We spend significant amounts and resources in innovation work for new
We expend significant resources on product and technology R&D which may not be successful in the market.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Developing new products or updating existing products and solutions requires significant levels of financial and other commitments to research and development, which may not always result in success. We are also actively engaged in the development of
technology, standards that we are incorporating into our products and solutions. In order for us to be successful, those standardstechnologies, products and solutions must be accepted by relevant standardization bodies and by the industry as a whole. Our sales and earnings may suffer ifIf we invest in the development of technologies, products and technology standardssolutions that do not function as expected, are not adopted inby the industry, are not ready in time or are not acceptedsuccessful in the marketplace within the timeframe we expect, or at all.
Please also see section “Researchour sales and Development” in the Board of Directors’ Report and in Information on the Company.earnings may suffer.
WeAcquisitions and divestments
In addition to in-house innovation efforts, we make strategic acquisitions to get access to technology, competence or new markets.
In our industry, which requires huge investments in technology and at the same time is exposed to rapid technological and market changes, we make strategic investments in order to obtain various benefits, e.g. to reduce time-to-market, to gain access to technology and/or competence, to increase our scale or to broaden our product portfolio or expand our customer base. From time to time we also divest parts of our operations to optimize our product portfolio or operations. There are no guarantees that such acquisitions or divestments are successful or that we will succeed in integrating the acquired entities to gain the expected benefits within the time frame we expect or at all or in the timeframe we expect.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
all.
We enter into jointJoint ventures strategic alliances and third party agreements to offer complementary products and services.partnerships
If our partnering arrangements fail to perform as expected whether as a result(whether through an incorrect assessment of having incorrectly assessed our needs or the capabilities or financial stability of our strategic partners,partners), our ability to work with these partners or otherwise, our ability to develop new products and solutions may be constrained and this may harm our competitive position in the market. Additionally, our share of any losses from, or commitments to contribute additional capital to, joint ventures has andsuch partnerships may continue to adversely affect our financial position or results of operations.operations or financial position.
A limited number of suppliers of components, production capacity and R&D and IT services
Our ability to deliver according to market demands and contractual commitments depends significantly on obtaining timely and adequate supply of materials, components and production capacity and other vital services on competitive terms. Although we strive to avoid single-source supplier solutions, this is not always possible. Failure by any of our suppliers could interrupt our product supply or operations and significantly limit our sales or increase our costs. To find an alternative supplier or re-design products to replace components may also requiretake significant time. If we fail to anticipate customer demand properly, an over/under-supply of components and production capacity could occur. In many cases, some of our competitors utilize the same contract manufacturers and if they have purchased capacity ahead of us to license technologieswe could be blocked from other companies and successfully integrate such technologies with ouracquiring the needed products. It may be necessary in the future to seek or renew licenses relating to various aspects of these products. There can be no assurance that the necessary licenses would be available on acceptable terms, or at all. Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a non-exclusive basisThis factor could limit our ability to protectsupply our proprietarycustomers or could increase our costs. At the same time, we commit to certain capacity levels or component quantities, which, if unused, will result in charges for unused capacity or scrapping costs. We are also exposed to financial counterpart risks to suppliers where we pay in advance. We conduct regular supplier audits and evaluations to mitigate the risks mentioned as well as brand risks related to the suppliers’ compliance with e.g. labor and environmental regulations.
Product or service quality issues
Sales contracts normally include warranty undertakings for faulty products and often also provisions regarding penalties and/or termination rights in the event of a failure to deliver ordered products or services on time or with required quality. Although we undertake a number of quality assurance measures to reduce such risks, product quality or service performance issues may affect our products.results negatively.
Significant foreign exchange exposures
With the majority of our cost base in SEK and a very large share of sales in other currencies, and significant operations outside Sweden, our foreign exchange exposures are significant. Currency exchange rate fluctuations affect our consolidated income statement, balance sheet and cash flows when foreign currencies are exchanged or translated to SEK, which increases volatility in reported results.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
As market prices are predominantly established in USD or EUR, and with a net revenue exposure in foreign currencies, a stronger SEK exchange rate would generally have a negative effect on our reported results. Our products incorporate intellectualattempts to reduce the effects of exchange rate fluctuations through a variety of hedging activities may not be sufficient or successful, resulting in an adverse impact on our results.
Intellectual property rights (IPR) developed by us that may be difficult to protect or may be found to infringe on the rights of others.
WhileAlthough we have been issued a large number of patents, and other patent applications are currently pending, there can be no assurance that any of these patentsthey will not be challenged, invalidated, or circumvented, or that any rights granted under thesein relation to our patents will in fact provide competitive advantages to us.
In 2005, the European Union considered placing restrictions on the patentability of software. Although the European Union ultimately rejected this proposal, we cannot guarantee that they will not revisit this issue in the future. We rely on many software patents, and any limitations on the patentability of software may materially affect our business.
We utilize a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements in addition to relying on patent, copyright and trademark laws to protect our intellectual property rights. However, these measures may not be adequate to prevent or deter infringement or other misappropriation. Moreover, we may not be able to detect unauthorized use or take appropriate and timely steps to establish and enforce our proprietary rights. In fact, existing laws of some countries in which we conduct business offer only limited protection of our intellectual property rights, if at all.
Our solutions may also require us to license technologies from third parties. It may be necessary in the future to seek or renew licenses and there can be no assurance that they would be available on acceptable terms, or at all. Moreover, the inclusion in our products of software or other intellectual property licensed from third parties on a non-exclusive basis could limit our ability to protect proprietary rights in our products.
Many key aspects of telecommunications and data network technology are governed by industry-wide standards which are usable by all market participants. As the number of market entrants as well asand the complexity of the technology increases, the possibility of functional overlap and inadvertent infringement of intellectual property rights also increases. Third parties have asserted, and may assert in the future, claims, directly against us or indirectly against our customers, alleging that we infringeinfringement of their intellectual property rights. Defending such claims may be expensive, time consumingtime-consuming and divert the efforts of our management and/or technical personnel. As a result of litigation, we could be required to pay damages and other compensation directly or indemnifying our customers for such damages and other compensation, develop non-infringing products/technology or enter into royalty or licensing agreements. However, we cannot be certain that any such licenses if available at all, will be available to us on commercially reasonable terms.terms or at all.
Adverse resolution of litigation may harm our operating results or financial condition.Litigations
We are a party to lawsuits inIn the normal course of our business.business we are involved in legal proceedings. Litigation can be expensive, lengthy and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material adverse effect on our business, reputation, operating results, or financial condition.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
As a publicly listed company, Ericsson ismay be exposed to class-action lawsuits, in which plaintiffs allege that the Company or its officers have failed to comply with securities laws, stock market regulation or any other laws, regulations or requirements. Whether or not there is merit to such claims, the time and costs incurred to defend the Company and its officers and the potential settlement or compensation to the plaintiffs may have significant impact on our reported results and reputation. For additional information regarding certain of the lawsuits in which we are involved, see “Legal and Tax Proceedings” in the Board of Directors’ Report.
We rely on a limited number of suppliers for the majority of our components and electronic manufacturing services.
Our ability to deliver according to market demands depends in large part on obtaining timely and adequate supply of materials, components and production capacity on competitive terms. Failure by any of our suppliers could interrupt our product supply and could significantly limit our sales or increase our costs. If we fail to anticipate customer demand properly, an over/undersupply of components and production capacity could occur. In many cases, some of our competitors also utilize the same contract manufacturers, and we could be blocked from acquiring the needed components or from increasing capacity if they have purchased capacity ahead of us. This factor could limit our ability to supply our customers or could increase our costs. At the same time, we commit to certain capacity levels or component quantities, which, if unused, will result in charges for unused capacity or scrapping costs.
We are dependent upon hiring and retaining highly qualified employees.
We believe that our future success depends in large part on our continued ability to hire, develop, motivate and retain engineers and other qualified personnel needed to develop successful new products, support our existing product range and provide services to our customers. Competition for skilled personnel and highly qualified managers in the telecommunications industry remains intense. We are continuously developing our remuneration and benefit policies as well as other measures. However, we may not be as successful at attracting and retaining such highly skilled personnel in the future.
We are dependent on access to short-term and long-term capital.
If we do not generate sufficient amounts of capital to support our operations, service our debt, continue our research and development and customer finance programs or we cannot raise sufficient amounts of capital at the times and on the terms required by us, our business will likely be adversely affected. Access to short-term funding may decrease or become more expensive as a result of our operational and financial condition and market conditions or due to deterioration in our credit rating. We cannot assure you that additional sources of funds will be available or available on reasonable terms.
As a Swedish company operating globally, we have substantial foreign exchange exposures.
With the majority of our cost base being Swedish krona (SEK) denominated and a very large share of sales in currencies other than SEK, and many subsidiaries outside Sweden, our foreign exchange exposure is significant. Currency exchange rate fluctuations affect our consolidated balance sheet, cash flows and income statement when foreign currencies are exchanged or translated to SEK. Our attempts to reduce the effect of exchange rate fluctuations through a variety of hedging activities may not be sufficient or successful, resulting in an adverse impact on our results.
A stronger SEK exchange rate would generally have a negative effect on our competitiveness compared to competitors with costs denominated in other currencies.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
A significantBusiness interruption or other failure of our information technology (IT) operations or communications networks could have a material adverse affect on our operations and results.
Our business operations rely on complex IT operations and communications networks, which are vulnerable to damage or disturbance from a variety of sources. Having outsourced a significant portion of our IT operations, we depend partly on security and reliability measures of external companies. Regardless of protection measures, essentially all IT systems and communications networks are susceptible to disruption from equipment failure, vandalism, computer viruses, security breaches, natural disasters, power outages and other events. We also have a concentration of operations on certain sites, e.g. for production, R&D, network operation centers, logistic centers, shared services centers, where business interruptions could cause material damage and costs. Although we have assessed these risks, and implemented controls, performed business continuity planning and selected reputable companies for outsourced services, we cannot be sure that interruptions with material adverse effects will not occur.
Attract and retain highly qualified employees
We believe that our future success largely depends on our continued ability to hire, develop, motivate and retain engineers and other qualified personnel needed to develop successful new products, support our existing product range and provide services to our customers. Competition for skilled personnel and highly qualified managers in the telecommunications industry remains intense. We are continuously developing our corporate culture, remuneration, promotion and benefit policies as well as other measures aimed at empowering our employees and reducing employee turnover. However, there are no guarantees that we will be successful in attracting and retaining employees with appropriate skills in the future.
Access to short-term and long-term capital
If we do not generate sufficient amounts of capital to support our operations, service our debt and continue our research and development and customer finance programs, or if we cannot raise sufficient amounts of capital at the times and on the terms required by us, our business is likely to be adversely affected. Access to short-term funding may decrease or become more expensive as a result of our operational and financial condition and market conditions or due to deterioration in our credit rating. We cannot assure that additional sources of funds that we from time to time may need will be available or available on reasonable terms.
RISKS ASSOCIATED WITH OWNING ERICSSON SHARESRegulatory, Compliance and Corporate Governance Risks
Regulatory environment changes
Telecommunications is an industry subject to particular regulation and regulatory changes affect both our customers’ and our own operations. For example, regulations imposing more stringent, time-consuming or costly planning and zoning requirements or building approvals for radio base stations and other network infrastructure could adversely affect the timing and costs of network construction or expansion, and ultimately the commercial launch and success of these networks. Similarly, tariff and roaming regulations or rules on network neutrality could also affect operators’ ability or willingness to invest in network infrastructure, which in turn could affect the sales of our systems and services. Also radio frequency spectrum allocation between different types of usage may affect operator spending adversely or force us to develop new products to be able to compete.
License fees, environmental, health and safety, privacy and other regulatory changes, in general or particular to our industry, may increase costs and restrict operations for network operators and service providers or us. Also indirect impacts of such changes could affect our business adversely even though the specific regulations may not apply directly to our products or us.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Country-specific political, economic and regulatory risks
We conduct business throughout the world and are subject to the effects of general global economic conditions as well as conditions unique to a specific country or region. We conduct business in more than 170 countries, with a significant proportion of our sales to emerging markets in Asia Pacific, Latin America, Eastern Europe, the Middle East and Africa. We expect that sales to such emerging markets will represent an increasing portion of total sales, as developing nations and regions around the world increase their investments in telecommunications. We already have extensive operations in many of these countries, which involve certain risks, including volatility in gross domestic product, civil disturbances, economic and political instability, nationalization of private assets and the imposition of exchange controls.
Changes in regulatory requirements, tariffs and other trade barriers, price or exchange controls or other governmental policies in the countries where we do business could limit our operations and make the repatriation of profits difficult. In addition, the uncertainty of the legal environment in some regions could limit our ability to enforce our rights. In addition we must comply with the export control regulations of the countries and any trade embargoes in force at the time of sale and/or delivery. Although we seek to comply with all such regulations, even unintentional violations could have material adverse effects on our business, operational results and brand.
Compliance with high standards of corporate governance
Ericsson applies mandatory corporate governance statutes and rules, such as the Swedish Code of Corporate Governance and is also committed to several corporate responsibility and environmental initiatives. To ensure that our operations are executed in accordance with these requirements, our management system includes a robust corporate culture and a Code of Business Ethics as well as policies and directives to govern our processes and operations. We regularly perform communication and training in these areas, and we monitor and audit internal compliance with the policies and directives as well as our suppliers’ adherence to our Supplier Code of Conduct. There is however no guarantee that violations will not occur, which could have material adverse effects on our brand, reputation and business.
Compliance with a environmental, health and safety regulations
We are subject to certain environmental, health and safety laws and regulations that affect our operations, facilities and products in each of the jurisdictions in which we operate. We believe that we are in compliance with all material laws and regulations. However, there is a risk that we may have to incur expenditures to cover environmental and health liabilities to maintain compliance with current or future laws and regulations or to undertake any necessary remediation. It is difficult to reasonably estimate the future impact of environmental matters, including potential liabilities. This is due to several factors, particularly the length of time often involved in resolving such matters.
Potential health risks related to electromagnetic fields
The mobile telecommunications industry is subject to claims that mobile handsets and other devices that generate electromagnetic fields expose users to health risks. At present, a substantial number of scientific studies conducted by various independent research bodies have indicated that electromagnetic fields, at levels within the limits prescribed by public health authority safety standards and recommendations, cause no adverse effects to human health. However, any perceived risk or new scientific findings of adverse health effects of mobile communication devices and equipment could adversely affect us through a reduction in sales or through liability claims. Although Ericsson’s products are designed to comply with all current safety standards and recommendations regarding electromagnetic fields, we cannot guarantee that we or the jointly owned Sony Ericsson Mobile Communications or ST-Ericsson will not become the subject of product liability claims or be held liable for such claims or be required to comply with future regulatory changes that may have an adverse effect on our business.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Risks associated with owning Ericsson shares
Our share price has been and may continue to be volatile.volatile
Our share price has been volatile partly due in part to the high volatility in the securities markets generally and for telecommunications and technology companies in particular, and in part dueparticular. The share price is also likely to be affected by the development in our market, and our reported financial results and the expectations of financial analysts, as well as statements and market speculation regarding our future prospects. Variations between our actual financial results and expectations of financial analysts and investors, as well asor the timing or content of any profit warning announcements by us may have significant impact onor our share price.competitors.
Factors other than our financial results that may affect our share price include, but are not limited to, ato:
A weakening of our brand name or anyother circumstances causingwith adverse effects on our reputation, announcementsreputation.
Announcements by our customers, competitors or ourselvesus regarding capital spending plans of network operators, financialoperators.
Financial difficulties for network operators for whom we have provided financing or with whom we have entered into material contracts, awardsour customers.
Awards of large supply agreements or contracts for network roll-out. Additional factors include but are not limited to: speculationservice contracts.
Speculation in the press or investment community about the business level of business activity or perceived growth in the market for mobile communications services and equipment; technicalcommunications.
Technical problems, in particular those relating to the introduction and viability of new network systems like 3G or IPTV; actualLTE/4G.
Actual or expected results of ongoing or potential litigation involving ourselves or the markets in which we operate. Even though we may not be directly involved, announcementslitigation.
Announcements concerning bankruptcy or other similar reorganization proceedings involving, or any investigations into the accounting practicesprocedures of other telecommunications companies, may materially adversely affect our share price. even if we are not involved.
Our ability to forecast and communicate our future results in a manner consistent with investor expectations may affect the market value of our shares.expectations.
Currency fluctuations may adversely affect the trading prices of our Class B shares and ADSs and theshare value or value of any distributions we make thereon.dividends
Because our shares are quoted in Swedish kronor (SEK)SEK on NASDAQ OMX Stockholm (our primary stock exchange), but in USD on NASDAQ (ADSs) in USD,, fluctuations in exchange rates between SEK and USD may affect the value of your investment. In addition, because we pay cash dividends in SEK, fluctuations in exchange rates may affect the value of distributions if arrangements with your bank, broker or depositary in the case of ADSs, call for distributions to you in currencies other than SEK. An increasing part of the trade in our shares is carried out on alternative exchanges or markets, which may lead to less accurate share price information on NASDAQ OMX Stockholm or NASDAQ.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
This Annual Report includes forward-looking statements, including statements reflecting management’s current views relating to the growth of the market, future market conditions, future events and expected operational and financial performance. The words “believe”, “expect”, “foresee”, “anticipate”, “assume”, “intend”, “may”, “could”, “plan”, “estimate”, “will”, “should”, “could”, “aim”, “target”, “might” or, in each case, their negative, and similar words are intended to help identify forward-looking statements. Forward-looking statements may be found throughout this document, but in particular in the chapters “Board of Directors’ Report” and “Information on the Company”, and include statements regarding:
our goals, strategies and operational or financial performance expectations;
development of corporate governance standards, stock market regulations and related legislation;
the growth of the markets in which we operate;
our liquidity, capital resources, capital expenditures, our credit ratings and the development in the capital markets, affecting our industry or us;
the expected demand for our existing as well as new products and services;
the expected operational or financial performance of our joint ventures and other strategic cooperation activities;
the time until acquired entities will be accretive to income;
technology and industry trends including regulatory and standardization environment, competition and our customer structure;
our plans for new products and services including research and development expenditures.
Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we cannot assure you that these expectations will materialize. Because forward-looking statements are based on assumptions, judgments and estimates, and are subject to risks and uncertainties, actual results could differ materially from those described or implied herein. Important factors that could affect whether and to what extent any of our forward-looking statements materialize include, but are not limited to:
our ability to respond to changes in the telecommunications market and other general market conditions in a cost effective and timely manner;
developments in the political, economic or regulatory environment affecting the markets in which we operate, including trade embargoes, changes in tax rates, changes in patent protection regulations, allegations of health risks from electromagnetic fields, cost of radio licenses for our customers, allocation of radio frequencies for different purposes and results of standardization activities;
the effectiveness of our strategies and their execution, including partnerships, acquisitions and divestments;
financial risks, including changes in foreign exchange rates or interest rates, lack of liquidity or access to financing, changes in tax liabilities, credit risks in relation to counterparties, customer defaults under significant customer finance arrangements and risks of confiscation of assets in foreign countries;
the impact of the consolidation in the industry, and the resulting (i) reduction in the number of customers, and adverse consequences of a loss of, or significant decline in, our business with a major customer; (ii) increased strength of a competitor or the establishment of new competitors;
the impact of changes in product demand, price erosion, competition from existing or new competitors or new technologies or alliances between vendors of different types of technology and the risk that our products and services may not sell at the rates or levels we anticipate;
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
the product mix and margins of our sales;
the volatility of market demand and difficulties to forecast such demand;
our ability to develop commercially viable products, systems and services, to acquire licenses of necessary technology, to protect our intellectual property rights through patents and trademarks and to license them to others and defend them against infringement, and results of patent litigation;
supply constraints, including component or production capacity shortages, suppliers’ abilities to cost effectively deliver quality products on time and in sufficient volumes, and risks related to concentration of proprietary or outsourced production in a single facility or sole source situations with a single vendor;
our ability to successfully manage operators’ networks to their satisfaction with satisfactory margins;
our ability to maintain a strong brand and good reputation and to be acknowledged for good corporate governance;
our ability to recruit and retain qualified management and other key employees.
Certain of these risks and uncertainties are described further in “Risk Factors”. We undertake no obligation to publicly update or revise any forward-looking statements included in this Annual Report, whether as a result of new information, future events or otherwise, except as required by applicable law or stock exchange regulation.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
STOCK EXCHANGE TRADING
The Ericsson Class A and Class B shares are listed on NASDAQ OMX Stockholm. In the United States, the Class B shares are listed on NASDAQ in the form of American Depositary Shares (ADS) evidenced by American Depositary Receipts (ADR) under the symbol ERIC. Each ADS represents one Class B share.
In 2009, approximately 7 (20) billion shares were traded on NASDAQ OMX Stockholm and NASDAQ, of which about 74 (84) percent were on NASDAQ OMX Stockholm and about 26 (16) percent were on NASDAQ. Trading volume in Ericsson shares decreased by approximately 71 percent on NASDAQ OMX Stockholm and increased by approximately 7 percent on NASDAQ as compared to 2008. (Note: Ericsson had a reversed split of shares of 1:5 for the B-share on June 2, 2008 and a 10:1 to 1:1 change in the ADS ratio from June 10, 2008 which affects the comparative figures above.)
SHARE PRICE TREND
In 2009, Ericsson’s total market value increased by about 13 (–22) percent to approximately SEK 215 billion (SEK 191 billion in 2008). The OMXSP Index on NASDAQ OMX Stockholm increased by 47 percent, the NASDAQ telecom index (CUTL) increased by approximately 48 percent and the NASDAQ composite index (CCMP) increased by approximately 44 percent.
SHARE DATA
2009 | 2008 | 2007 | 2006 | 2005 | ||||||
Earnings per share, diluted (SEK) | 1.14 | 3.52 | 6.84 | 8.23 | 7.64 | |||||
Operating income per share (SEK)2) | 5.80 | 7.50 | 9.64 | 11.29 | 10.44 | |||||
Cash flow from operating activities per share (SEK) | 7.67 | 7.54 | 6.04 | 5.82 | 5.26 | |||||
Stockholders’ equity per share, basic, end of period (SEK) | 43.79 | 44.21 | 42.17 | 37.82 | 32.03 | |||||
P/E ratio | 57 | 17 | 11 | 17 | 18 | |||||
Total shareholder return % | 15 | –20 | –43 | 3 | 31 | |||||
Dividend per share (SEK)1)2) | 2.00 | 1.85 | 2.50 | 2.50 | 2.25 |
1) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
2) | For 2009 and 2008 excluding restructuring charges. |
3) | For 2009 as proposed by the Board of Directors. |
All share based performance indicators except Earnings per share and Stockholders’ equity per share are calculated based on average number of shares outstanding, basic. Comparison periods has been restated for consistency.
SHARE PRICES ON NASDAQ OMX STOCKHOLM
(SEK) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||
Class A at last day of trading1) | 65.00 | 59.30 | 76.80 | 138.00 | 137.50 | |||||
Class A high for year (April 17, 2009)1) | 78.80 | 83.60 | 148.50 | 154.50 | 143.50 | |||||
Class A low for year (January 20, 2009)1) | 55.40 | 40.60 | 73.00 | 104.50 | 99.00 | |||||
Class B at last day of trading1) | 65.90 | 58.80 | 75.90 | 138.25 | 136.50 | |||||
Class B high for year (April 17, 2009)1) | 79.60 | 83.70 | 149.50 | 155.00 | 145.00 | |||||
Class B low for year (January 20, 2009)1) | 55.50 | 40.60 | 72.65 | 104.50 | 97.00 |
1) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
OFFER AND LISTING DETAILS
Principal trading market—NASDAQ OMX Stockholm—share prices
The table to the right states the high and low sales prices for our Class A and Class B shares as reported by NASDAQ OMX Stockholm for the last five years. The equity securities listed on the NASDAQ OMX Stockholm Official Price List of Shares currently comprise the shares of 258 companies. Trading on the exchange generally continues until 5:30 p.m. (CET) each business day. In addition to official trading on the exchange, there is also trading off the exchange during official trading hours and also after 5:30 p.m. (CET). Trading on the exchange tends to involve a higher percentage of retail clients, while trading off the exchange often involves larger Swedish institutions, banks arbitraging between the Swedish market and foreign markets, and foreign buyers and sellers purchasing shares from or selling shares to Swedish institutions.
NASDAQ OMX Stockholm publishes a daily Official Price List of Shares which includes the volume of recorded transactions in each listed stock, together with the prices of the highest and lowest recorded trades of the day. The Official Price List of Shares reflects price and volume information for trades completed by the members.
Host market NASDAQ—ADS prices
The table to the right states the high and low sales prices quoted for our ADSs on NASDAQ for the last five years. The NASDAQ quotations represent prices between dealers, not including retail mark-ups, markdowns or commissions, and do not necessarily represent actual transactions.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
MARKET PRICES ON NASDAQ OMX STOCKHOLM AND NASDAQ
NASDAQ OMX Stockholm | NASDAQ | |||||||||||
SEK per Class A share | SEK per Class B share | USD per ADS1) | ||||||||||
Period | High | Low | High | Low | High | Low | ||||||
Annual high and low | ||||||||||||
20052) | 143.50 | 99.00 | 145.00 | 97.00 | 18.60 | 13.89 | ||||||
20062) | 154.50 | 104.50 | 155.00 | 104.50 | 20.57 | 14.44 | ||||||
20072) | 148.50 | 73.00 | 149.50 | 72.65 | 21.71 | 11.12 | ||||||
2008 | 83.60 | 40.60 | 83.70 | 40.60 | 14.00 | 5.49 | ||||||
2009 | 78.80 | 55.40 | �� | 79.60 | 55.50 | 10.92 | 6.60 | |||||
Quarterly high and low | ||||||||||||
2008 | ||||||||||||
First Quarter | 79.50 | 51.10 | 78.90 | 50.25 | 12.28 | 8.52 | ||||||
Second Quarter | 83.60 | 58.70 | 83.70 | 57.50 | 14.00 | 9.76 | ||||||
Third Quarter | 75.80 | 61.60 | 75.80 | 61.20 | 12.65 | 9.03 | ||||||
Fourth Quarter | 66.60 | 40.60 | 65.90 | 40.60 | 9.15 | 5.49 | ||||||
2009 | ||||||||||||
First Quarter | 78.00 | 55.40 | 78.70 | 55.50 | 9.65 | 6.60 | ||||||
Second Quarter | 78.80 | 64.10 | 79.60 | 64.00 | 9.92 | 8.10 | ||||||
Third Quarter | 78.60 | 65.80 | 79.50 | 66.10 | 10.84 | 9.10 | ||||||
Fourth Quarter | 76.25 | 64.70 | 76.95 | 65.25 | 10.92 | 8.94 | ||||||
Monthly high and low | ||||||||||||
August 2009 | 70.60 | 65.80 | 71.20 | 66.10 | 10.04 | 9.10 | ||||||
September 2009 | 74.30 | 67.10 | 74.70 | 67.50 | 10.84 | 9.29 | ||||||
October 2009 | 76.25 | 67.00 | 76.95 | 67.30 | 10.92 | 9.73 | ||||||
November 2009 | 75.40 | 65.65 | 76.00 | 66.30 | 10.74 | 9.56 | ||||||
December 2009 | 68.35 | 64.70 | 68.90 | 65.25 | 9.96 | 8.94 | ||||||
January 2010 | 72.20 | 65.20 | 73.30 | 65.90 | 10.31 | 9.46 | ||||||
February 2010 | 73.50 | 69.20 | 74.65 | 70.15 | 10.28 | 9.84 | ||||||
March 2010 | 78.70 | 69.90 | 80.00 | 70.95 | 11.33 | 9.84 |
1) | One ADS = 1 Class B share. |
2) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CHANGES IN NUMBER OF SHARES AND CAPITAL STOCK 2005–2009
Number of shares | Share capital | |||||
2005 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2006 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2007 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2008 | June 2, reverse split 1:5 | 3,226,451,735 | 16,132,258,678 | |||
2008 | July 23, new issue. (Class C shares, later converted to Class B) | 19,900,000 | 99,500,000 | |||
2008 | December 31 | 3,246,351,735 | 16,231,758,678 | |||
2009 | June 8, new issue (Class C-shares, later converted to Class B) | 27,000,000 | 135,000,000 | |||
2009 | December 31 | 3,273,351,735 | 16,366,758,678 |
SHARE CAPITAL
In the second quarter, as decided by the Board of Directors with authorization from the Annual General Meeting, a stock issue and a subsequent repurchase was made for the share-based employee remuneration program. 27 million Class C shares were issued and later repurchased as treasury stock. The shares were converted into Class B shares. The quotient value of the repurchased shares was SEK 135.0 million, representing less than 1 percent of capital stock, and the acquisition cost was SEK 135.1 million.
As of December 31, 2009, the Parent Company’s share capital was SEK 16,366,758,678 (16,231,758,678) represented by 3,273,351,735 (3,246,351,735) shares. The quotient value of each share is SEK 5.00 (SEK 5.00). As of December 31, 2009, the shares were divided into 261,755,983 (261,755,983) Class A shares, each carrying one vote, and 3,011,595,752 (2,984,595,752) Class B shares, each carrying one-tenth of one vote. As of December 31, 2009, Ericsson held 78 978 533 Class B shares as treasury shares.
TEN LARGEST COUNTRIES, OWNERSHIP
As of December 31, | ||||||
Percent of capital | 2009 | 2008 | ||||
Sweden | 47.9 | % | 47.2 | % | ||
United States | 24.2 | % | 25.0 | % | ||
United Kingdom | 7.9 | % | 8.9 | % | ||
Norway | 1.9 | % | 1.3 | % | ||
Canada | 1.2 | % | 1.1 | % | ||
Japan | 1.2 | % | 1.3 | % | ||
Switzerland | 1.1 | % | 1.7 | % | ||
France | 1.1 | % | 1.1 | % | ||
Netherlands | 0.8 | % | 0.8 | % | ||
Denmark | 0.8 | % | 0.8 | % | ||
Other countries | 11.9 | % | 10.8 | % |
Source: | Capital Precision, December 31, 2009. |
The information from Capital Precision is based on the shareholders’ domicile or in case of funds, areas of operation.
SHAREHOLDERS
As of December 31, 2009, the Parent Company had 690,726 shareholders registered at Euroclear Sweden AB (the Central Securities Depository—CSD), of which 1,421 holders had a US address. According to
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
information provided by Citibank, there were 242,229,433 ADSs outstanding as of December 31, 2009, and 5,068 registered holders of such ADSs. A significant number of the ADSs are held of record by banks, brokers and/ or nominees for the accounts of their customers. As of year end 2009, banks, brokers and/or nominees held ADSs on behalf of 240,915 accounts.
According to information known at year-end 2009, almost 77 percent of our Class A and Class B shares were owned by institutions, Swedish and international.
Our major shareholders do not have different voting rights than other shareholders holding the same classes of shares.
As far as we know, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person(s) separately or jointly.
TOP EXECUTIVES AND DIRECTORS, OWNERSHIP
Number of Class A shares | Number of Class B shares | Voting rights, percent | ||||
Top executives and directors as a group (28 persons) | 2,416 | 3,844,472 | 0.07 |
For individual holdings, see “Corporate Governance Report”.
The table shows the total number of shares in the Parent Company owned by top executives and directors as a group as of December 31, 2009.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The following table shows share information, as of December 31, 2009, with respect to our 15 largest shareholders, ranked by voting rights, as well as percentage of voting rights as of December 31, 2009, 2008 and 2007.
LARGEST SHAREHOLDERS, DECEMBER 31, 2009 AND PERCENTAGE OF VOTING RIGHTS, DECEMBER 31, 2009, 2008 AND 2007
Identity of person or group1) | Number of Class A shares | Percentage of total Class A shares | Number of Class B shares | Percentage of total Class B shares | 2009 Voting rights percent | 2008 Voting rights percent | 2007 Voting rights percent | |||||||
Investor AB | 102,664,038 | 39.22 | 61,414,664 | 2.04 | 19.33 | 19.42 | 19.49 | |||||||
AB Industrivärden | 76,680,600 | 29.29 | 0 | 0.00 | 13.62 | 13.28 | 13.36 | |||||||
Handelsbankens Pensionsstiftelse | 19,800,000 | 7.56 | 0 | 0.00 | 3.52 | 3.00 | 3.01 | |||||||
Swedbank Robur Fonder AB | 1,510,466 | 0.58 | 157,785,431 | 5.24 | 3.07 | 2.44 | 1.67 | |||||||
Skandia Liv AB | 15,270,077 | 5.83 | 17,079,591 | 0.57 | 3.02 | 2.89 | 2.75 | |||||||
Pensionskassan SHB Försäkringsföreningen | 12,672,000 | 4.84 | 0 | 0.00 | 2.25 | 2.26 | 2.27 | |||||||
BlackRock Advisors, Inc. | 0 | 0.00 | 101,632,540 | 3.38 | 1.81 | 0.00 | 0.06 | |||||||
Brandes Investment Partners LP | 0 | 0.00 | 55,603,761 | 2.54 | 1.36 | 2.08 | 1.73 | |||||||
AMF Pensionsforsakring AB | 800,000 | 0.31 | 65,104,680 | 2.16 | 1.30 | 1.55 | 0.89 | |||||||
OppenheimerFunds, Inc. | 0 | 0.00 | 72,541,045 | 2.41 | 1.29 | 1.31 | 1.57 | |||||||
Dodge & Cox, Inc. | 0 | 0.00 | 29,149,700 | 1.96 | 1.05 | 0.98 | 0.00 | |||||||
Gamla Livförsäkringsbolaget SEB Trygg Liv | 4,675,919 | 1.79 | 8,475,600 | 0.28 | 0.98 | 1.04 | 1.04 | |||||||
Handelsbanken Fonder AB | 2,335 | 0.00 | 52,894,889 | 1.76 | 0.94 | 1.02 | 1.08 | |||||||
Norges Bank Investment Management | 0 | 0.00 | 50,368,857 | 1.67 | 0.89 | 0.46 | 0.35 | |||||||
SEB Investment Management AB | 480,909 | 0.18 | 45,030,567 | 1.50 | 0.89 | 0.98 | 0.78 | |||||||
Others | 27,199,639 | 10.40 | 2,294,514,427 | 74.49 | 44.68 | 47.29 | 49.95 | |||||||
Total | 261,755,983 | 100.00 | 3,011,595,752 | 100.00 | 100.00 | 100.00 | 100.00 | |||||||
1) | Sources: Capital Precision, December 2009 and 2008. Euroclear Sweden AB, December 31, 2007. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Telecommunications plays a central role in the daily life of practically every person on earth. It is fundamental to the global economy and increasingly important to the environment. Over the last decade, mobile became a ubiquitous communications service, enabling people from all regions and walks of life to connect at an unprecedented level.
With the widespread adoption of mobile communications for voice and text messaging, the impetus to add more voice subscribers has started to diminish. Growth will continue with more than two billion new mobile voice subscriptions expected over the coming years but these will mainly come from low-usage customers in developing areas or users with multiple subscriptions. This dilutes average revenue per subscription but the underlying growth in minutes of use per user is stronger than the subscription dilution. Thus the total voice traffic continues to grow.
Mobile broadband is fast becoming the main growth driver for operators and equipment suppliers globally. Consumer behavior is changing with the introduction of mobile broadband prompting innovation in a number of areas and driving the need for ever greater bandwidth and data speeds. The industry focus is shifting from connecting places and people to connecting devices and applications.
There are many devices whose utility is enabled by mobile broadband, including mobile phones, personal computers and a growing number of electronic devices and software applications. Wireless connectivity will make broadband mobile and affordable to the majority of people. Particularly in the case of machine-to-machine communications, it will also enable applications for a variety of industries and uses (e.g. smart grids, transportation, financial services and healthcare.) This is far beyond the capability and scope of today’s networks.
We envision 50 billion network connections over the next decade, compared with some 5 billion currently. The underlying network technologies must be enhanced to accommodate such a vast number of connections. We expect Ericsson to benefit from this as network operators and service providers:
Accelerate the transition from legacy technologies to IP- based technologies.
Respond to rising demands for services that aid economic, societal and environmental development.
Invest in mobile and fixed broadband access, multi-service edge routing, IP multimedia subsystems (IMS) based services and Metro optical and/or radio transport.
Prioritize suppliers that combine technology with services for lower total cost, faster time-to-market and reduced project risks.
Outsource more of their network-related activities and operations for increased flexibility and focus more on the consumer experience.
These are all areas where the Company is well positioned and continues to invest heavily. Ericsson is now focused exclusively on serving network operators and service providers while device manufacturers and consumers are addressed via two joint venture companies, i.e. ST-Ericsson and Sony Ericsson.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
ICT, especially mobile, positively affects GDP levels as well as the environment
Even though the benefits of a connected society are difficult to precisely quantify, telecommunications has become as essential to any nation’s infrastructure as water, transportation or electricity. As already well demonstrated by telephony, there is clear evidence that the ubiquitous availability of affordable ICT services has a positive effect on any country’s economy. The ICT industry generates approximately 2 percent of global CO2emissions. However, ICT could potentially reduce the other 98 percent by 15 percent or more.
A higher GDP level obviously enables more broadband adoption but studies of the relationship between broadband penetration and economic development indicate that broadband plays an even more fundamental role than telephony in accelerating the economic and social development of a country. Mobile broadband networks, along with suitable devices and appropriate applications, can accelerate broadband penetration by avoiding the relatively more expensive and time-consuming deployments of fixed networks.
Mobile communications market
Mobile communication is the service of choice for consumers across the world and we believe there is considerable potential for further growth with the introduction of mobile broadband. During 2010, Ericsson expects mobile subscriptions to grow to more than 5.2 billion, mainly driven by voice in developing markets and broadband in more developed markets.
Although at a slower pace than in previous years, mobile communications continued to grow in 2009 with over 600 (670) million new subscriptions added. The number of mobile phones shipped was approximately 1,100 (1,190) million, mainly due to less subscriber additions and longer replacement intervals. Based on vendor reports and Ericsson estimates, the mobile systems market is estimated to have declined by more than 10 percent due to the economic slowdown and weaker demand for GSM. However, we believe investments in mobile communications are below optimal levels—suggesting the possibility of increased spending once the economy recovers.
At the end of 2009, the 4.6 (4.0) billion mobile subscriptions worldwide represented a global subscription penetration of 64 (59) percent (the actual number of mobile users is probably some 20-25 percent less due to inactive and multiple subscriptions). The High Speed Packet Access (HSPA) version of 3G/WCDMA is now deployed in 303 (247) commercial networks across 130 (110) countries. Ericsson supplies 144 (115) of these networks, serving the majority of mobile broadband subscribers.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The number of subscribers covered by commercial 3G/ WCDMA networks remains well below half that of 2G/GSM. Subscribers to mobile broadband services worldwide reached 360 (180) million by the end of 2009. The vast majority of the 360 million are handheld devices and the figure is set to soar with the mass consumer adoption of mobile internet devices such as smartphones and netbooks. This additional demand presents a significant opportunity for network infrastructure and systems integration, areas in which Ericsson has a market-leading position.
Fixed and mobile broadband main market drivers
The number of fixed and mobile broadband subscriptions is expected to increase five times between 2009 and 2015 to approximately 4 billion, of which the vast majority will be subscriptions for mobile broadband. Broadband internet access revenues for fixed operators (including cable operators) are expected to grow from around 25 to around 30 percent of total revenues in the next five years. Similarly, data’s share of mobile operators’ revenue, which is currently some 25 percent, is expected to account for a progressively larger portion of global mobile revenues over the next five years.
These projections assume the cost for mobile data services aligns with subscriber expectations, i.e. data must be priced lower than voice when comparing the amount of bandwidth consumed. Hence, operators may implement cost-efficient solutions for delivering more network capacity with revenues based on service value rather than the amount of capacity. This motivates a next-generation network that offers fixed and mobile convergence and leverages IP technology for a lower cost, higher performance broadband service.
However, operators’ willingness to invest in modernizing their networks can be inhibited by governmental regulations on how they can monetize their investments. For example, open access policies seek to facilitate the entrance into broadband markets for new competitors by requiring existing operators to lease access to their networks at regulated wholesale rates. The basic idea is that the more competitive consumer broadband markets are, the better the service offering, i.e. at lower prices, to more consumers. The alternative approach is to avoid forcing operators to lease network assets to competitors as it can undermine the incentive to invest.
The major challenge is identifying regulatory policies and practices that promote ubiquitous availability without undermining competition by mandating how an operator can monetize usage and capacity consumption.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Mobile broadband creates bottlenecks in parts of the network
The deployment of access nodes that connect devices at ever faster speeds increases subscriber uptake which can quickly create bottlenecks in other parts of the network especially on the backhaul part of the transport network.
Backhaul capacity needs to be provided more dynamically and efficiently than is possible with traditional backhaul solutions. Support of multiple services is required to ensure continuity for existing services as well as allowing new services. Operators want to maximize investments in existing infrastructure while leveraging the capabilities of new technologies.
Roughly two-thirds of backhaul globally is provided via microwave radio with the notable exception of the US and China where fiber is the preferred method. The dynamic nature of multi-service broadband access requires changes in the network technology used—a change from TDM/STM/ATM structures to IP/Ethernet. Ericsson already has a market-leading position in microwave radio systems and with the acquisitions of Marconi and Redback, the Company is well positioned with optical transmission systems and IP/Ethernet products.
Convergence and network transformation in focus
Placing greater emphasis on smarter networks and bundled service offerings, operators are starting the conversion to all-IP broadband networks. An increase in broadband access, routing and transmission deployments, combined with next-generation service delivery and revenue management systems, means operators will be able to offer a broader range of services to key customer segments. Each segment (business, consumer and wholesale) requires a different and varying mix of fixed, mobile and converged services.
Ericsson has developed a network architecture that meets consumer desires and operator requirements for converged services, covering the device ecosystems, fixed and mobile broadband access, transport, control, applications, revenue management, services and operations management. All the components have been integrated for a high performance and scalable end-to-end solution.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Ericsson’s full-service broadband solution has been built from in-house development, e.g. mobile broadband and IMS, and is complemented by the acquisitions of IP-routing products (Redback), optical transport (Marconi), deep fiber access systems (Entrisphere) and IPTV (Tandberg). The Company has also developed a comprehensive network transformation service that leverages professional services such as consulting and systems integration.
The internet is changing TV
The vision of the television industry is a simple one: to let you watch whatever, whenever and wherever you want and to help you discover other interesting programs and share your favorites and comments with other people. We believe that the best way to achieve this is to use internet technology enhanced with telecom-grade performance.
Consumers are already using the internet to find new ways of accessing TV, with interactive on-demand capabilities now a basic expectation. Despite this trend, we do not expect operators to become marginalized as bit pipe providers. Efficient bit pipes will be needed, but to differentiate their services, operators will need to continue to leverage their network capabilities. This is where IMS comes into play to provide the reliability and combination of services required for a portfolio of applications which differentiates from the competition.
Today some 1.2 billion (850 million) households have television services, of which only 25 (20) million are currently served by IPTV. This number is expected to grow to above 130 million by end of 2015. In the same time period, DSL-based broadband access is forecasted to grow from some 300 million to 400 million households and cable-TV-based broadband access is estimated to grow from 90 million to more than 100 million households. FTTx-based broadband access is estimated to increase from 35 million to some 100 million households. Building on the acquisitions of Tandberg Television and Entrisphere, the Company continues to invest in a leading position in IPTV and FTTx broadband access.
Mobility is changing the internet
Today, less than 40 percent of mobile subscribers are also internet users. However, the increasing use of high-speed applications in the fixed environment is stimulating a parallel expectation on the mobile side. When people become accustomed to using bandwidth-intensive applications at home or in the office, they tend to want them everywhere they go.
Multimedia-capable mobile internet devices and affordable mobile broadband access are driving a change in usage. Users will be able to create and discover content of personal interest and instantaneously share ideas and information with friends and colleagues. We see mobile internet devices helping to accelerate consumer demand for wireless internet access. This will have the greatest impact on emerging markets, where household PC penetration is only about 10 percent compared with well over 60 percent in developed markets. This is particularly significant as there are more than three times as many households in emerging markets as there are in more developed markets.
The Company has established a product unit to provide mobile broadband connectivity for notebook PCs and other mobile internet devices. Three of the world’s largest notebook manufacturers are already using Ericsson embedded modules. In addition, Intel, among others, has signed an agreement to use Ericsson’s mobile broadband technology.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operator consolidation and network sharing
Operator consolidation continues in all regions globally. In the Americas, consolidation has substantially reduced the number of operators. In Europe, mergers continue along with other collaborations such as network sharing and outsourcing of network operations. In other regions, operator consolidation has led to the emergence of rapidly growing pan-regional operators, particularly in the CEMA markets (Central and Eastern Europe, Middle East and Africa). Western European-based operators continue to invest in operators in developing markets such as Brazil and India. There have also been attempts to combine certain Indian operators with African operators but with little progress so far.
Despite the trend for operator consolidation, the number of mobile operators has actually increased in many regions over the past few years, with the notable exception of the Americas. The introduction of mobile number portability in many markets has simplified service substitution, leading to fierce competition and declining market share for the top two players in each market. Consequently, mobile operator margins are under pressure from the more intense competition which requires lower costs to compensate.
Network sharing offers potentially significant capex and opex savings to operators. However, the overall impact of network sharing should ultimately be neutral for mobile equipment vendors. To a certain extent, short-term disruption of capital expenditure plans or re-negotiation of contracts with the network sharing companies may be offset by faster coverage buildout, an earlier entry into expansion phases and increased sales of professional services, particularly network integration and managed operations. Over the longer term, the majority of savings come from shared plant and property rather than equipment as the equipment has to be dimensioned for the total traffic load of the combined networks.
Ericsson is well positioned to benefit from operator consolidation with a suite of solutions for network sharing and a well proven capability for outsourcing network operations, consulting and systems integration as well as a strong presence with consolidating companies.
Opportunities in Professional Services
Outsourcing of network operations is another form of consolidation. Operators are able to tap into the global scale and efficiency offered by a company like Ericsson via managed services. Ericsson is well positioned to benefit from this trend for operator consolidation with a suite of professional services and a well proven capability for outsourcing network operations.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Demand for professional services (i.e., managed services, consulting, systems integration, network optimization and modernization) is growing rapidly. The demand for professional services is increasing, driven by operators’ desire to optimize capex investments, take out unnecessary costs and deliver a competitive end-user experience.
The potential market for managed services is larger than the market for network equipment and related deployment services. A mature operator is estimated to typically spend some 5–6 percent of revenues on network equipment and 10–12 percent on operating its network.
More than two-thirds of network operational expenses today are believed to be handled in-house by operators but network operations are increasingly being outsourced as operators realize the competitive advantages and potential cost savings. Therefore, the available market for managed services is expected to continue to show good growth prospects.
Over time, as networks evolve, grow and become more versatile, their complexity increases and so does the number of operations and business support systems. This creates many opportunities to help operators streamline both networks and operations. One aspect of streamlining is reducing the number of support systems needed for the network. The other aspect of streamlining comes from outsourcing operations. Operators may also ask for advice and best-practice to create efficiency in their own operations. An indicator of this streamlining or efficiency trend is the increasing demand for consulting and systems integration services like revenue assurance, operations and business support systems transformation and service assurance.
Replacement rates affect mobile handset sales
With subscriber additions slowing, mobile phone replacements have increasingly become the key market driver, now accounting for roughly two-thirds of shipments and an even higher proportion of sales.
Mobile phone replacement tends to go in tandem with contract renewal. In mature markets, this is often operator driven via subsidies that lower or eliminate the upfront cost of buying a new phone in exchange for multi-year subscription commitments. Many operators are now pushing SIM card only plans to reduce phone subsidies for lower value subscriptions and prioritizing subsidies for smartphones and mobile internet devices that carry much higher value subscriptions. This is slowing the demand for replacement phones, especially in the low- to mid-end price range, as consumers postpone upgrading their mobile phones.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
In emerging markets, operators often subsidize multi SIM card plans rather than handsets. This has stimulated the market for ultra low priced phones rather than curtailing subscription growth or mobile phone usage. With inflationary and other economic pressures rising in these markets, consumers are buying more refurbished or unlicensed phones. Manufacturers of illicit phones enjoy cost advantages because they do not pay for licenses, test their products for safety or provide warranties or offer sales support. Some countries, such as India, are especially concerned about personal safety and national security of unlicensed phones, but enforcement is far less strict in most other emerging markets.
Sony Ericsson has refined its product portfolio and value proposition to target an increased share of the replacement market.
Effects of the macro-economic slowdown
While not a trend, the economic recession affected Ericsson’s business development for networks, but with improving operational efficiency, a market leading position, scale and a solid balance sheet, the Company is in a good position to meet continued tough market conditions.
The macro-economic developments are externally driven and beyond the control or the influence of the Company. But the Company does control the cost structure and is adjusting to a more challenging market environment including the effects of a global recession.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONTENTS
COMPANY HISTORY DEVELOPMENT AND STRATEGYDEVELOPMENT
INTRODUCTIONInnovating to empower people, business and society
Our origins date back to 1876 when Alexander Graham Bell filed a patent application in the United States for the telephone. The same year, Lars Magnus Ericsson opened a small workshop in Stockholm to repair telegraph instruments. That same year in the United States, Alexander Graham Bell filed a patent application for the telephone. Lars Magnus Ericsson soon recognized the great potential of voice-based telecommunications and realized that the technology could be improved. He started to developinstruments and sell his own telephone equipment and within a few years reached an agreement to supply telephones and switchboards to Sweden’s first telecom operator. Stockholm soon had the highest telephone density in the world.equipment.
Today, Ericsson is a leading provider of communications equipment, and related professional services and multimedia solutions tosolutions. Our customers are operators of mobile and fixed networks worldwide. Over 1,000 networks in more than 175 countries utilize our equipment and we are oneequipment. More than 40 percent of the few companies worldwide that support end-to-end solutions for all the main global standards of the GSM/WCDMA track.mobile traffic goes through Ericsson equipment.
We invest heavily in R&D and actively promote standardization and open systems. As a result, weWe have a long history of innovation and pioneering of future technologies for more efficient and higher quality telecommunications.
Also reflecting our ongoing commitment to technology leadership, wetelecommunications technologies. We have one of the industry’s most comprehensive intellectual property portfolios containingwith approximately 24,00025,000 patents.
Technical milestones
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
VISION, GOAL AND STRATEGY
Ericsson’s vision is to“to be the prime driver in an all-communicating world—world”—a world in which any person can use voice, text, images and video to share ideas and access information whenever and wherever he/she wants.they want. Within a few years, we foresee communications extending beyond places and people to devices. Then everything that benefits from being connected will be. We strongly believe that affordable and generally available telecommunications are a prerequisite for social and economic development, and that the ICT industry is a key enabler for a sustainable and prosperous society and for bridging the digital divide.
Our strategy to realize our vision and reach our goals is to:
Excel with a leading portfolio in mobile and converged networks.
Expand in services by enabling world-class operations and network evolution.
Extend in multimedia, with leading applications and business goalsupport solutions.
Successful execution of the strategy is to create valuebuilt on (1) close customer relations; (2) technology and services leadership and (3) operational excellence in all we do.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Close customer relations
The foundation for our stakeholdersbusiness is our strong, long-term customer relationships. We have been present in most of our markets for more than 100 years. We work closely with the operators to understand their business, their objectives and generate growth, profit and cash flow that are sustainable over the longer term. We measure performance in three fundamental metrics: customer satisfaction, employee satisfaction and financial returns for our owners. We believe that highly satisfied customers, empowered employees and an enduring capability for value creation for our shareholders help to assure a competitive advantage.technology needs.
We strive to be the preferred business partner to our customers and we are a major supplier to most of the world’s leading mobile operators and many of the world’s leading wireline operators. We believe that our ability to offer superior end-to-end solutions—network infrastructure, professional services, multimedia solutions and core handset technology—together with our in-depth knowledge of consumer requirements, makeservices makes us well positioned to assist operators with their network development and operations.
We are a market leader in GSM and WCDMA/HSPA network equipment and related rollout services, systems integration and managed services. We are growing in the area of wireline broadband networks, in metro Ethernet solutions and in optical transport, and we are a provider of multimedia solutions for both wireless and wireline operators.
Our strategy to realize our vision and business goal is to:
excel in network infrastructure,
expand in services, and
establish a position in multimedia solutions
to make people’s lives easier and richer, provide affordable communication for all and enable new ways to do business.
Successful execution of the strategy is built on (1) addressing customer needs; (2) innovation for technology leadership and (3) operational excellence in all we do.
Addressing customer needs
The foundation for our business is the strong and long-term relationships we have with our customers, and we work closely to understand their business and technology needs. Needs naturally vary among the customer base, however, with some apparent general needs:
From a market perspective, operators need solutions and support in emerging markets for managing the growing voice subscriber base and traffic, and in mature markets for managing the growing mobile broadband subscriber base and data traffic.
From a technology perspective, the ongoing migration to one all-IP-based broadband network combining broadband Internet, voice and image traffic is a primary challenge. Further, operators desire energy-efficient multi-technology solutions, driven by environmental and cost improvement opportunities as well as ability for effective forward migration.
From an operational perspective, operators seek solutions and support to gain flexibility, reduce operating expenses and improve efficiency for network operation and maintenance.
With our significant scale advantage, tailoredcustom-tailored end-to-end solutions and local presence, we are able to serve as a true partner—providing fast time to market (TTM)time-to-market and competitive total cost of ownership (TCO)—and helpownership—helping our customers to fulfillreach their business objectives.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Ericsson has 82,500 employees across the world, close to our customers. Local operations have strong technical, commercial and administrative support from specialist functions in R&D, supply, network operations centra and Group functions.
Innovation for technologyTechnology and services leadership
Innovation is an important element of our corporate culture andculture. It is key to our competitiveness and future success. We have a long tradition of developing innovative communication technologies, including technologies that form the base for industry standards.technologies. By early involvement in creating new standards and technologies we are often first to market with new solutions—a distinct competitive advantage.
We are a market leader in GSM, WCDMA/HSPA, LTE, packet core networks, microwave transmission, revenue management applications and managed services. We are growing in the area of wireline access, metro Ethernet solutions and optical transport, and we are a provider of multimedia solutions and brokering services for both wireless and wireline operators and TV broadcasters. We have recently acquired Nortel’s CDMA and LTE operations in North America.
Within our ambitious R&D program, we have approximately 19,800 (19,300)18,300 (19,800) employees in 17 (17) countries worldwide and in 2009 we invested SEK 3127 billion (excluding SEK 36 billion restructuring charges) or 1513 percent of sales on research and development during 2008. The vast majoritysales. Most of this is invested in product development, of which the majoritygreater part is in mobile communications network infrastructure. We have continued to invest in strategically important areas of broadband access, mobile systems like LTE, converged core networks, service layer, IP technology and multimedia. Our ability to generate world-class innovations is enhanced through cooperation with a variety of partners, including customers, universities and research institutes.
INTELLECTUAL PROPERTY RIGHTS (IPR) AND LICENSING
Through many years of involvement in the development of new technologies we have built up a considerable portfolio of intellectual property rights (IPR) relating to telecommunications technologies.. As of December 31, 2008,2009, we held approximately 24,000 (23,000)25,000 (24,000) patents worldwide, including patents essential to the standards GSM, GPRS, EDGE, WCDMA, HSPA, MBMS, TD-SCDMA, cdma2000, WiMAX and next-generation LTE. We also hold essential patents for many other areas, e.ge.g. IMS, Voice-over-IP, ATM, Messaging, WAP, Bluetooth, SDH/SONET, WDM and Carrier Ethernet.
Our intellectual property rights are valuable business assets. We license these rights to many other companies including infrastructure(infrastructure equipment suppliers, embedded module suppliers, handset suppliers and mobile application developers,developers) in return for royalty payments and/or access to additionaltheir intellectual property rights. In addition, we acquire rights via licenses to utilize intellectual property rights of third parties. We believe that we have access to all relatedessential patents that are material to our business in part or in whole.
For more information, please see also Risk Factors, “Strategic“Market, Technology and OperationalBusiness Risks” and Board of Directors’ Report, “Research and Development”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operational excellence in all we do
We are convinced thatEricsson is focused mainly on infrastructure solutions and services for telecom operators. This focus enables us to have a functional organization and leverage our scale to gain competitive advantage. The Group is organized in some 200 legal entities, aligned to a common functional structure, using standardized processes.
Group functions coordinate the Company’s strategies, operations and resource allocation and establish the necessary directives, processes and organization for the effective governance of the Group. They also manage support units, such as Ericsson Research, IT and shared service centers.
The main operational functions/processes are:
Business units:
product management
product/service and solution development
sourcing, manufacturing and supply of products
sales of spare parts and repair.
Market units:
marketing and sales
service delivery
customer support.
Operational excellence is aan important competitive advantage. Thereforeand we arefocus on three areas:
Speed—to reduce time to market and working capital and to increase flexibility and responsiveness.
Scale—to leverage our market-leading position, enabling us to afford developing best-in-class solutions.
Skills—to work according to standardized processes with highly educated employees and partners.
We continuously focusingfocus on how to improve our internalimproving processes, support systems and our ways of working. Our mission, to take our customers forward in the best possible wayempower people, business and society, requires well developedstrong change capabilities and efficient and effective processes, that consistently yielddelivering innovative, high-quality products and servicessolutions with low cost of ownership.
No matter how farThe Company culture of innovation and competitiveness and continuous competence development of our employees are key enablers for success. Ericsson Academy is one of our vehicles to achieve this—a new, innovative forum for learning and sharing of ideas and knowledge, open to our employees and available to our customers during 2010. We believe this will sharpen our employees’ skills, enhance performance for our customers, and give us a competitive edge in the new business and technology landscape.
To further increase flexibility and efficiency and reduce cost, we have come, we will always continue to drive operational excellence across the company. By continuously learning from our experiencesseveral partnerships with strong players in outsourced manufacturing, IT services and the needscertain areas of our customers we will become an even better company.R&D and services. Examples are: Flextronics, HP, IBM and Tieto.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Legal name:name of the Parent Company:
Telefonaktiebolaget LM Ericsson (publ)
Organization number:
556016-0680
Legal form of the Parent Company:
A Swedish limited liability company, organized under the Swedish Companies Act. The terms “Ericsson”, “the Company”, “the Group”, “us”, “we”, and “our” all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries.
Country of incorporation:
Sweden.
Date of incorporation:
The Parent Company was incorporated on August 18, 1918, as a result of a merger between AB LM Ericsson & Co. and Stockholms Allmänna Telefon AB.
Domicile:
Our registered addressoffice is Telefonaktiebolaget LM Ericsson, SE-164SE–164 83 Stockholm, Sweden. Our headquarters are located at Torshamnsgatan 23, Kista, Sweden.
Our telephone number is +46Telephone number:
+46 10 719 0000.0000
Our web site is www.ericsson.com.Website:
www.ericsson.com
Agent in the US:
Ericsson Inc., Vice President Legal Affairs, 6300 Legacy Drive, Plano, Texas 75024. Telephone number: +1 972 583 0000.
Shares:
OurEricsson’s Class A and Class B shares are traded on NASDAQ OMX Stockholm. In the United States,US, our American depository sharesDepository Shares (ADS), each representing 1one underlying Class B share, are traded on NASDAQ.
Parent Company operations:
The business of the Parent Company, Telefonaktiebolaget LM Ericsson, consists mainly of corporate management, holding company functions and internal banking activities. Parent Company operations also include customer credit management activities performed by Ericsson Credit AB on a commission basis.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Subsidiaries and associated companies:
For a listing of our significant subsidiaries, please see Notes to the Parent Company Financial Statements—Note P9, “Investments”. In addition to our joint venture with SONY Corporation,ventures Sony Ericsson and ST-Ericsson, we are engaged in a number of other minor joint ventures, cooperative arrangements and venture capital initiatives. For more information regarding risks associated with joint ventures, strategic alliances and third partythird-party agreements please see Risk Factors, “Strategic“Market, Technology and OperationalBusiness Risks”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Documents on display:
We file annual reports and other information (normally in Swedish only) for certain domestic legal entities with Bolagsverket (Swedish Companies Registration Office) pursuant to Swedish rules and regulations.
You may order any of these reports from their web sitewebsite www.bolagsverket.se. If you access these reports, please be aware that the information included may not be indicative of our published consolidated results in all aspects. Other than information related to the Parent Company, only consolidated numbers for the Group totals are included in our reports.
Filing in the US:
Annual reports and other information are filed with the Securities and Exchange Commission (SEC) in the United States, pursuant to the rules and regulations that apply to foreign private issuers. Electronic access to these documents may be obtained from the SEC’s website, www.sec.gov/edgar/searchedgar/webusers.htm, where they are stored in the EDGAR database.
As the global economy braces for a contraction in the near term, we look longer term to the opportunities of broadband everywhere and the operator investments required for network transformation to all IP.
Network infrastructure is addressing operators’ capex while professional services mainly addresses operators’ opex. Mobile phones are addressed via the Sony Ericsson JV directly to consumers but most often with operators as distributors. Mobile platforms are sold to handset and PC manufacturers.
Ericsson believes the following key technologies will drive operator spending for the next several years: mobile and fixed broadband access; IP and multi-service switching; IP multimedia subsystems (IMS) based services like IPTV and VoIP; metro optical and radio transmission. Ericsson expects operators to accelerate the transition from legacy technologies such as TDM (circuit) switching and ATM (packet) in favor of IP- (Ethernet) based technologies for both switching and transmission; all areas in which the Company continues to invest heavily.
We expect the Company to continue to benefit from the underlying demand drivers for communications services, especially mobile broadband, that improve productivity and contribute to sustainable economic, societal and environmental development.
Mobile communication
Mobile communication has become the consumer service of choice for the majority of the world’s population over the last few years. We expect people to continue to use their mobile phones, even during economic downturns . And,evolved with the opportunities made available by high-speed mobile data services, we believe there is still considerable growth potential for the mobile communications industry.
2008 was another growth year for mobile communications with some 675 (586) million new subscriptions and approximately 1,190 (1,100) million mobile phones shipped. Using mobile operator capital expenditures (capex) estimates as a proxy for the mobile network equipment market, we believe the mobile systems market grew somewhat better than the planning assumption of almost zero growth in 2008.
At the end of 2008, the 4.0 (3.3) billion mobile subscriptions worldwide represented a global subscription penetration of 59 (49) percent. (Note: The number of actual individual mobile subscribers is significantly lower, perhaps some 15–20 percent but possibly more, because of inactive subscriptions and people having multiple subscriptions.) Of these subscriptions, nearly 290 (180) million subscriptions were on 264 (197) mobile broadband (3G/WCDMA) networks, out of which Ericsson is a supplier of 149 (129).
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
The High Speed Packet Access (HSPA) version of 3G/WCDMA is now deployed within 247 (166) commercial networks in 110 (75) countries. Ericsson is a supplier of 115 (81) of these networks, which represent the majority of HSPA users. Despite this growth, the number of subscribers covered by commercial 3G/WCDMA networks is only around one third of those covered by 2G/GSM services. This provides a significant opportunity for equipment suppliers to upgrade 2G networks to 3G where Ericsson has already secured a market-leading position.
The Company expects the number of mobile subscriptions to grow to more than 4.5 billion during 2009. This will create continued need for new and expanded mobile networks and corresponding professional services. Although GSM subscriptions continue to represent the majority of the mobile systems market, GSM growth will slow as 3G/WCDMA is accelerating.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Weakening economy affecting mobile handset sales
Comments from operators suggest that economic pressures are altering their priorities to pursue a number of cost reduction initiatives. Handset replacement tends to go in tandem with contract renewal. In mature markets this is operator driven via subsidies in exchange for multi-year commitments. Now, many operators are pushing SIM card-only plans to reduce subsidies and preserve cash. This is slowing the demand for replacement phones especially in the mid-to-high end price range as consumers postpone upgrading their mobile phones. The drop in replacement rates is most noticeable in Western Europe.
In emerging markets, operators subsidize multi-SIM card plans rather than handsets. This has stimulated the used phone market rather than curtailing subscription growth or mobile phone usage. With inflationary and other economic pressures rising in these markets, consumers are buying more used-phones or repairing the ones they have. There are many small enterprises whose business is retailing/wholesaling refurbished phones or repairing phones for consumers.
Sony Ericsson is responding to the decreasing demand and increased price competition with a EUR 480 million annual cost reduction program with full effect expected by the second half of 2009.
Positive correlation between broadband penetration and GDP levels
Although emerging markets represent around one third of global GDP, our network sales in emerging markets grew an estimated 15 percent and now represents more than half of the networks sales. Mature markets sales increased an estimated 4 percent. As already demonstrated by the mobile telephone, the ubiquitous availability of affordable communication services has a positive effect on a country’s economy. Broadband services are expected to show similar benefits. A higher GDP level obviously enables more broadband adoption but studies of the relationship between broadband penetration and economic development indicate that broadband plays a fundamental role in accelerating the economic and social development of a country. However, inadequate fixed network infrastructure and low PC penetration inhibits fixed broadband adoption in most emerging markets. Mobile broadband networks along with suitable devices and appropriate applications can improve broadband penetration by avoiding the relatively more expensive and time consuming deployments of fixed network technologies.
Fixed and mobile broadband main market driver
We expect the number of fixed and mobile broadband subscriptions to increase by a factor of 7 between 2008 and 2014 to almost 3.5 billion. Broadband Internet access revenues for fixed operators (including cable operators) are expected to grow from 20 percent to 35 percent of total revenues in the next five years. Similarly, data’s share of mobile operators’ revenue, which is currently some 20 percent, is expected to account for a progressively more significant portion of global mobile revenues over the next five years.
These projections assume the cost for mobile data services aligns with subscriber expectations, i.e. data must be priced lower than voice when comparing the amount of bandwidth consumed. Operator revenues will likely become uncoupled from the traditionally linear returns on capacity provisioning for voice minutes of use growth. Hence, operators may implement cost-efficient solutions for delivering more network capacity with revenues based on service value rather than the amount of capacity. This motivates a new generation network that offers fixed and mobile convergence and leverages IP technology for a lower cost, higher performance broadband service.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Broadband access creates bottlenecks in other parts of the network
The deployment of access nodes that can connect devices at ever faster speeds quickly creates bottlenecks in other parts of the network with subscriber uptake. The increased capacity of the access nodes brings pressure on the backhaul part of the transport network. The additional backhaul capacity must be provided more dynamically and more efficiently than possible with traditional backhaul solutions. Support for multiple services is required to ensure continuity for existing services as well as new services. This enables operators to maximize investments in existing infrastructure. The dynamic nature of multi-service broadband access along with the mix of services will require changes in the network technology used – IP/Ethernet via optical fiber or microwave radio transmission will become the transport technology of choice. Ericsson already has a market leading position in microwave radio systems and with the acquisitions of Marconi and Redback is now well positioned with optical transmission systems and IP/Ethernet products.industry:
The future of TV
The vision of the television industry is a simple one:from equipment driven, to let you watch whatever you want, whenever you want, and wherever you want, as well asservices driven, with close to help you discover what else might be interesting to watch and to share your favorites as well as comments with other people. We believe that the best way to achieve this is to use Internet technology enhanced with telecom grade performance.
Consumers are already using the Internet to find new ways of accessing TV with interactive on-demand capabilities a basic expectation. Despite this trend, we do not expect operators to become marginalized as bit pipe providers. Efficient bit pipes will be needed, but to differentiate their services, operators will need to continue to leverage their network capabilities and this is where IMS comes into play to provide the reliability and combination of services required for differentiated services and applications.
Today some 850 million households have television services of which only 20 million are currently served by IPTV. This number is expected to grow to above 100 million by end of 2014. In the same time period, DSL- based broadband access is forecasted to grow from some 270 million to 400 million households while cable-TV-based broadband access is estimated to almost double from 90 million to 175 million households. FTTx-based broadband access is estimated to increase from 25 million households to some 90 million households. Building on the acquisitions of Tandberg Television and Entrisphere, the Company continues to invest for a leading position in IPTV and FTTx broadband access.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Mobility is changing the Internet
Today, less than 40 percent of mobile subscribers also use the Internet. However, the increasing usesales and almost 50 percent of high-speed applications in the fixed environment is stimulating a parallel expectation on the mobile side. When people become accustomedemployees now related to using bandwidth-intensive applications at home or in the office, they tendservices
from hardware to want them everywhere they go.
Multimedia-capable mobile Internet devicessoftware, with more and affordable mobile broadband access are harbingers of change. Users will be able to create and discover content of personal interest and to instantaneously share ideas and information with friends and colleagues. We see mobile Internet devices helping to accelerate consumer demand for wireless Internet access.
This will have the greatest impact on emerging markets where household penetration of PCs is slightly more than 10 percent compared with 60 percent in mature markets. And there are more than three times as many households in emerging markets as in mature ones. The Company has established a product unit to provide mobile broadband connectivity for notebook PCs and mobile Internet devices. Three of the world’s largest notebook manufacturers are already using Ericsson embedded modules. In addition, Intel, among others, has signed an agreement to use Ericsson’s mobile broadband technology.functionality in our solutions being software-based
Convergence and network transformation in focus
Placing greater emphasis on smarter networks and bundled service offerings, operators have accelerated the conversionfrom narrow-band voice to all-IP broadband, networks with increased deployments of broadband access, routing and transmission along with next-generation service delivery and revenue management systems to enable a better service to main customer segments—business, consumer and wholesale—as each requires a different and varying mix of fixed, mobile andstrong focus on converged services.
Ericsson has developed a network architecture that meets consumer desire as well as operator requirements for converged services and covers the device ecosystems, fixed and mobile broadband access, transport, control, applications, revenue management, services and operations management. All of the components have been integrated for a high performance and scalable end-to-end solution. Ericsson’s full-service broadband solution has been built from in-house development, e.g. mobile broadband and IMS, complemented by the acquisitions of IP routing products (Redback), optical transport (Marconi), deep fiber access systems (Entrisphere) and IPTV
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
(Tandberg). Furthermore, the Company has developed a comprehensive network transformation service that leverages professional services such as business consulting and systems integration.
Operator consolidation and network sharing
Operator consolidation continues across all regions. In the Americas, consolidation has substantially reduced the number of operators. In Europe, mergers continue as well as other types of combinations, such as network sharing and outsourcing of network operations. In other regions, operator consolidation has led to the emergence of rapidly growing pan-regional operators, particularly in the CEMA markets (Central and Eastern Europe, Middle East and Africa).
Ongoing operator consolidation, especially in Western Europe, where the technology shift for more efficient networks as well as changing regulations, such as price caps for roaming and lower call termination fees, is affecting operator willingness and need to increase network investments in the near term. This trend is most pronounced for highly penetrated GSM networks, in which demand for upgrades and expansions has rapidly diminished as operators spend more to expand and enhance their 3G networks.
Despite the trend of operator consolidation across many regions, the number of mobile operators within a region has actually increased except in the Americas over the past several years. The introduction of mobile number portability in many markets has simplified service substitution, leading to fierce competition and declining market shares for the top two players in each market. Consequently, mobile operator margins are under pressure from the more intense competition which drives a need for lower costs to compensate.
Network sharing offers potentially significant capex and opex savings to operators. However, the overall impact of network sharing should ultimately be neutral for mobile equipment vendors. To a certain extent, short-term disruption of capital expenditure plans or re-negotiation of contracts with the network sharing companies may be somewhat compensated by increased sales of professional services, especially network integration and managed operations as well as faster coverage buildout and an earlier entry into expansion phases. Over the longer term, the majority of savings will come from shared plant and property rather than the equipment, as the equipment still has to be dimensioned for the peak traffic demand of the combined networks.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Opportunities for managed services
Another form of consolidation is outsourcing of network operations where an operator is able to tap into the global scale offered by a company like Ericsson via managed services. Ericsson is well positioned to benefit from operator consolidation with a suite of solutions for network sharing, a well proven capability for outsourcing network operations and strong presence with consolidating companies.
Compared with network deployment services, which tend to grow more or less in line with the equipment market, demand for managed services (i.e., network operation and hosting services) as well as systems integration is growing more rapidly. The potential market for network operation services is larger than the potential market for network equipment and related deployment services. A mature operator is estimated to typically spend some 5–6 percent of annual sales on network equipment, but spends approximately 10–12 percent of sales to operate its network. More than two thirds of network operation expenses today are believed to be handled in-house by operators but network operation is increasingly being outsourced as operators realize the competitive advantages and potential cost savings. The market for such managed services is thus expected to continue to show good growth prospects.
Effects of the macro-economic slowdown
It is too early to say how the economic recession will affect Ericsson’s business development but operational efficiency, a market leading position, scale and a solid balance sheet place the Company in a good position to meet tougher market conditions. Despite similarities to the 2001–2003 market downturn, we do not anticipate as major of a slowdown for the mobile telecoms industry. Several factors leading to the last downturn in operator capex are not in place today. Operators have significantly strengthened their balance sheets, growth expectations are more realistic and network utilization is materially higher. Capital intensity has been at historically low levels with many major operators for several years. We expect slowing GDP to cause less than proportionate declines in mobile and broadband revenue. We believe this for several reasons: 1) there are better substitutes for traditional fixed telephone services (e.g. mobile, VoIP) than previously; 2) term contracts and bundling make it more difficult (or at least slower) for subscribers to reduce spending; and 3) mobile communications and the Internet are much more pervasive and engrained in today’s society. While most regional markets are resilient so far, some operators in Western Europe have shown a progressive deterioration in their business during the year, which has negatively affected suppliers, especially mobile phone manufacturers including Sony Ericsson.
There are, however, several aspects similar to prior downturns, such as capital preservation. Operators’ need for free cash flow was the primary cause of the declines in both fixed and mobile spending on network equipment in 2001–2003 while overcapacity played a secondary role. We expect a similar dynamic in this economic cycle, but less dramatic.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
We understand that certain operator spending, for example in network upgrades, is subject to deferrals if not cancellations. Even capacity expansions can be suspended for a period of time if operators choose to lower service quality levels. This was the case also 2001–2003. However, if operators do not keep their networks up to date, they run a risk of higher opex and customer churn negatively affecting revenues as well as earnings. The macro-economic developments are externally driven and beyond the control or the influence of the Company. But the Company does control the cost structure and is adjusting to a challenging market environment to manage through a prolonged global recession.
Business segments (primary)
Ericsson is a telecommunications company developing and selling a variety of solutions aimed largely at customers in the telecommunications industry. When determining our business segments, we have looked at which market and to what type of customers our products and services are aimed, and through what distribution channels they are sold as well as to commonality regarding technology, research and development. To best reflect our business focus, we report four business segments:
Networks.capabilities.
Professional Services.
Multimedia.
Phones—the joint venture Sony Ericsson.
Segment Networks
Business segment Networks includes products and solutions for wireless and wireline access, core networks and transmission as well as management systems. Related network rollout services are also included.
Segment Networks accounted for 68 percent of total sales in 2008.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Wireless and wireline access
Ericsson provides wireless access solutions to network operators that enable reliable, efficient and cost effective mobile telephony networks as well as wireless broadband for mobile, nomadic and fixed users in urban and rural areas. Our leadership in GSM, WCDMA/HSPA and LTE technologies grants us to offer tailored solutions to network operators, regardless of the existing network standard used. Our radio access networks are interconnecting with devices such as mobile phones, notebooks and PCs and can easily be upgraded with the latest radio technology to support new revenue streams at the same time as maintaining existing mobile business. These solutions support different standardized mobile technologies on the same platform, which simplifies for operators to manage the ever more complex mobile business cost-efficiently and with less effort.
The recent expansion of our wireline broadband access offering, enabled by our acquisitions of Marconi and Entrisphere, has been an important step in reinforcing our ability to address network operators as they begin integrating their fixed and mobile networks. We provide wireline access solutions, based on both fiber and copper, which make it possible for operators to efficiently modernize or expand their fixed access network business and thereby enable them to offer attractive user services such as High Definition TV, Video on Demand and other IP-based services with high demand on bandwidth and cost-efficiency.
IP core network (switching, routing and control)
The evolution to IP starts in the core network. Our core network solutions include industry-leading softswitches, IP infrastructure for edge and core routing, IP-based multimedia subsystem (IMS) and gateways. Our acquisition of Redback Networks has further strengthened our IP product portfolio with broadband routers to manage broadband, telephony, TV and mobility services.
GSM and WCDMA/HSPA share a common core network, meaning that previous investments are preserved as operators migrate from voice-centric to multimedia networks. Our switching products have industry-leading scalability and capacity. Many of our core network switching systems are built upon common platforms.
Ericsson IP Multimedia Subsystem (IMS) is a complete end-to-end offering that enables consumers to access the same content and services using a multitude of access technologies and devices. IMS is an open service layer and control platform that enables standardized services and enablers such as Rich Communication Suite, Multimedia Telephony etc. Since our IMS solution is common for both fixed and mobile networks, converged services can be transparently provided independent of the type of access.
Transmission
Microwave and optical transport solutions provide cost-effective management of voice and data traffic for both fixed and mobile networks. Our MINI-LINK micro-wave radio systems is one of the world’s most widely deployed mobile backhaul solutions and, complemented with the wireline access and optical portfolio based on fiber and copper, we offer operators cost-efficient and scalable transport solutions supporting the increasing mobile broadband traffic. Transport networks (e.g. MINI-LINK, metro optical networks) are essential elements of our end-to-end solutions.
Network rollout services
Fast rollout of large volumes involves a heavy ramp-up of resources. Ericsson’s Global Services organization uses a mix of local, in-house capabilities, subcontractors and central resources. We manage our capabilities in a way that has proven to be highly successful, providing precise projects and satisfied customers.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Segment Professional Services
Ericsson’s professional services capabilities include expertise in managed services, systems integration, consulting, education and customer support services.
Segment Professional Services accounted for 23 percent of total sales in 2008.
Managed services
We offer the most comprehensive managed services capabilities within the telecom industry. Through outsourcing our customers can reduce cost of operations and gain flexibility in resources and shorten time to market—all with an assured quality of service. Our offering covers
Network operations; management of all aspects of day-to-day operations of a customer’s network, high-quality operations of fixed and mobile networks at a predictable cost.
Hosting of service layer platforms and applications; we enable operators to launch new services in a simple, fast and cost-effective manner.
We are the industry leader in managed services, managing networks with 250 million subscribers. Since managed services are often signed as multi-year agreements, a major part of managed services sales is of a recurring nature.
Systems integration
Operators can minimize risk by engaging Ericsson to integrate equipment from multiple suppliers and handle technology change programs, as well as to design and integrate new solutions. More and more operators who introduce multimedia services or face challenging technology transformations are asking us to serve as a prime integrator, i.e. acting as the primary interface and program manager, ensuring successful deployment of the total solution.
Consulting
Our consultants with expertise in business and technology strategy support our customers in the decision-making, planning and execution to improve and grow their business. Our Industry Programs package the expertise into end-to-end solutions in the key areas of multimedia, 3G rollout, broadband, value creation and revenue assurance.
Education
We provide our customers with tailored education programs to ensure that their employees have the skills and competence necessary for managing today’s and tomorrow’s complex technologies.
Customer support services
Having experienced professionals available around-the-clock to provide customer support is a crucial part of our service offering. Our staff, across the world, supports operators that in total have over 1 billion customers. Giving advice on how to maximize efficiency in day-to-day operations ensures network uptime and lowers total cost of ownership.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Segment Multimedia
Ericsson provides the enablers and the applications operators and service providers require in order to deliver a richer user-experience. We understand the new multimedia ecosystem and with the growing demand for enriched communication and personalized content the mass market for multimedia services are rapidly increasing. Users want services that can be delivered seamlessly over any screen, at any time, anywhere.
Segment Multimedia accounted for 9 percent of total sales in 2008.
TV solutions
We enable the future of digital television through technology leadership, an open architecture, and integrated hardware and software solutions. Our end-to-end TV solution provides the technology, services and offerings necessary for successful traditional (linear), on-demand or podcast TV, making an individual TV experience possible at home or on the move, via a mobile phone or a laptop. Our end-to-end solution provides opportunities for all players in the TV field—operators and service providers, advertisers as well as content providers.
Ericsson is a founding member of the Open IPTV Forum and continues to drive industry-wide standardization in bodies working with TV-enabling technologies, such as IMS and DLNA (Digital Living Network Alliance).
Consumer and business applications
We provide our customers with the latest multimedia solutions for both the consumer and the business communication market. For the consumer segment we offer video and mobile TV solutions, enriched messaging, community communications and location-based services like “family finder” or finding the nearest restaurant. In the business communication segment we provide network operators with converged, fixed-mobile, business communication solutions to target enterprises’ needs for cost control, accessibility and staff efficiency.
Multimedia brokering
Our multimedia brokering offering, based on IPX, is serving more than 1,000 content, services, and media companies. With live premium services in 25 countries, our solution reaches two billion subscribers and our messaging service covers more than 500 networks reaching more than 96 percent of all mobile phone users worldwide.
We offer leading multimedia brokering solutions—facilitating payment and distribution of content by seamlessly interconnecting content and media companies, information and search services as well as consumer brands and a variety of enterprises with the network operators.
Service delivery and provisioning
Our service delivery and provisioning platforms enable operators and service providers to effectively and efficiently create, sell, and manage multimedia services and multi-play offerings, closely interacting with standard services and BSS/OSS (business/operations support systems) management systems.
Thanks to our ability to combine products, solutions, systems integration and business consulting into one offering we are able to create a multimedia marketplace according to each customer’s specific needs.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Revenue management
We are a leading provider of revenue management solutions. We help our customers capture and secure their revenue streams and leverage the business opportunities, by providing expertise and solutions to manage the revenues from traditional services like voice and sms as well as multimedia services.
One of the leading solutions within revenue management is convergent charging and billing that enables operators to handle all users and services in the same way, independent of payment options or access technologies. We are gaining momentum from our majority stake in LHS.
Mobile platforms
We are a leading supplier of platform technology for GSM/EDGE and WCDMA/HSPA used in devices such as mobile handsets, PC-cards, and other mobile devices. Ericsson licenses open-standard, end-to-end interoperability tested GSM/EDGE and WCDMA/HSPA technology platforms.
In August 2008, Ericsson and STMicroelectronics announced plans to establish a joint venture which will have one of the industry’s strongest product offering in semiconductors and platforms for mobile devices.
Segment Phones
Sony Ericsson delivers innovative and feature-rich mobile phones, accessories and PC-cards, which allow us to provide end-to-end solutions to our customers. The joint venture, formed in October 2001, combines the mobile communications expertise of Ericsson with the consumer electronic devices and content expertise of SONY Corporation and forms an essential part of our end-to-end capability for mobile multimedia services.
Sony Ericsson is responsible for product design and development, as well as marketing, sales, distribution and customer services.
Sales for Sony Ericsson are not included in our reported sales, as their operating results are reported according to the equity method under “Share in earnings of joint ventures and associated companies” in the income statement.
Please also see Notes to the Consolidated Financial Statements—Note C3, “Segment Information”.
GEOGRAPHICAL SEGMENTS (SECONDARY)
We group sales into five geographical segments; Western Europe, CEMA (Central and Eastern Europe, Middle East and Africa), Asia Pacific, North America and Latin America.
There is a good distribution of sales between geographical segments, mitigating volatility, as a decrease in one area is often offset by an increase in another. In addition, no individual country accounts for more than 8 percent of sales. The segments have different characteristics in terms of penetration of fixed and mobile telephony, network traffic, sophistication of services and average country GDP and other economic factors.
We strongly believe that affordable and generally available telecommunication services are a prerequisite for social and economic development, which improves the welfare of all people in any given country. As one of the world’s largest providers of communications equipment and services, we have implemented a strict trade compliance program throughout the Company in order to comply with foreign and domestic laws and regulations, trade embargoes and sanctions in force. In no way should our business activities be construed as supporting a particular political agenda or regime.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
SALES PER REGION AND SEGMENT 2008
SEK million | Networks | Professional Services | Multi- media | Total | ||||
Western Europe | 25,642 | 18,537 | 7,391 | 51,570 | ||||
CEMA1) | 38,364 | 9,843 | 4,873 | 53,080 | ||||
Asia Pacific | 49,843 | 10,507 | 2,957 | 63,307 | ||||
Latin America | 16,096 | 5,522 | 1,430 | 23,048 | ||||
North America | 12,105 | 4,569 | 1,251 | 17,925 | ||||
Total | 142,050 | 48,978 | 17,902 | 208,930 | ||||
MARKET ENVIRONMENT
Long-term customer relationships and global scale
We have been present in most of our markets for more than 100 years, building strong, long-term relationships with the world’s leading operators. Our scale advantage, end-to-end offerings, and a local presence in every major market enable us to serve as a true partner for cost-effective delivery of solutions and support to a diverse base of customers. As operators are striving to reduce the number of different key suppliers they rely on, the responsiveness of our employees and the power of our portfolio of products and services are key to our future success.
We work closely with our customers to understand their businesses and technology needs, and provide tailored solutions to help them fulfill their business objectives. Our expertise and experience in all major telecommunication standards along with our proven track record for quality and innovation have allowed us to develop our business on a worldwide basis. We believe that our widespread geographical presence and the economies of scale associated with market share leadership give us competitive advantages. Global presence is an important factor, particularly when working as a business partner to operators working in multiple markets or globally. We are utilizing our strong international reach and core competence in mobile and fixed communications to expand into growth areas such as systems integration, service applications and managed services, as well as to develop alliances with suppliers and manufacturers in many countries in order to increase our combined effectiveness.
Customers
We are supplyingsupply equipment, integrated solutions, multimedia applications and services to almost all major operators globally. We derive most of our sales from large, multi-year agreements with a limited number of significant customers. Out of a customer base of more than 425 network operators, the ten10 largest customers account for 42 (42) percent of our net sales whileand the 20 largest customers account for 61 (58)57 (61) percent of our net sales. Our largest customer accounted for approximately 65 (6) percent of sales during 2008.in 2009. For more information, see Risk Factors, “Market, Technology and Business Risks”
Our customers have different needs inand demands when interacting with us, ranging from support in identifying and capturing business opportunities to complex system deliveries including systems integration or outsourced operation of the customer’s network to simple add-on deliveries of equipment or spare parts to “do-it-yourself” fulfillment. We use three different sales approaches that acknowledge these different needs;us:
Project Sales—interactive relationship selling with high involvementStrategy and business model development in an increasingly complex environment.
Network expansion and evolution in response to subscriber and traffic growth and new technology.
Support, training and spare parts.
Efficient operations to keep operating expenses competitive.
Our own market units are our primary sales channel. They perform most of the customer to identify and capture business opportunities,sales where the solutioncustomer is not known at the point of sales,a fixed or mobile telecommunications operator.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
For certain products or solutions we also use other channels:
System Sales—interactive relationship selling ofTV solutions configured for specific customer needs, andare sold through other equipment vendors as resellers as well as directly by business unit Multimedia to cable-TV operators.
Product Sales—Mobile broadband modules are sold directly by business unit Networks to PC/netbook manufacturers.
For newly acquired entities, certain market channels normally prevail during a transition period, e.g. LHS has maintained its market channels for billing solutions until it is fully owned and integrated.
A central IPR unit is managing sales of licenses to equipment vendors or others who wish to use our patented technology.
Our two joint ventures are the outcome of relationshipchannels to the handset and mobile platform/chipset markets.
Our sales andto network operators is normally based on multi-year frame agreements where customers may call-off well-defined productsafter an initial tender with a system and supplier selection.
During the frame agreement, equipment, software, services electronically.
System Sales has historically been our most common sales approachand spare parts are called off according to best meet our customers’ needs, however,price lists. On a highly selective basis we occasionally provide customer financing. The vast majority of customer financing is provided by third parties, often guaranteed by Swedish export credit agencies. Various types of services, such as their needs evolve,training or consulting, are often ordered separately as needed. Managed services contracts are normally also multi-year contracts and negotiated separately as they require extensive scoping and planning for transfer of employees and operations.
We have implemented a strict trade compliance program throughout the two other sales approaches will growCompany in importance.
For more information, see Risk Factors, “Risks Associatedorder to comply with the Industryforeign and Market Conditions”.domestic laws and regulations, trade embargoes and sanctions in force. Our business activities should not be construed as supporting a particular political agenda or regime in any way.
Seasonality
Our quarterly sales, income and cash flow from operations are seasonal in nature and generally lowest in the first quarter of the year and highest in the fourth quarter. This is mainly a result of the seasonal purchase patterns of network operators. The table below illustrates the long-term average seasonal effect on sales for the five-year period 19942005 through 2008.2009.
15-YEARMOST RECENT 5-YEAR AVERAGE SEASONALITY
First quarter | Second quarter | Third quarter | Fourth quarter | |||||||||
Sequential Change | -26 | % | 16 | % | -4 | % | 32 | % | ||||
Share of annual sales | 21 | % | 24 | % | 23 | % | 31 | % |
The table below illustrates the average seasonal effect on sales for the last three years.
MOST RECENT 3-YEAR AVERAGE SEASONALITY
First quarter | Second quarter | Third quarter | Fourth quarter | First quarter | Second quarter | Third quarter | Fourth quarter | |||||||||||||||||
Sequential Change | -18 | % | 12 | % | -5 | % | 31 | % | –20 | % | 13 | % | –6 | % | 29 | % | ||||||||
Share of annual sales | 22 | % | 24 | % | 23 | % | 30 | % | 22 | % | 25 | % | 23 | % | 30 | % |
Competitors
In the Networks segment, we compete mainly with large and well-established communication equipment suppliers. Although competition varies depending on the products, services and geographical regions, ourOur most significant competitors in mobile communication include Alcatel/Lucent, Huawei, Nokia/Siemens, Cisco, ZTE and ZTE. With respect to fixed communications equipment, the competition is also highly concentrated and includes, among others, Alcatel/Lucent, Cisco, Huawei and Nokia/Siemens.Juniper. We also compete with numerous local and regional manufacturers and providers of communication equipment and services.
We believe the most important competitive factors in this industry includeinclude; existing customer relationships, the ability to cost-effectively upgrade or migrate an installed base,superior network performance and subscriber experience, technological innovation, product design compatibility of products with industry standards,and cost, and the capability for end-to-endability to scale/ upgrade/migrate existing network investments, and the systems integration.integration capability.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Competition in the Professional Services segment includes not only many of the traditional communication equipment suppliers mentioned above, but also a number of large companies from other industry sectors, such as IS/IT, for example Accenture, HP/EDS, IBM, and IBMseveral India-based off-shore companies, e.g. Tata Consultancy Services and Tech Mahindra, as well as a large number of smaller but specialized companies operating on a local or regional basis.
As the professional servicesthis segment grows, we expect to see additional competitors emerge, possibly including someas a result of network sharing or of network operators attempting to expand into new segments.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
their business.
In the Multimedia segment we face significant competition. As the market is rather fragmented, our competitors vary widely depending on the product or service being offered, and we face significant competition for substantially all of these products and services.offered. Competitors include many of the traditional communication equipment and IT suppliers mentioned above as well as companies from other industries, such as Acision, Amdocs, Comverse, Harmonic, Oracle and Thomson.
Within the segment Phones, thehandset market, Sony Ericsson’s primary competitors include Nokia, Motorola, Samsung, and a number of other companies such as LG, Electronics, NEC and Sharp, as well as companies like Apple, HTC and RIM for smartphones. We believe that our mobile phone joint venture with SONY Corporation creates a distinctive competitive advantage.advantage by combining our telecom expertise with their media, content and consumer equipment know-how.
We also compete in the mobile platform/wireless chipset market through our joint venture ST-Ericsson. Here, the largest competitor is Qualcomm. This market is growing in complexity as several new software platforms for handsets and other devices are being launched, e.g. Google’s Android, Microsoft’s Windows and Samsung’s Bada.
For more information on competitive risks, see Risk Factors, “Risks Associated with the Industry“Market, Technology and Market Conditions”Business Risks”.
ManufacturingOperating segments
Ericsson is a vendor of solutions and assemblyservices to telecom operators of fixed and mobile networks. We also provide TV solutions and managed services for television broadcast companies and mobile access modules to netbook manufacturers. Through two joint ventures we address the mobile handset and mobile platform/wireless chipset markets.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
When determining our operating segments, we have looked at which markets and what type of customers our products and services aim to attract as well as what distribution channels they are sold through. We have also considered commonality regarding technology, research and development. To best reflect our business focus and to facilitate comparability with peers, we report five operating segments:
Networks
Professional Services
Multimedia
Sony Ericsson
ST-Ericsson
Segment Networks
MostNetworks includes products/solutions for:
wireless and wireline access
IP core networks
transmission/backhaul
network management
network rollout services
In 2009, we acquired Nortel’s CDMA and LTE operations. Services, other than network rollout, are reported under Professional Services. In 2009, segment Networks accounted for 66 percent of total sales.
Wireless and wireline access
Ericsson provides market-leading wireless access solutions to network operators for reliable, efficient and cost-effective mobile telephony networks. Ericsson also has a strong product portfolio for wireline access. Our
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
leadership in GSM, WCDMA/ HSPA and LTE technologies and now also CDMA enables us to offer tailored solutions regardless of the existing network standard used, delivering superior performance and consumer experience.
We provide wireline access solutions, for both fiber and copper, such as GPON and DSL. In 2009, AT&T appointed Ericsson as a domain vendor for wireline access solutions.
IP core network (switching, routing and control)
Our core network solutions include industry-leading softswitches, IP infrastructure for edge and core routing (Ericsson SmartEdge), IP-based Multimedia Subsystem (IMS) and gateways. GSM and WCDMA/HSPA share a common core network. Therefore operators’ previous investments are preserved as they migrate from voice-centric to multimedia networks. Our switching products have industry-leading scalability and capacity.
Transmission/backhaul
Our MINI-LINK microwave system is one of the world’s most widely deployed mobile backhaul solutions. Transport networks (e.g. MINI-LINK, metro optical networks) are essential elements of our node production, i.e., assembly, integrationend-to-end solutions.
Network management
Ericsson offers a portfolio of network management tools, supporting vital operator activities for management of existing networks as well as for introduction of new network architectures, technologies and testingservices, such as: configuration, performance monitoring, security management, inventory management and software upgrades. The tools are applicable for fixed and mobile access, transport and core. They are often capable of modular subsystems into complete system nodes such as radio base stations, mobile switching centers etc., is done in-house. The major partmanaging also multi-vendor networks.
Network rollout services
Fast rollout of large networks involves a heavy ramp-up of resources. Ericsson’s Global Services organization uses a mix of local, in-house capabilities, authorized service providers and central specialist resources. We manage our module production, i.e., productioncapabilities in a way that has proven to be highly successful, resulting in successful projects and satisfied customers.
Sourcing, manufacturing and supply and availability of subsystemsmaterials
Our hardware products largely consist of electronics, such as circuit boards, radio frequency (RF) modules, antennas etc., is outsourced to a group For manufacturing of electronics manufacturing services companies (EMS), of which the vast majority is in low-cost countries.
We alsoproducts we purchase customized and standardized equipment, components and services from several global providers as well as from numerous local and regional suppliers. A numberWe produce certain types of components in-house, such as power modules and cables.
The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies (EMS), of which the vast majority is in low-cost countries. Node production, i.e. assembly, integration and testing of modules into complete radio base stations, mobile switching centers etc., is largely done in-house and on-demand.
Where possible, we rely on alternative supply sources for the purchased elements of our suppliers designproducts. This avoids sole source situations and manufacture highly specialized and customized components for our end-to-end solutions as well as for individual nodes.
We generally attempt to negotiate globalsecures sufficient supply agreements with our primary suppliers. Whileat competitive prices. When selecting a new supplier, we are not dependent on any one supplier for the provision of standardized equipment or components and seek to avoid single source supply situations, a need to switch to an alternative supplier may require us to allocate additional resourcestry to ensure that our technical standards and other requirements are met. This process could take some timemet, including our supplier code of conduct. Assuming there will only be a moderate increase in near-term market demand, we do not foresee any
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
supply constraints to complete. Accordingly,meet our expected production requirements during 2010. Variations in market prices for copper, aluminum, steel, precious metals, plastics and other raw materials generally have a need to switch to an alternative supplier could potentially have an adverselimited effect on our operations in the short term.total cost of goods sold. For more information related to sourcing, see Risk Factors, “Strategic“Market, Technology and OperationalBusiness Risks”.
We intend to continue to outsource module production where adequate manufacturing capacity and expertise are available on favorable terms. Such outsourcing of the major part of volume module manufacturing provides us greater flexibility to adapt to economic and market changes. The timing and level of outsourcing is a balance between short-term demand and longer-term flexibility.
We manage our own production capacity on a global basis by allocating production to sites where capacity is available and costs are competitive. We work with shortening of lead-times and regionalization in order to reduce total distribution cost and CO2 emission. At year-end 2008, our overall utilization was close to 100 percent as we continuously adjust our production capacity to meet expected demand. At year-end 2009, our overall capacity utilization was close to 100 percent. The table “Primary Manufacturingmanufacturing and assembly facilities” summarizes where we have our major manufacturing and assembly facilitiessites as well as the total square meters of floor space at year-end. In Sweden, the majority of the floor space within our production facilities is used for node assembly and verification.
Segment Professional Services
SourcesEricsson’s professional services capabilities include expertise in managed services, systems integration, consulting, education and availabilitycustomer support services.
Segment Professional Services accounted for 27 percent of materialstotal sales in 2009, up from 23 percent in 2008.
Managed services
We purchase components, ready-made productsare the industry leader in managed services, managing networks with more than 370 million subscribers. We offer the most comprehensive managed services capabilities within the telecom industry:
Network design and services from a significant numberplanning.
Network operations; including networks without any Ericsson equipment installed, such as Sprint’s fixed and mobile CDMA/IDEN networks in the US.
Field operations and maintenance of domestic and foreign suppliers. Variations in market prices for copper, aluminum, steel, precious metals, plastics and other rawsites.
Shared solutions; e.g. managed backhaul or hosting of platforms like pre-paid or real time billing/charging.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
materials have a limited effect on our total cost of goods sold. To a limited extent, we are involved in the production of certain components such as power modules and cables, which are used in our systems products as well as sold externally to other equipment manufacturers.
To the extent possible, we rely on alternative supply sources for the purchased elements of our products to avoid sole source situations and to secure sufficient supply at competitive prices. Assuming there will only be moderate increase in market demand, we do not foresee any supply constraints to meet our expected production requirements during 2009. For more information, see Risk Factors, “Strategic and Operational Risks”.
ORGANIZATIONSystems integration
Company structure and organization
Operators can minimize risk by engaging Ericsson is organized in business units, market units and group functions. Business units are innovators, developers and suppliers of high-quality products, services and customer offerings. Market units are marketing & sales channels and the Company’s representative in the local market environment. Group functions coordinate the Company’s strategies, operations and resource allocation and define the necessary directives, processes and organization for the effective governance of the Group.
For more information please see, Corporate Governance Report, “Company structure and organization”.
Changes in the Organization:to:
On May 1, 2008, Ericsson divested its enterprise PBX solutions to Aastra Technologies.
Changes in the Group Management Team:
As per January 1, 2008, Jan Frykhammar was appointed Senior Vice President and head of business unit Global Services and was included in the Group Management Team.integrate equipment from multiple suppliers
As per February 1, 2008, Torbjörn Possne was appointed Senior Vice President and head of group function Sales and Marketing and was included in the Group Management Team.manage technology change programs
As per July 1, 2008, Johan Wibergh was appointed Senior Vice Presidentdesign and headintegrate new solutions.
More and more operators who introduce multimedia services or face challenging technology transformations ask us to serve as prime integrator, ensuring successful deployment of the total solution.
Consulting
With expertise in business, unit Networksstrategy and was includedtechnology, our consultants support customers in decision-making, planning and execution in order to improve and grow their business. Our Industry Programs package the expertise into end-to-end solutions in the Group Management Team.
As per July 1, 2008, Kurt Jofskey areas of multimedia, 3G rollout, broadband, value creation and Björn Olsson leftrevenue assurance.
Education
We provide our customers with tailored education programs to ensure their employees have the Group Management Team.skills and competences necessary for managing today’s and tomorrow’s complex technologies.
Customer support
As per December 31, 2008, Joakim Westh leftHaving experienced professionals available around-the-clock to provide customer support is a crucial part of our service offering. We support operators across the Group Management Team.world with over one billion customers in total.
For more information about management, please see Notes to the Consolidated Financial Statements—Note C29, “Information Regarding Employees, Members of the Board of Directors and Management”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
PRIMARY MANUFACTURING AND ASSEMBLY FACILITIESSTOCK EXCHANGE TRADING
The Ericsson Class A and Class B shares are listed on NASDAQ OMX Stockholm. In the United States, the Class B shares are listed on NASDAQ in the form of American Depositary Shares (ADS) evidenced by American Depositary Receipts (ADR) under the symbol ERIC. Each ADS represents one Class B share.
In 2009, approximately 7 (20) billion shares were traded on NASDAQ OMX Stockholm and NASDAQ, of which about 74 (84) percent were on NASDAQ OMX Stockholm and about 26 (16) percent were on NASDAQ. Trading volume in Ericsson shares decreased by approximately 71 percent on NASDAQ OMX Stockholm and increased by approximately 7 percent on NASDAQ as compared to 2008. (Note: Ericsson had a reversed split of shares of 1:5 for the B-share on June 2, 2008 and a 10:1 to 1:1 change in the ADS ratio from June 10, 2008 which affects the comparative figures above.)
SHARE PRICE TREND
In 2009, Ericsson’s total market value increased by about 13 (–22) percent to approximately SEK 215 billion (SEK 191 billion in 2008). The OMXSP Index on NASDAQ OMX Stockholm increased by 47 percent, the NASDAQ telecom index (CUTL) increased by approximately 48 percent and the NASDAQ composite index (CCMP) increased by approximately 44 percent.
SHARE DATA
2008 | 2007 | 2006 | 2005 | |||||||||||||
Sites | Sq meters | Sites | Sq meters | Sites | Sq meters | Sites | Sq meters | |||||||||
Sweden | 8 | 226,000 | 8 | 244,300 | 8 | 231,500 | 9 | 256,615 | ||||||||
China | 4 | 38,500 | 4 | 33,900 | 3 | 20,860 | 3 | 15,200 | ||||||||
Italy | 2 | 20,100 | 2 | 20,100 | 2 | 20,100 | 0 | 0 | ||||||||
Brazil | 1 | 18,000 | 1 | 25,900 | 1 | 18,400 | 1 | 15,840 | ||||||||
Germany | 1 | 300 | 1 | 300 | 1 | 13,900 | 0 | 0 | ||||||||
India | 1 | 9,000 | 1 | 6,400 | 1 | 5,364 | 1 | 5,364 | ||||||||
USA | 1 | 5,000 | 1 | 5,000 | 1 | 5,000 | 0 | 0 | ||||||||
Other | 0 | 0 | 0 | 0 | 1 | 3,100 | 0 | 0 | ||||||||
Total | 18 | 316,900 | 18 | 335,900 | 18 | 317,560 | 14 | 293,019 | ||||||||
2009 | 2008 | 2007 | 2006 | 2005 | ||||||
Earnings per share, diluted (SEK) | 1.14 | 3.52 | 6.84 | 8.23 | 7.64 | |||||
Operating income per share (SEK)2) | 5.80 | 7.50 | 9.64 | 11.29 | 10.44 | |||||
Cash flow from operating activities per share (SEK) | 7.67 | 7.54 | 6.04 | 5.82 | 5.26 | |||||
Stockholders’ equity per share, basic, end of period (SEK) | 43.79 | 44.21 | 42.17 | 37.82 | 32.03 | |||||
P/E ratio | 57 | 17 | 11 | 17 | 18 | |||||
Total shareholder return % | 15 | –20 | –43 | 3 | 31 | |||||
Dividend per share (SEK)1)2) | 2.00 | 1.85 | 2.50 | 2.50 | 2.25 |
1) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
2) | For 2009 and 2008 excluding restructuring charges. |
3) | For 2009 as proposed by the Board of Directors. |
All share based performance indicators except Earnings per share and Stockholders’ equity per share are calculated based on average number of shares outstanding, basic. Comparison periods has been restated for consistency.
SHARE PRICES ON NASDAQ OMX STOCKHOLM
(SEK) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||
Class A at last day of trading1) | 65.00 | 59.30 | 76.80 | 138.00 | 137.50 | |||||
Class A high for year (April 17, 2009)1) | 78.80 | 83.60 | 148.50 | 154.50 | 143.50 | |||||
Class A low for year (January 20, 2009)1) | 55.40 | 40.60 | 73.00 | 104.50 | 99.00 | |||||
Class B at last day of trading1) | 65.90 | 58.80 | 75.90 | 138.25 | 136.50 | |||||
Class B high for year (April 17, 2009)1) | 79.60 | 83.70 | 149.50 | 155.00 | 145.00 | |||||
Class B low for year (January 20, 2009)1) | 55.50 | 40.60 | 72.65 | 104.50 | 97.00 |
1) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
OFFER AND LISTING DETAILS
Principal trading market—NASDAQ OMX Stockholm—share prices
The table to the right states the high and low sales prices for our Class A and Class B shares as reported by NASDAQ OMX Stockholm for the last five years. The equity securities listed on the NASDAQ OMX Stockholm Official Price List of Shares currently comprise the shares of 258 companies. Trading on the exchange generally continues until 5:30 p.m. (CET) each business day. In addition to official trading on the exchange, there is also trading off the exchange during official trading hours and also after 5:30 p.m. (CET). Trading on the exchange tends to involve a higher percentage of retail clients, while trading off the exchange often involves larger Swedish institutions, banks arbitraging between the Swedish market and foreign markets, and foreign buyers and sellers purchasing shares from or selling shares to Swedish institutions.
NASDAQ OMX Stockholm publishes a daily Official Price List of Shares which includes the volume of recorded transactions in each listed stock, together with the prices of the highest and lowest recorded trades of the day. The Official Price List of Shares reflects price and volume information for trades completed by the members.
Host market NASDAQ—ADS prices
The table to the right states the high and low sales prices quoted for our ADSs on NASDAQ for the last five years. The NASDAQ quotations represent prices between dealers, not including retail mark-ups, markdowns or commissions, and do not necessarily represent actual transactions.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
MARKET PRICES ON NASDAQ OMX STOCKHOLM AND NASDAQ
NASDAQ OMX Stockholm | NASDAQ | |||||||||||
SEK per Class A share | SEK per Class B share | USD per ADS1) | ||||||||||
Period | High | Low | High | Low | High | Low | ||||||
Annual high and low | ||||||||||||
20052) | 143.50 | 99.00 | 145.00 | 97.00 | 18.60 | 13.89 | ||||||
20062) | 154.50 | 104.50 | 155.00 | 104.50 | 20.57 | 14.44 | ||||||
20072) | 148.50 | 73.00 | 149.50 | 72.65 | 21.71 | 11.12 | ||||||
2008 | 83.60 | 40.60 | 83.70 | 40.60 | 14.00 | 5.49 | ||||||
2009 | 78.80 | 55.40 | �� | 79.60 | 55.50 | 10.92 | 6.60 | |||||
Quarterly high and low | ||||||||||||
2008 | ||||||||||||
First Quarter | 79.50 | 51.10 | 78.90 | 50.25 | 12.28 | 8.52 | ||||||
Second Quarter | 83.60 | 58.70 | 83.70 | 57.50 | 14.00 | 9.76 | ||||||
Third Quarter | 75.80 | 61.60 | 75.80 | 61.20 | 12.65 | 9.03 | ||||||
Fourth Quarter | 66.60 | 40.60 | 65.90 | 40.60 | 9.15 | 5.49 | ||||||
2009 | ||||||||||||
First Quarter | 78.00 | 55.40 | 78.70 | 55.50 | 9.65 | 6.60 | ||||||
Second Quarter | 78.80 | 64.10 | 79.60 | 64.00 | 9.92 | 8.10 | ||||||
Third Quarter | 78.60 | 65.80 | 79.50 | 66.10 | 10.84 | 9.10 | ||||||
Fourth Quarter | 76.25 | 64.70 | 76.95 | 65.25 | 10.92 | 8.94 | ||||||
Monthly high and low | ||||||||||||
August 2009 | 70.60 | 65.80 | 71.20 | 66.10 | 10.04 | 9.10 | ||||||
September 2009 | 74.30 | 67.10 | 74.70 | 67.50 | 10.84 | 9.29 | ||||||
October 2009 | 76.25 | 67.00 | 76.95 | 67.30 | 10.92 | 9.73 | ||||||
November 2009 | 75.40 | 65.65 | 76.00 | 66.30 | 10.74 | 9.56 | ||||||
December 2009 | 68.35 | 64.70 | 68.90 | 65.25 | 9.96 | 8.94 | ||||||
January 2010 | 72.20 | 65.20 | 73.30 | 65.90 | 10.31 | 9.46 | ||||||
February 2010 | 73.50 | 69.20 | 74.65 | 70.15 | 10.28 | 9.84 | ||||||
March 2010 | 78.70 | 69.90 | 80.00 | 70.95 | 11.33 | 9.84 |
1) | One ADS = 1 Class B share. |
2) | 2005, 2006 and 2007 restated for reverse split 1:5 in 2008. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CHANGES IN NUMBER OF SHARES AND CAPITAL STOCK 2005–2009
Number of shares | Share capital | |||||
2005 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2006 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2007 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||
2008 | June 2, reverse split 1:5 | 3,226,451,735 | 16,132,258,678 | |||
2008 | July 23, new issue. (Class C shares, later converted to Class B) | 19,900,000 | 99,500,000 | |||
2008 | December 31 | 3,246,351,735 | 16,231,758,678 | |||
2009 | June 8, new issue (Class C-shares, later converted to Class B) | 27,000,000 | 135,000,000 | |||
2009 | December 31 | 3,273,351,735 | 16,366,758,678 |
SHARE CAPITAL
In the second quarter, as decided by the Board of Directors with authorization from the Annual General Meeting, a stock issue and a subsequent repurchase was made for the share-based employee remuneration program. 27 million Class C shares were issued and later repurchased as treasury stock. The shares were converted into Class B shares. The quotient value of the repurchased shares was SEK 135.0 million, representing less than 1 percent of capital stock, and the acquisition cost was SEK 135.1 million.
As of December 31, 2009, the Parent Company’s share capital was SEK 16,366,758,678 (16,231,758,678) represented by 3,273,351,735 (3,246,351,735) shares. The quotient value of each share is SEK 5.00 (SEK 5.00). As of December 31, 2009, the shares were divided into 261,755,983 (261,755,983) Class A shares, each carrying one vote, and 3,011,595,752 (2,984,595,752) Class B shares, each carrying one-tenth of one vote. As of December 31, 2009, Ericsson held 78 978 533 Class B shares as treasury shares.
TEN LARGEST COUNTRIES, OWNERSHIP
As of December 31, | ||||||
Percent of capital | 2009 | 2008 | ||||
Sweden | 47.9 | % | 47.2 | % | ||
United States | 24.2 | % | 25.0 | % | ||
United Kingdom | 7.9 | % | 8.9 | % | ||
Norway | 1.9 | % | 1.3 | % | ||
Canada | 1.2 | % | 1.1 | % | ||
Japan | 1.2 | % | 1.3 | % | ||
Switzerland | 1.1 | % | 1.7 | % | ||
France | 1.1 | % | 1.1 | % | ||
Netherlands | 0.8 | % | 0.8 | % | ||
Denmark | 0.8 | % | 0.8 | % | ||
Other countries | 11.9 | % | 10.8 | % |
Source: | Capital Precision, December 31, 2009. |
The information from Capital Precision is based on the shareholders’ domicile or in case of funds, areas of operation.
SHAREHOLDERS
As of December 31, 2009, the Parent Company had 690,726 shareholders registered at Euroclear Sweden AB (the Central Securities Depository—CSD), of which 1,421 holders had a US address. According to
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
information provided by Citibank, there were 242,229,433 ADSs outstanding as of December 31, 2009, and 5,068 registered holders of such ADSs. A significant number of the ADSs are held of record by banks, brokers and/ or nominees for the accounts of their customers. As of year end 2009, banks, brokers and/or nominees held ADSs on behalf of 240,915 accounts.
According to information known at year-end 2009, almost 77 percent of our Class A and Class B shares were owned by institutions, Swedish and international.
Our major shareholders do not have different voting rights than other shareholders holding the same classes of shares.
As far as we know, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person(s) separately or jointly.
TOP EXECUTIVES AND DIRECTORS, OWNERSHIP
Number of Class A shares | Number of Class B shares | Voting rights, percent | ||||
Top executives and directors as a group (28 persons) | 2,416 | 3,844,472 | 0.07 |
For individual holdings, see “Corporate Governance Report”.
The table shows the total number of shares in the Parent Company owned by top executives and directors as a group as of December 31, 2009.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The following table shows share information, as of December 31, 2009, with respect to our 15 largest shareholders, ranked by voting rights, as well as percentage of voting rights as of December 31, 2009, 2008 and 2007.
LARGEST SHAREHOLDERS, DECEMBER 31, 2009 AND PERCENTAGE OF VOTING RIGHTS, DECEMBER 31, 2009, 2008 AND 2007
Identity of person or group1) | Number of Class A shares | Percentage of total Class A shares | Number of Class B shares | Percentage of total Class B shares | 2009 Voting rights percent | 2008 Voting rights percent | 2007 Voting rights percent | |||||||
Investor AB | 102,664,038 | 39.22 | 61,414,664 | 2.04 | 19.33 | 19.42 | 19.49 | |||||||
AB Industrivärden | 76,680,600 | 29.29 | 0 | 0.00 | 13.62 | 13.28 | 13.36 | |||||||
Handelsbankens Pensionsstiftelse | 19,800,000 | 7.56 | 0 | 0.00 | 3.52 | 3.00 | 3.01 | |||||||
Swedbank Robur Fonder AB | 1,510,466 | 0.58 | 157,785,431 | 5.24 | 3.07 | 2.44 | 1.67 | |||||||
Skandia Liv AB | 15,270,077 | 5.83 | 17,079,591 | 0.57 | 3.02 | 2.89 | 2.75 | |||||||
Pensionskassan SHB Försäkringsföreningen | 12,672,000 | 4.84 | 0 | 0.00 | 2.25 | 2.26 | 2.27 | |||||||
BlackRock Advisors, Inc. | 0 | 0.00 | 101,632,540 | 3.38 | 1.81 | 0.00 | 0.06 | |||||||
Brandes Investment Partners LP | 0 | 0.00 | 55,603,761 | 2.54 | 1.36 | 2.08 | 1.73 | |||||||
AMF Pensionsforsakring AB | 800,000 | 0.31 | 65,104,680 | 2.16 | 1.30 | 1.55 | 0.89 | |||||||
OppenheimerFunds, Inc. | 0 | 0.00 | 72,541,045 | 2.41 | 1.29 | 1.31 | 1.57 | |||||||
Dodge & Cox, Inc. | 0 | 0.00 | 29,149,700 | 1.96 | 1.05 | 0.98 | 0.00 | |||||||
Gamla Livförsäkringsbolaget SEB Trygg Liv | 4,675,919 | 1.79 | 8,475,600 | 0.28 | 0.98 | 1.04 | 1.04 | |||||||
Handelsbanken Fonder AB | 2,335 | 0.00 | 52,894,889 | 1.76 | 0.94 | 1.02 | 1.08 | |||||||
Norges Bank Investment Management | 0 | 0.00 | 50,368,857 | 1.67 | 0.89 | 0.46 | 0.35 | |||||||
SEB Investment Management AB | 480,909 | 0.18 | 45,030,567 | 1.50 | 0.89 | 0.98 | 0.78 | |||||||
Others | 27,199,639 | 10.40 | 2,294,514,427 | 74.49 | 44.68 | 47.29 | 49.95 | |||||||
Total | 261,755,983 | 100.00 | 3,011,595,752 | 100.00 | 100.00 | 100.00 | 100.00 | |||||||
1) | Sources: Capital Precision, December 2009 and 2008. Euroclear Sweden AB, December 31, 2007. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
FORWARD-LOOKING STATEMENTSMARKET TRENDS
This Annual Report includes “forward-looking statements”, including statements reflecting management’s current views relatingTelecommunications plays a central role in the daily life of practically every person on earth. It is fundamental to the global economy and increasingly important to the environment. Over the last decade, mobile became a ubiquitous communications service, enabling people from all regions and walks of life to connect at an unprecedented level.
With the widespread adoption of mobile communications for voice and text messaging, the impetus to add more voice subscribers has started to diminish. Growth will continue with more than two billion new mobile voice subscriptions expected over the coming years but these will mainly come from low-usage customers in developing areas or users with multiple subscriptions. This dilutes average revenue per subscription but the underlying growth in minutes of use per user is stronger than the market, future market conditions, future eventssubscription dilution. Thus the total voice traffic continues to grow.
Mobile broadband is fast becoming the main growth driver for operators and expected operationalequipment suppliers globally. Consumer behavior is changing with the introduction of mobile broadband prompting innovation in a number of areas and financial performance.driving the need for ever greater bandwidth and data speeds. The words “believe”, “expect”, “anticipate”, “intend”, “may”, “could”, “plan”, “estimate”, “will”, “should”, “could”, “aim”, “target”, “might” or, in each case, their negative,industry focus is shifting from connecting places and similar wordspeople to connecting devices and applications.
There are intendedmany devices whose utility is enabled by mobile broadband, including mobile phones, personal computers and a growing number of electronic devices and software applications. Wireless connectivity will make broadband mobile and affordable to help identify forward-looking statements. Forward-looking statements may be found throughout this document, but in particularthe majority of people. Particularly in the sections captioned “Boardcase of Directors’ Report”machine-to-machine communications, it will also enable applications for a variety of industries and “Information onuses (e.g. smart grids, transportation, financial services and healthcare.) This is far beyond the Company”,capability and include statements regarding:scope of today’s networks.
We envision 50 billion network connections over the next decade, compared with some 5 billion currently. The underlying network technologies must be enhanced to accommodate such a vast number of connections. We expect Ericsson to benefit from this as network operators and service providers:
our goals, strategies and operational or financial performance expectations;Accelerate the transition from legacy technologies to IP- based technologies.
development of corporate governance standards, stock market regulationsRespond to rising demands for services that aid economic, societal and related legislationenvironmental development.
the growth of the marketsInvest in which we operate;mobile and fixed broadband access, multi-service edge routing, IP multimedia subsystems (IMS) based services and Metro optical and/or radio transport.
our liquidity, capital resources, capital expendituresPrioritize suppliers that combine technology with services for lower total cost, faster time-to-market and our credit ratings and the development in the capital markets, affecting our industry;reduced project risks.
Outsource more of their network-related activities and operations for increased flexibility and focus more on the expected demand for our existingconsumer experience.
These are all areas where the Company is well positioned and continues to invest heavily. Ericsson is now focused exclusively on serving network operators and service providers while device manufacturers and consumers are addressed via two joint venture companies, i.e. ST-Ericsson and Sony Ericsson.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
ICT, especially mobile, positively affects GDP levels as well as the environment
Even though the benefits of a connected society are difficult to precisely quantify, telecommunications has become as essential to any nation’s infrastructure as water, transportation or electricity. As already well demonstrated by telephony, there is clear evidence that the ubiquitous availability of affordable ICT services has a positive effect on any country’s economy. The ICT industry generates approximately 2 percent of global CO2emissions. However, ICT could potentially reduce the other 98 percent by 15 percent or more.
A higher GDP level obviously enables more broadband adoption but studies of the relationship between broadband penetration and economic development indicate that broadband plays an even more fundamental role than telephony in accelerating the economic and social development of a country. Mobile broadband networks, along with suitable devices and appropriate applications, can accelerate broadband penetration by avoiding the relatively more expensive and time-consuming deployments of fixed networks.
Mobile communications market
Mobile communication is the service of choice for consumers across the world and we believe there is considerable potential for further growth with the introduction of mobile broadband. During 2010, Ericsson expects mobile subscriptions to grow to more than 5.2 billion, mainly driven by voice in developing markets and broadband in more developed markets.
Although at a slower pace than in previous years, mobile communications continued to grow in 2009 with over 600 (670) million new subscriptions added. The number of mobile phones shipped was approximately 1,100 (1,190) million, mainly due to less subscriber additions and longer replacement intervals. Based on vendor reports and Ericsson estimates, the mobile systems market is estimated to have declined by more than 10 percent due to the economic slowdown and weaker demand for GSM. However, we believe investments in mobile communications are below optimal levels—suggesting the possibility of increased spending once the economy recovers.
At the end of 2009, the 4.6 (4.0) billion mobile subscriptions worldwide represented a global subscription penetration of 64 (59) percent (the actual number of mobile users is probably some 20-25 percent less due to inactive and multiple subscriptions). The High Speed Packet Access (HSPA) version of 3G/WCDMA is now deployed in 303 (247) commercial networks across 130 (110) countries. Ericsson supplies 144 (115) of these networks, serving the majority of mobile broadband subscribers.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The number of subscribers covered by commercial 3G/ WCDMA networks remains well below half that of 2G/GSM. Subscribers to mobile broadband services worldwide reached 360 (180) million by the end of 2009. The vast majority of the 360 million are handheld devices and the figure is set to soar with the mass consumer adoption of mobile internet devices such as smartphones and netbooks. This additional demand presents a significant opportunity for network infrastructure and systems integration, areas in which Ericsson has a market-leading position.
Fixed and mobile broadband main market drivers
The number of fixed and mobile broadband subscriptions is expected to increase five times between 2009 and 2015 to approximately 4 billion, of which the vast majority will be subscriptions for mobile broadband. Broadband internet access revenues for fixed operators (including cable operators) are expected to grow from around 25 to around 30 percent of total revenues in the next five years. Similarly, data’s share of mobile operators’ revenue, which is currently some 25 percent, is expected to account for a progressively larger portion of global mobile revenues over the next five years.
These projections assume the cost for mobile data services aligns with subscriber expectations, i.e. data must be priced lower than voice when comparing the amount of bandwidth consumed. Hence, operators may implement cost-efficient solutions for delivering more network capacity with revenues based on service value rather than the amount of capacity. This motivates a next-generation network that offers fixed and mobile convergence and leverages IP technology for a lower cost, higher performance broadband service.
However, operators’ willingness to invest in modernizing their networks can be inhibited by governmental regulations on how they can monetize their investments. For example, open access policies seek to facilitate the entrance into broadband markets for new competitors by requiring existing operators to lease access to their networks at regulated wholesale rates. The basic idea is that the more competitive consumer broadband markets are, the better the service offering, i.e. at lower prices, to more consumers. The alternative approach is to avoid forcing operators to lease network assets to competitors as it can undermine the incentive to invest.
The major challenge is identifying regulatory policies and practices that promote ubiquitous availability without undermining competition by mandating how an operator can monetize usage and capacity consumption.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Mobile broadband creates bottlenecks in parts of the network
The deployment of access nodes that connect devices at ever faster speeds increases subscriber uptake which can quickly create bottlenecks in other parts of the network especially on the backhaul part of the transport network.
Backhaul capacity needs to be provided more dynamically and efficiently than is possible with traditional backhaul solutions. Support of multiple services is required to ensure continuity for existing services as well as allowing new services. Operators want to maximize investments in existing infrastructure while leveraging the capabilities of new technologies.
Roughly two-thirds of backhaul globally is provided via microwave radio with the notable exception of the US and China where fiber is the preferred method. The dynamic nature of multi-service broadband access requires changes in the network technology used—a change from TDM/STM/ATM structures to IP/Ethernet. Ericsson already has a market-leading position in microwave radio systems and with the acquisitions of Marconi and Redback, the Company is well positioned with optical transmission systems and IP/Ethernet products.
Convergence and network transformation in focus
Placing greater emphasis on smarter networks and bundled service offerings, operators are starting the conversion to all-IP broadband networks. An increase in broadband access, routing and transmission deployments, combined with next-generation service delivery and revenue management systems, means operators will be able to offer a broader range of services to key customer segments. Each segment (business, consumer and wholesale) requires a different and varying mix of fixed, mobile and converged services.
Ericsson has developed a network architecture that meets consumer desires and operator requirements for converged services, covering the device ecosystems, fixed and mobile broadband access, transport, control, applications, revenue management, services and operations management. All the components have been integrated for a high performance and scalable end-to-end solution.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Ericsson’s full-service broadband solution has been built from in-house development, e.g. mobile broadband and IMS, and is complemented by the acquisitions of IP-routing products (Redback), optical transport (Marconi), deep fiber access systems (Entrisphere) and services;IPTV (Tandberg). The Company has also developed a comprehensive network transformation service that leverages professional services such as consulting and systems integration.
The internet is changing TV
The vision of the television industry is a simple one: to let you watch whatever, whenever and wherever you want and to help you discover other interesting programs and share your favorites and comments with other people. We believe that the best way to achieve this is to use internet technology enhanced with telecom-grade performance.
Consumers are already using the internet to find new ways of accessing TV, with interactive on-demand capabilities now a basic expectation. Despite this trend, we do not expect operators to become marginalized as bit pipe providers. Efficient bit pipes will be needed, but to differentiate their services, operators will need to continue to leverage their network capabilities. This is where IMS comes into play to provide the reliability and combination of services required for a portfolio of applications which differentiates from the competition.
Today some 1.2 billion (850 million) households have television services, of which only 25 (20) million are currently served by IPTV. This number is expected to grow to above 130 million by end of 2015. In the same time period, DSL-based broadband access is forecasted to grow from some 300 million to 400 million households and cable-TV-based broadband access is estimated to grow from 90 million to more than 100 million households. FTTx-based broadband access is estimated to increase from 35 million to some 100 million households. Building on the acquisitions of Tandberg Television and Entrisphere, the Company continues to invest in a leading position in IPTV and FTTx broadband access.
Mobility is changing the internet
Today, less than 40 percent of mobile subscribers are also internet users. However, the increasing use of high-speed applications in the fixed environment is stimulating a parallel expectation on the mobile side. When people become accustomed to using bandwidth-intensive applications at home or in the office, they tend to want them everywhere they go.
Multimedia-capable mobile internet devices and affordable mobile broadband access are driving a change in usage. Users will be able to create and discover content of personal interest and instantaneously share ideas and information with friends and colleagues. We see mobile internet devices helping to accelerate consumer demand for wireless internet access. This will have the greatest impact on emerging markets, where household PC penetration is only about 10 percent compared with well over 60 percent in developed markets. This is particularly significant as there are more than three times as many households in emerging markets as there are in more developed markets.
The Company has established a product unit to provide mobile broadband connectivity for notebook PCs and other mobile internet devices. Three of the world’s largest notebook manufacturers are already using Ericsson embedded modules. In addition, Intel, among others, has signed an agreement to use Ericsson’s mobile broadband technology.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operator consolidation and network sharing
Operator consolidation continues in all regions globally. In the Americas, consolidation has substantially reduced the number of operators. In Europe, mergers continue along with other collaborations such as network sharing and outsourcing of network operations. In other regions, operator consolidation has led to the emergence of rapidly growing pan-regional operators, particularly in the CEMA markets (Central and Eastern Europe, Middle East and Africa). Western European-based operators continue to invest in operators in developing markets such as Brazil and India. There have also been attempts to combine certain Indian operators with African operators but with little progress so far.
Despite the trend for operator consolidation, the number of mobile operators has actually increased in many regions over the past few years, with the notable exception of the Americas. The introduction of mobile number portability in many markets has simplified service substitution, leading to fierce competition and declining market share for the top two players in each market. Consequently, mobile operator margins are under pressure from the more intense competition which requires lower costs to compensate.
Network sharing offers potentially significant capex and opex savings to operators. However, the overall impact of network sharing should ultimately be neutral for mobile equipment vendors. To a certain extent, short-term disruption of capital expenditure plans or re-negotiation of contracts with the network sharing companies may be offset by faster coverage buildout, an earlier entry into expansion phases and increased sales of professional services, particularly network integration and managed operations. Over the longer term, the majority of savings come from shared plant and property rather than equipment as the equipment has to be dimensioned for the total traffic load of the combined networks.
Ericsson is well positioned to benefit from operator consolidation with a suite of solutions for network sharing and a well proven capability for outsourcing network operations, consulting and systems integration as well as a strong presence with consolidating companies.
Opportunities in Professional Services
Outsourcing of network operations is another form of consolidation. Operators are able to tap into the global scale and efficiency offered by a company like Ericsson via managed services. Ericsson is well positioned to benefit from this trend for operator consolidation with a suite of professional services and a well proven capability for outsourcing network operations.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Demand for professional services (i.e., managed services, consulting, systems integration, network optimization and modernization) is growing rapidly. The demand for professional services is increasing, driven by operators’ desire to optimize capex investments, take out unnecessary costs and deliver a competitive end-user experience.
The potential market for managed services is larger than the market for network equipment and related deployment services. A mature operator is estimated to typically spend some 5–6 percent of revenues on network equipment and 10–12 percent on operating its network.
More than two-thirds of network operational expenses today are believed to be handled in-house by operators but network operations are increasingly being outsourced as operators realize the competitive advantages and potential cost savings. Therefore, the available market for managed services is expected to continue to show good growth prospects.
Over time, as networks evolve, grow and become more versatile, their complexity increases and so does the number of operations and business support systems. This creates many opportunities to help operators streamline both networks and operations. One aspect of streamlining is reducing the number of support systems needed for the network. The other aspect of streamlining comes from outsourcing operations. Operators may also ask for advice and best-practice to create efficiency in their own operations. An indicator of this streamlining or efficiency trend is the increasing demand for consulting and systems integration services like revenue assurance, operations and business support systems transformation and service assurance.
Replacement rates affect mobile handset sales
With subscriber additions slowing, mobile phone replacements have increasingly become the key market driver, now accounting for roughly two-thirds of shipments and an even higher proportion of sales.
Mobile phone replacement tends to go in tandem with contract renewal. In mature markets, this is often operator driven via subsidies that lower or eliminate the upfront cost of buying a new phone in exchange for multi-year subscription commitments. Many operators are now pushing SIM card only plans to reduce phone subsidies for lower value subscriptions and prioritizing subsidies for smartphones and mobile internet devices that carry much higher value subscriptions. This is slowing the demand for replacement phones, especially in the low- to mid-end price range, as consumers postpone upgrading their mobile phones.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
In emerging markets, operators often subsidize multi SIM card plans rather than handsets. This has stimulated the market for ultra low priced phones rather than curtailing subscription growth or mobile phone usage. With inflationary and other economic pressures rising in these markets, consumers are buying more refurbished or unlicensed phones. Manufacturers of illicit phones enjoy cost advantages because they do not pay for licenses, test their products for safety or provide warranties or offer sales support. Some countries, such as India, are especially concerned about personal safety and national security of unlicensed phones, but enforcement is far less strict in most other emerging markets.
Sony Ericsson has refined its product portfolio and value proposition to target an increased share of the replacement market.
Effects of the macro-economic slowdown
While not a trend, the economic recession affected Ericsson’s business development for networks, but with improving operational efficiency, a market leading position, scale and a solid balance sheet, the Company is in a good position to meet continued tough market conditions.
The macro-economic developments are externally driven and beyond the control or the influence of the Company. But the Company does control the cost structure and is adjusting to a more challenging market environment including the effects of a global recession.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONTENTS
167 | ||
170 | ||
171 | ||
173 |
COMPANY HISTORY AND DEVELOPMENT
Innovating to empower people, business and society
Our origins date back to 1876 when Alexander Graham Bell filed a patent application in the United States for the telephone. The same year, Lars Magnus Ericsson opened a small workshop in Stockholm to repair telegraph instruments and sell his own telephone equipment.
Today, Ericsson is a leading provider of communications equipment, professional services and multimedia solutions. Our customers are operators of mobile and fixed networks worldwide. Over 1,000 networks in more than 175 countries utilize our equipment. More than 40 percent of all mobile traffic goes through Ericsson equipment.
We invest heavily in R&D and promote standardization and open systems. We have a long history of innovation and pioneering future telecommunications technologies. We have one of the industry’s most comprehensive intellectual property portfolios with approximately 25,000 patents.
Ericsson’s vision is “to be the prime driver in an all-communicating world”—a world in which any person can use voice, text, images and video to share ideas and access information whenever and wherever they want. Within a few years, we foresee communications extending beyond places and people to devices. Then everything that benefits from being connected will be. We strongly believe that affordable and generally available telecommunications are a prerequisite for social and economic development, and that the ICT industry is a key enabler for a sustainable and prosperous society and for bridging the digital divide.
Our strategy to realize our vision and reach our goals is to:
Excel with a leading portfolio in mobile and converged networks.
Expand in services by enabling world-class operations and network evolution.
Extend in multimedia, with leading applications and business support solutions.
Successful execution of the expectedstrategy is built on (1) close customer relations; (2) technology and services leadership and (3) operational or financial performanceexcellence in all we do.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Close customer relations
The foundation for our business is our strong, long-term customer relationships. We have been present in most of our markets for more than 100 years. We work closely with the operators to understand their business, their objectives and technology needs.
We are a major supplier to most of the world’s leading mobile operators and many leading wireline operators. We believe that our ability to offer superior end-to-end solutions and services makes us well positioned to assist operators with their network development and operations. With our significant scale advantage, custom-tailored end-to-end solutions and local presence, we are able to serve as a true partner—providing fast time-to-market and competitive total cost of ownership—helping our customers reach their business objectives.
Ericsson has 82,500 employees across the world, close to our customers. Local operations have strong technical, commercial and administrative support from specialist functions in R&D, supply, network operations centra and Group functions.
Technology and services leadership
Innovation is an important element of our corporate culture. It is key to our competitiveness and future success. We have a long tradition of developing innovative communication technologies. By early involvement in creating new standards we are often first to market with new solutions—a distinct competitive advantage.
We are a market leader in GSM, WCDMA/HSPA, LTE, packet core networks, microwave transmission, revenue management applications and managed services. We are growing in the area of wireline access, metro Ethernet solutions and optical transport, and we are a provider of multimedia solutions and brokering services for both wireless and wireline operators and TV broadcasters. We have recently acquired Nortel’s CDMA and LTE operations in North America.
Within our ambitious R&D program, we have approximately 18,300 (19,800) employees in 17 (17) countries worldwide and in 2009 we invested SEK 27 billion (excluding SEK 6 billion restructuring charges) or 13 percent of sales. Most of this is invested in product development, of which the greater part is in network infrastructure. We have continued to invest in strategically important areas of broadband access, converged core networks, IP technology and multimedia. Our ability to generate world-class innovations is enhanced through cooperation with a variety of partners, including customers, universities and research institutes.
Through many years of development of new technologies we have built up a considerable portfolio of intellectual property rights (IPR). As of December 31, 2009, we held approximately 25,000 (24,000) patents worldwide, including patents essential to the standards GSM, GPRS, EDGE, WCDMA, HSPA, MBMS, TD-SCDMA, cdma2000, WiMAX and LTE. We also hold essential patents for many other areas, e.g. IMS, Voice-over-IP, ATM, Messaging, WAP, Bluetooth, SDH/SONET, WDM and Carrier Ethernet.
Our intellectual property rights are valuable business assets. We license these rights to many other companies (infrastructure equipment suppliers, embedded module suppliers, handset suppliers and mobile application developers) in return for royalty payments and/or access to their intellectual property rights. We believe that we have access to all essential patents that are material to our business in part or in whole.
For more information, please see also Risk Factors, “Market, Technology and Business Risks”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operational excellence in all we do
Ericsson is focused mainly on infrastructure solutions and services for telecom operators. This focus enables us to have a functional organization and leverage our scale to gain competitive advantage. The Group is organized in some 200 legal entities, aligned to a common functional structure, using standardized processes.
Group functions coordinate the Company’s strategies, operations and resource allocation and establish the necessary directives, processes and organization for the effective governance of the Group. They also manage support units, such as Ericsson Research, IT and shared service centers.
The main operational functions/processes are:
Business units:
product management
product/service and solution development
sourcing, manufacturing and supply of products
sales of spare parts and repair.
Market units:
marketing and sales
service delivery
customer support.
Operational excellence is an important competitive advantage. and we focus on three areas:
Speed—to reduce time to market and working capital and to increase flexibility and responsiveness.
Scale—to leverage our market-leading position, enabling us to afford developing best-in-class solutions.
Skills—to work according to standardized processes with highly educated employees and partners.
We continuously focus on improving processes, support systems and our ways of working. Our mission, to empower people, business and society, requires strong change capabilities and efficient and effective processes, delivering innovative, high-quality solutions with low cost of ownership.
The Company culture of innovation and competitiveness and continuous competence development of our employees are key enablers for success. Ericsson Academy is one of our vehicles to achieve this—a new, innovative forum for learning and sharing of ideas and knowledge, open to our employees and available to our customers during 2010. We believe this will sharpen our employees’ skills, enhance performance for our customers, and give us a competitive edge in the new business and technology landscape.
To further increase flexibility and efficiency and reduce cost, we have several partnerships with strong players in outsourced manufacturing, IT services and certain areas of R&D and services. Examples are: Flextronics, HP, IBM and Tieto.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Legal name of the Parent Company:
Telefonaktiebolaget LM Ericsson (publ)
Organization number:
556016-0680
Legal form of the Parent Company:
A Swedish limited liability company, organized under the Swedish Companies Act. The terms “Ericsson”, “the Company”, “the Group”, “us”, “we”, and “our” all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries.
Country of incorporation:
Sweden.
Date of incorporation:
The Parent Company was incorporated on August 18, 1918, as a result of a merger between AB LM Ericsson & Co. and Stockholms Allmänna Telefon AB.
Domicile:
Our registered office is Telefonaktiebolaget LM Ericsson, SE–164 83 Stockholm, Sweden. Our headquarters are located at Torshamnsgatan 23, Kista, Sweden.
Telephone number:
+46 10 719 0000
Website:
www.ericsson.com
Agent in the US:
Ericsson Inc., Vice President Legal Affairs, 6300 Legacy Drive, Plano, Texas 75024. Telephone number: +1 972 583 0000.
Shares:
Ericsson’s Class A and Class B shares are traded on NASDAQ OMX Stockholm. In the US, our American Depository Shares (ADS), each representing one underlying Class B share, are traded on NASDAQ.
Parent Company operations:
The business of the Parent Company, Telefonaktiebolaget LM Ericsson, consists mainly of corporate management, holding company functions and internal banking activities. Parent Company operations also include customer credit management activities performed by Ericsson Credit AB on a commission basis.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Subsidiaries and associated companies:
For a listing of our significant subsidiaries, please see Notes to the Parent Company Financial Statements—Note P9, “Investments”. In addition to our joint ventures Sony Ericsson and ST EricssonST-Ericsson, we are engaged in a number of other minor joint ventures, cooperative arrangements and venture capital initiatives. For more information regarding risks associated with joint ventures, strategic alliances and third-party agreements please see Risk Factors, “Market, Technology and Business Risks”.
Documents on display:
We file annual reports and other strategic cooperation activities;information (normally in Swedish only) for certain domestic legal entities with Bolagsverket (Swedish Companies Registration Office) pursuant to Swedish rules and regulations.
You may order any of these reports from their website www.bolagsverket.se. If you access these reports, please be aware that the information included may not be indicative of our published consolidated results in all aspects. Other than information related to the Parent Company, only consolidated numbers for the Group totals are included in our reports.Filing in the US:Annual reports and other information are filed with the Securities and Exchange Commission (SEC) in the United States, pursuant to the rules and regulations that apply to foreign private issuers. Electronic access to these documents may be obtained from the SEC’s website, www.sec.gov/edgar/searchedgar/webusers.htm, where they are stored in the EDGAR database.
Ericsson has evolved with the changes in the industry:
from equipment driven, to services driven, with close to 40 percent of sales and almost 50 percent of employees now related to services
technologyfrom hardware to software, with more and industry trends including regulatory and standardization environment, competition andmore of the functionality in our customer structure; andsolutions being software-based
our plans for new productsfrom narrow-band voice to all-IP broadband, with strong focus on converged networks and services including researchcapabilities.
Customers
We supply equipment, integrated solutions, multimedia applications and development expenditures.
Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we cannot assure you that these expectations will materialize. Because forward-looking statements are based on assumptions, judgments and estimates, and are subjectservices to risks and uncertainties, actual results could differ materially from those described or implied herein. Important factors that could affect whether and to what extent anyalmost all major operators globally. We derive most of our forward-looking statements materialize include, but are notsales from large, multi-year agreements with a limited to:number of significant customers. Out of a customer base of more than 425 network operators, the 10 largest customers account for 42 (42) percent of our net sales and the 20 largest customers account for 57 (61) percent of our net sales. Our largest customer accounted for approximately 5 (6) percent of sales in 2009. For more information, see Risk Factors, “Market, Technology and Business Risks”
Our customers have different needs and demands when interacting with us:
our ability to respond to changesStrategy and business model development in the telecommunications market and other general market conditions in a cost effective and timely manner;an increasingly complex environment.
developmentsNetwork expansion and evolution in the political, economic or regulatory environment affecting the markets in which we operate, including trade embargos, changes in tax rates, changes in patent protection regulations, allegations of health risks from electromagnetic fields, cost of radio licenses for our customers, allocation of radio frequencies for different purposesresponse to subscriber and results of standardization activities within telecommunications;traffic growth and new technology.
the effectiveness of our strategiesSupport, training and their execution, including partnerships, acquisitions and divestitures;spare parts.
financial risks, including changes in foreign exchange ratesEfficient operations to keep operating expenses competitive.
Our own market units are our primary sales channel. They perform most of the sales where the customer is a fixed or interest rates, lack of liquiditymobile telecommunications operator.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
For certain products or accesssolutions we also use other channels:
TV solutions are sold through other equipment vendors as resellers as well as directly by business unit Multimedia to financing, changes in tax liabilities, credit risks in relation to counterparties, customer defaults under significant customer finance arrangements and risks of confiscation of assets in foreign countries;cable-TV operators.
the impact of the consolidation in the industry, and the resulting (i) reduction in the number of customers, and adverse consequences of a loss of, or significant decline in, ourMobile broadband modules are sold directly by business with a major customer; (ii) increased strength of a competitor or the establishment of new competitors;unit Networks to PC/netbook manufacturers.
impactFor newly acquired entities, certain market channels normally prevail during a transition period, e.g. LHS has maintained its market channels for billing solutions until it is fully owned and integrated.
A central IPR unit is managing sales of changes in product demand,licenses to equipment vendors or others who wish to use our patented technology.
Our two joint ventures are the channels to the handset and mobile platform/chipset markets.
Our sales to network operators is normally based on multi-year frame agreements after an initial tender with a system and supplier selection.
During the frame agreement, equipment, software, services and spare parts are called off according to price erosion, competition from existing or new competitors or new technologies or alliances between vendorslists. On a highly selective basis we occasionally provide customer financing. The vast majority of differentcustomer financing is provided by third parties, often guaranteed by Swedish export credit agencies. Various types of technologyservices, such as training or consulting, are often ordered separately as needed. Managed services contracts are normally also multi-year contracts and negotiated separately as they require extensive scoping and planning for transfer of employees and operations.
We have implemented a strict trade compliance program throughout the Company in order to comply with foreign and domestic laws and regulations, trade embargoes and sanctions in force. Our business activities should not be construed as supporting a particular political agenda or regime in any way.
Seasonality
Our quarterly sales, income and cash flow from operations are seasonal in nature and generally lowest in the first quarter of the year and highest in the fourth quarter. This is mainly a result of the seasonal purchase patterns of network operators. The table below illustrates the average seasonal effect on sales for the five-year period 2005 through 2009.
MOST RECENT 5-YEAR AVERAGE SEASONALITY
First quarter | Second quarter | Third quarter | Fourth quarter | |||||||||
Sequential Change | –20 | % | 13 | % | –6 | % | 29 | % | ||||
Share of annual sales | 22 | % | 25 | % | 23 | % | 30 | % |
Competitors
In the Networks segment, we compete mainly with large and well-established communication equipment suppliers. Our most significant competitors include Alcatel/Lucent, Huawei, Nokia/Siemens, Cisco, ZTE and Juniper. We also compete with numerous local and regional manufacturers and providers of communication equipment and services.
We believe the most important competitive factors in this industry include; existing customer relationships, superior network performance and subscriber experience, technological innovation, product design and cost, and the riskability to scale/ upgrade/migrate existing network investments, and the systems integration capability.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Competition in the Professional Services segment includes not only many of the suppliers mentioned above, but also large companies from other industry sectors, such as Accenture, HP/ EDS, IBM, and several India-based off-shore companies, e.g. Tata Consultancy Services and Tech Mahindra, as well as a large number of smaller but specialized companies operating on a local or regional basis.
As this segment grows, we expect to see additional competitors emerge, possibly as a result of network sharing or of network operators attempting to expand their business.
In the Multimedia segment we face significant competition. As the market is rather fragmented, our competitors vary widely depending on the product or service being offered. Competitors include many of the traditional communication equipment and IT suppliers as well as companies from other industries, such as Acision, Amdocs, Comverse, Harmonic, Oracle and Thomson.
Within the handset market, Sony Ericsson’s primary competitors include Nokia, Motorola, Samsung, LG, NEC and Sharp, as well as companies like Apple, HTC and RIM for smartphones. We believe that our joint venture with SONY Corporation creates a distinctive competitive advantage by combining our telecom expertise with their media, content and consumer equipment know-how.
We also compete in the mobile platform/wireless chipset market through our joint venture ST-Ericsson. Here, the largest competitor is Qualcomm. This market is growing in complexity as several new software platforms for handsets and other devices are being launched, e.g. Google’s Android, Microsoft’s Windows and Samsung’s Bada.
For more information on competitive risks, see Risk Factors, “Market, Technology and Business Risks”.
Operating segments
Ericsson is a vendor of solutions and services to telecom operators of fixed and mobile networks. We also provide TV solutions and managed services for television broadcast companies and mobile access modules to netbook manufacturers. Through two joint ventures we address the mobile handset and mobile platform/wireless chipset markets.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
When determining our operating segments, we have looked at which markets and what type of customers our products and services mayaim to attract as well as what distribution channels they are sold through. We have also considered commonality regarding technology, research and development. To best reflect our business focus and to facilitate comparability with peers, we report five operating segments:
Networks
Professional Services
Multimedia
Sony Ericsson
ST-Ericsson
Segment Networks
Networks includes products/solutions for:
wireless and wireline access
IP core networks
transmission/backhaul
network management
network rollout services
In 2009, we acquired Nortel’s CDMA and LTE operations. Services, other than network rollout, are reported under Professional Services. In 2009, segment Networks accounted for 66 percent of total sales.
Wireless and wireline access
Ericsson provides market-leading wireless access solutions to network operators for reliable, efficient and cost-effective mobile telephony networks. Ericsson also has a strong product portfolio for wireline access. Our
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
leadership in GSM, WCDMA/ HSPA and LTE technologies and now also CDMA enables us to offer tailored solutions regardless of the existing network standard used, delivering superior performance and consumer experience.
We provide wireline access solutions, for both fiber and copper, such as GPON and DSL. In 2009, AT&T appointed Ericsson as a domain vendor for wireline access solutions.
IP core network (switching, routing and control)
Our core network solutions include industry-leading softswitches, IP infrastructure for edge and core routing (Ericsson SmartEdge), IP-based Multimedia Subsystem (IMS) and gateways. GSM and WCDMA/HSPA share a common core network. Therefore operators’ previous investments are preserved as they migrate from voice-centric to multimedia networks. Our switching products have industry-leading scalability and capacity.
Transmission/backhaul
Our MINI-LINK microwave system is one of the world’s most widely deployed mobile backhaul solutions. Transport networks (e.g. MINI-LINK, metro optical networks) are essential elements of our end-to-end solutions.
Network management
Ericsson offers a portfolio of network management tools, supporting vital operator activities for management of existing networks as well as for introduction of new network architectures, technologies and services, such as: configuration, performance monitoring, security management, inventory management and software upgrades. The tools are applicable for fixed and mobile access, transport and core. They are often capable of managing also multi-vendor networks.
Network rollout services
Fast rollout of large networks involves a heavy ramp-up of resources. Ericsson’s Global Services organization uses a mix of local, in-house capabilities, authorized service providers and central specialist resources. We manage our capabilities in a way that has proven to be highly successful, resulting in successful projects and satisfied customers.
Sourcing, manufacturing and supply and availability of materials
Our hardware products largely consist of electronics, such as circuit boards, radio frequency (RF) modules, antennas etc. For manufacturing of products we purchase customized and standardized equipment, components and services from several global providers as well as from numerous local and regional suppliers. We produce certain types of components in-house, such as power modules and cables.
The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies (EMS), of which the vast majority is in low-cost countries. Node production, i.e. assembly, integration and testing of modules into complete radio base stations, mobile switching centers etc., is largely done in-house and on-demand.
Where possible, we rely on alternative supply sources for the purchased elements of our products. This avoids sole source situations and secures sufficient supply at competitive prices. When selecting a new supplier, we try to ensure that our technical standards and other requirements are met, including our supplier code of conduct. Assuming there will only be a moderate increase in near-term market demand, we do not sellforesee any
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
supply constraints to meet our expected production requirements during 2010. Variations in market prices for copper, aluminum, steel, precious metals, plastics and other raw materials generally have a limited effect on our total cost of goods sold. For more information related to sourcing, see Risk Factors, “Market, Technology and Business Risks”.
We continuously adjust our production capacity to meet expected demand. At year-end 2009, our overall capacity utilization was close to 100 percent. The table “Primary manufacturing and assembly facilities” summarizes where we have major sites as well as the total floor space at year-end. In Sweden, the ratesmajority of the floor space within our production facilities is used for node assembly and verification.
Segment Professional Services
Ericsson’s professional services capabilities include expertise in managed services, systems integration, consulting, education and customer support services.
Segment Professional Services accounted for 27 percent of total sales in 2009, up from 23 percent in 2008.
Managed services
We are the industry leader in managed services, managing networks with more than 370 million subscribers. We offer the most comprehensive managed services capabilities within the telecom industry:
Network design and planning.
Network operations; including networks without any Ericsson equipment installed, such as Sprint’s fixed and mobile CDMA/IDEN networks in the US.
Field operations and maintenance of sites.
Shared solutions; e.g. managed backhaul or levels we anticipate;hosting of platforms like pre-paid or real time billing/charging.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Systems integration
Operators can minimize risk by engaging Ericsson to:
the product mix of our sales;integrate equipment from multiple suppliers
our ability to develop commercially viable products, systems and services, to acquire licenses of necessarymanage technology to protect our intellectual property rights through patents and trademarks and to license them to others and defend them against infringement, and results of patent litigation;change programs
supply constraints, including componentdesign and integrate new solutions.
More and more operators who introduce multimedia services or production capacity shortages, suppliers’ abilitiesface challenging technology transformations ask us to cost effectively deliver quality products on timeserve as prime integrator, ensuring successful deployment of the total solution.
Consulting
With expertise in business, strategy and technology, our consultants support customers in sufficient volumes,decision-making, planning and risks relatedexecution in order to concentrationimprove and grow their business. Our Industry Programs package the expertise into end-to-end solutions in the key areas of proprietary or outsourced production in a single facility or sole source situations with a single vendor;multimedia, 3G rollout, broadband, value creation and
our ability to successfully manage operators’ networks to their satisfaction with satisfactory margins;
our ability to maintan a strong brand and good reputation and to be acknowledged for good corporate governance practices;
our ability to recruit and retain qualified management and other key employees.
Certain of these risks and uncertainties are described further in “Risk Factors”. We undertake no obligation to publicly update or revise any forward-looking statements included in this Annual Report, whether as a result of new information, future events or otherwise, except as required by applicable law or stock exchange regulation.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
revenue assurance.
We provide our customers with tailored education programs to ensure their employees have the skills and competences necessary for managing today’s and tomorrow’s complex technologies.
Customer support
Having experienced professionals available around-the-clock to provide customer support is a crucial part of our service offering. We support operators across the world with over one billion customers in total.
STOCK EXCHANGE TRADING
Ericsson’sThe Ericsson Class A and Class B shares are tradedlisted on NASDAQ OMX Stockholm and inStockholm. In the United States, the Class B shares are tradedlisted on NASDAQ in the form of American Depositary Shares (ADS) evidenced by American Depositary Receipts (ADR) under the symbol ERIC. Each ADS represents one Class B share. On April 15, 2008, the Ericsson Class B-share was de-listed from the London Stock Exchange.
Approximately 20 (44)In 2009, approximately 7 (20) billion shares were traded in 2008,on NASDAQ OMX Stockholm and NASDAQ, of which about 84 (83)74 (84) percent were on NASDAQ OMX Stockholm and about 1626 (16) percent were on NASDAQ. Trading volume in Ericsson shares decreased by approximately 5471 percent on NASDAQ OMX Stockholm and decreasedincreased by approximately 587 percent on NASDAQ as compared to 2007. (Note that2008. (Note: Ericsson had a reversed split of shares of 1:5 for the B-share on June 2, 2008 and a B-share/ADS ratio change from 10:1 to 1:1 change in 2008.the ADS ratio from June 10, 2008 which affects the comparative figures above.)
SHARE PRICE TREND
In 2008,2009, Ericsson’s total market value decreasedincreased by about 22 (45)13 (–22) percent to approximately SEK 215 billion (SEK 191 billion (SEK 245 billion in 2007)2008). The OMXSP Index on NASDAQ OMX Stockholm decreasedincreased by 4247 percent, the NASDAQ telecom index (CUTL) decreasedincreased by approximately 4348 percent and the NASDAQ composite index (CCMP) decreasedincreased by approximately 41 percent in 2008.44 percent.
SHARE DATA
2008 | 2007 | 2006 | 2005 | 2004 | ||||||
Earnings per share, diluted (SEK)1)3) | 3.52 | 6.84 | 8.23 | 7.64 | 5.54 | |||||
Operating income per share (SEK)1)3) | 7.47 | 9.50 | 11.10 | 10.25 | 8.30 | |||||
Cash flow from operating activities per share (SEK)1)3) | 7.50 | 5.95 | 5.75 | 5.15 | 6.95 | |||||
Stockholders’ equity per share (SEK)1)3) | 44.21 | 42.17 | 37.82 | 32.03 | 25.40 | |||||
P/E ratio, Class B shares1) | 17 | 11 | 17 | 18 | 19 | |||||
Total shareholder return1)3) | -0.18 | -0.44 | 0.02 | 0.31 | 0.64 | |||||
Dividend per share (SEK)2)3) | 1.85 | 2.50 | 2.50 | 2.25 | 1.25 |
2009 | 2008 | 2007 | 2006 | 2005 | ||||||
Earnings per share, diluted (SEK) | 1.14 | 3.52 | 6.84 | 8.23 | 7.64 | |||||
Operating income per share (SEK)2) | 5.80 | 7.50 | 9.64 | 11.29 | 10.44 | |||||
Cash flow from operating activities per share (SEK) | 7.67 | 7.54 | 6.04 | 5.82 | 5.26 | |||||
Stockholders’ equity per share, basic, end of period (SEK) | 43.79 | 44.21 | 42.17 | 37.82 | 32.03 | |||||
P/E ratio | 57 | 17 | 11 | 17 | 18 | |||||
Total shareholder return % | 15 | –20 | –43 | 3 | 31 | |||||
Dividend per share (SEK)1)2) | 2.00 | 1.85 | 2.50 | 2.50 | 2.25 |
1) |
2) | For 2009 and 2008 excluding restructuring charges. |
3) | For 2009 as proposed by the Board of Directors. |
All share based performance indicators except Earnings per share and Stockholders’ equity per share are calculated based on average number of shares outstanding, basic. Comparison periods has been restated for consistency.
SHARE PRICES ON NASDAQ OMX STOCKHOLM
(SEK) | 2008 | 2007 | 2006 | 2005 | 2004 | |||||
Class A at last day of trading1) | 59.30 | 76.80 | 138.00 | 137.50 | 108.50 | |||||
Class A high for year (May 19, 2008)1) | 83.60 | 148.50 | 154.50 | 143.50 | 130.50 | |||||
Class A low for year (October 10, 2008)1) | 40.60 | 73.00 | 104.50 | 99.00 | 70.00 | |||||
Class B at last day of trading1) | 58.80 | 75.90 | 138.25 | 136.50 | 106.00 | |||||
Class B high for year (May 19, 2008)1) | 83.70 | 149.50 | 155.00 | 145.00 | 122.50 | |||||
Class B low for year (October 10, 2008)1) | 40.60 | 72.65 | 104.50 | 97.00 | 63.50 |
(SEK) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||
Class A at last day of trading1) | 65.00 | 59.30 | 76.80 | 138.00 | 137.50 | |||||
Class A high for year (April 17, 2009)1) | 78.80 | 83.60 | 148.50 | 154.50 | 143.50 | |||||
Class A low for year (January 20, 2009)1) | 55.40 | 40.60 | 73.00 | 104.50 | 99.00 | |||||
Class B at last day of trading1) | 65.90 | 58.80 | 75.90 | 138.25 | 136.50 | |||||
Class B high for year (April 17, 2009)1) | 79.60 | 83.70 | 149.50 | 155.00 | 145.00 | |||||
Class B low for year (January 20, 2009)1) | 55.50 | 40.60 | 72.65 | 104.50 | 97.00 |
1) |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
OFFER AND LISTING DETAILS
NASDAQ OMX STOCKHOLM AND NASDAQ
Principal trading market—NASDAQ OMX Stockholm Stockholm—share prices
The table to the right states the high and low sales prices for our Class A and Class B shares as reported by NASDAQ OMX Stockholm for the last five years. The equity securities listed on the NASDAQ OMX Stockholm Official Price List of Shares currently comprise the shares of 263258 companies. Trading on the exchange generally continues until 5:30 p.m. (CET) each business day. In addition to official trading on the exchange, there is also trading off the exchange during official trading hours and also after 5:30 p.m. (CET). Trading on the exchange tends to involve a higher percentage of retail clients, while trading off the exchange often involves larger Swedish institutions, banks arbitraging between the Swedish market and foreign markets, and foreign buyers and sellers purchasing shares from or selling shares to Swedish institutions.
NASDAQ OMX Stockholm publishes a daily Official Price List of Shares which includes the volume of recorded transactions in each listed stock, together with the prices of the highest and lowest recorded trades of the day. The Official Price List of Shares reflects price and volume information for trades completed by the members.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Host market NASDAQ NASDAQ—ADS Pricesprices
The table to the right states the high and low sales prices quoted for our ADSs on NASDAQ for the last five years. The NASDAQ quotations represent prices between dealers, not including retail mark-ups, markdowns or commissions, and do not necessarily represent actual transactions.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
MARKET PRICES ON NASDAQ OMX STOCKHOLM AND NASDAQ
NASDAQ OMX Stockholm | NASDAQ | NASDAQ OMX Stockholm | NASDAQ | |||||||||||||||||||||
SEK per Class A share | SEK per Class B share | USD per ADS1) | SEK per Class A share | SEK per Class B share | USD per ADS1) | |||||||||||||||||||
Period | High | Low | High | Low | High | Low | High | Low | High | Low | High | Low | ||||||||||||
Annual high and low | ||||||||||||||||||||||||
20042) | 130.50 | 70.00 | 122.50 | 63.50 | 17.29 | 8.97 | ||||||||||||||||||
20052) | 143.50 | 99.00 | 145.00 | 97.00 | 18.60 | 13.89 | 143.50 | 99.00 | 145.00 | 97.00 | 18.60 | 13.89 | ||||||||||||
20062) | 154.50 | 104.50 | 155.00 | 104.50 | 20.57 | 14.44 | 154.50 | 104.50 | 155.00 | 104.50 | 20.57 | 14.44 | ||||||||||||
20072) | 148.50 | 73.00 | 149.50 | 72.65 | 21.71 | 11.12 | 148.50 | 73.00 | 149.50 | 72.65 | 21.71 | 11.12 | ||||||||||||
2008 | 83.60 | 40.60 | 83.70 | 40.60 | 14.00 | 5.49 | 83.60 | 40.60 | 83.70 | 40.60 | 14.00 | 5.49 | ||||||||||||
2009 | 78.80 | 55.40 | �� | 79.60 | 55.50 | 10.92 | 6.60 | |||||||||||||||||
Quarterly high and low | ||||||||||||||||||||||||
20072) | ||||||||||||||||||||||||
First Quarter | 148.50 | 119.75 | 149.50 | 119.00 | 21.07 | 16.97 | ||||||||||||||||||
Second Quarter | 139.30 | 124.25 | 140.30 | 125.00 | 20.26 | 18.05 | ||||||||||||||||||
Third Quarter | 142.00 | 117.70 | 143.70 | 118.20 | 21.71 | 16.83 | ||||||||||||||||||
Fourth Quarter | 134.00 | 73.00 | 135.20 | 72.65 | 20.98 | 11.12 | ||||||||||||||||||
2008 | ||||||||||||||||||||||||
First Quarter | 79.50 | 51.10 | 78.90 | 50.25 | 12.28 | 8.52 | 79.50 | 51.10 | 78.90 | 50.25 | 12.28 | 8.52 | ||||||||||||
Second Quarter | 83.60 | 58.70 | 83.70 | 57.50 | 14.00 | 9.76 | 83.60 | 58.70 | 83.70 | 57.50 | 14.00 | 9.76 | ||||||||||||
Third Quarter | 75.80 | 61.60 | 75.80 | 61.20 | 12.65 | 9.03 | 75.80 | 61.60 | 75.80 | 61.20 | 12.65 | 9.03 | ||||||||||||
Fourth Quarter | 66.60 | 40.60 | 65.90 | 40.60 | 9.15 | 5.49 | 66.60 | 40.60 | 65.90 | 40.60 | 9.15 | 5.49 | ||||||||||||
2009 | ||||||||||||||||||||||||
First Quarter | 78.00 | 55.40 | 78.70 | 55.50 | 9.65 | 6.60 | ||||||||||||||||||
Second Quarter | 78.80 | 64.10 | 79.60 | 64.00 | 9.92 | 8.10 | ||||||||||||||||||
Third Quarter | 78.60 | 65.80 | 79.50 | 66.10 | 10.84 | 9.10 | ||||||||||||||||||
Fourth Quarter | 76.25 | 64.70 | 76.95 | 65.25 | 10.92 | 8.94 | ||||||||||||||||||
Monthly high and low | ||||||||||||||||||||||||
August 2008 | 74.40 | 63.30 | 74.50 | 62.90 | 11.71 | 10.17 | ||||||||||||||||||
September 2008 | 75.80 | 63.00 | 75.80 | 63.00 | 11.60 | 9.03 | ||||||||||||||||||
October 2008 | 66.60 | 40.60 | 65.10 | 40.60 | 9.15 | 6.05 | ||||||||||||||||||
November 2008 | 60.60 | 46.50 | 61.10 | 46.40 | 8.03 | 5.49 | ||||||||||||||||||
December 2008 | 65.50 | 52.00 | 65.90 | 52.10 | 8.16 | 6.27 | ||||||||||||||||||
January 2009 | 67.90 | 55.40 | 68.10 | 55.50 | 8.49 | 6.81 | ||||||||||||||||||
August 2009 | 70.60 | 65.80 | 71.20 | 66.10 | 10.04 | 9.10 | ||||||||||||||||||
September 2009 | 74.30 | 67.10 | 74.70 | 67.50 | 10.84 | 9.29 | ||||||||||||||||||
October 2009 | 76.25 | 67.00 | 76.95 | 67.30 | 10.92 | 9.73 | ||||||||||||||||||
November 2009 | 75.40 | 65.65 | 76.00 | 66.30 | 10.74 | 9.56 | ||||||||||||||||||
December 2009 | 68.35 | 64.70 | 68.90 | 65.25 | 9.96 | 8.94 | ||||||||||||||||||
January 2010 | 72.20 | 65.20 | 73.30 | 65.90 | 10.31 | 9.46 | ||||||||||||||||||
February 2010 | 73.50 | 69.20 | 74.65 | 70.15 | 10.28 | 9.84 | ||||||||||||||||||
March 2010 | 78.70 | 69.90 | 80.00 | 70.95 | 11.33 | 9.84 |
1) | One ADS = 1 Class B share. |
2) |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
CHANGES IN NUMBER OF SHARES AND CAPITAL STOCK 2004–20082005–2009
Number of shares | Share capital | Number of shares | Share capital | |||||||||
2004 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | |||||||||
2005 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | ||||||
2006 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | ||||||
2007 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | December 31 (no changes) | 16,132,258,678 | 16,132,258,678 | ||||||
2008 | June 2, reverse split 1:5 | 3,226,451,735 | 16,132,258,678 | June 2, reverse split 1:5 | 3,226,451,735 | 16,132,258,678 | ||||||
2008 | July 23, new issue. (Class C-shares, later converted to Class B) | 19,900,000 | 99,500,000 | July 23, new issue. (Class C shares, later converted to Class B) | 19,900,000 | 99,500,000 | ||||||
2008 | December 31 | 3,246,351,735 | 16,231,758,678 | December 31 | 3,246,351,735 | 16,231,758,678 | ||||||
2009 | June 8, new issue (Class C-shares, later converted to Class B) | 27,000,000 | 135,000,000 | |||||||||
2009 | December 31 | 3,273,351,735 | 16,366,758,678 |
SHARE CAPITAL
On April 9, 2008In the second quarter, as decided by the Board of Directors with authorization from the Annual General Meeting, decided on a reverse split of shares 1:5stock issue and a B-share/ADS ratio change from 10:1 to 1:1.subsequent repurchase was made for the share-based employee remuneration program. 27 million Class C shares were issued and later repurchased as treasury stock. The last day of trading in the company´s shares on NASDAQ OMX Stockholm before the reverse split was May 30, 2008 and the first day of trading after the reverse split was June 2, 2008. At the same time thewere converted into Class B shares. The quotient value of the share was increased from SEK 1 to SEK 5. The first day of trading with ADSs on NASDAQ with ratio 1:1 to the consolidatedrepurchased shares was June 10, 2008.SEK 135.0 million, representing less than 1 percent of capital stock, and the acquisition cost was SEK 135.1 million.
As of December 31, 2008, Ericsson’s2009, the Parent Company’s share capital was SEK 16,231,758,678 (16,132,258,678)16,366,758,678 (16,231,758,678) represented by 3,246,351,735 (16,132,258,678)3,273,351,735 (3,246,351,735) shares. The quotient value of each share is SEK 5,005.00 (SEK 1.00)5.00). As of December 31, 2008,2009, the shares were divided into 261,755,983 (1,308,779,918)(261,755,983) Class A shares, each carrying one vote, and 2,984,595,752 (14,823,478,760)3,011,595,752 (2,984,595,752) Class B shares, each carrying one-tenth of one vote. As of December 31, 2008,2009, Ericsson held 61,066,09778 978 533 Class B shares as treasury shares.
There were 19,900,000 shares repurchased by EricssonTEN LARGEST COUNTRIES, OWNERSHIP
As of December 31, | ||||||
Percent of capital | 2009 | 2008 | ||||
Sweden | 47.9 | % | 47.2 | % | ||
United States | 24.2 | % | 25.0 | % | ||
United Kingdom | 7.9 | % | 8.9 | % | ||
Norway | 1.9 | % | 1.3 | % | ||
Canada | 1.2 | % | 1.1 | % | ||
Japan | 1.2 | % | 1.3 | % | ||
Switzerland | 1.1 | % | 1.7 | % | ||
France | 1.1 | % | 1.1 | % | ||
Netherlands | 0.8 | % | 0.8 | % | ||
Denmark | 0.8 | % | 0.8 | % | ||
Other countries | 11.9 | % | 10.8 | % |
Source: | Capital Precision, December 31, 2009. |
The information from Capital Precision is based on the shareholders’ domicile or in 2008.case of funds, areas of operation.
SHAREHOLDERS
As of December 31, 2009, the Parent Company had 690,726 shareholders registered at Euroclear Sweden AB (the Central Securities Depository—CSD), of which 1,421 holders had a US address. According to
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
TEN LARGEST COUNTRIES, OWNERSHIP
As of December 31, | ||||||
Percent of capital | 2008 | 2007 | ||||
Sweden | 46.0 | % | 46.1 | % | ||
United States | 28.5 | % | 32.3 | % | ||
United Kingdom | 11.8 | % | 6.7 | % | ||
Luxembourg | 3.6 | % | 3.9 | % | ||
Switzerland | 1.3 | % | 1.9 | % | ||
Belgium | 1.3 | % | 0.5 | % | ||
France | 1.1 | % | 1.3 | % | ||
Denmark | 0.8 | % | 1.0 | % | ||
Japan | 0.8 | % | 0.8 | % | ||
Australia | 0.7 | % | 0.3 | % | ||
Other countries | 4.1 | % | 5.2 | % |
SHAREHOLDERS
As of December 31, 2008, Ericsson had 728,333 shareholders registered at Euroclear Sweden AB (former VPC AB) (the Swedish Securities Register Center), of which 1,469 holders with a US address. According to information provided by Citibank, there were 329,803,670242,229,433 ADSs outstanding as of December 31, 2008,2009, and 5,1925,068 registered holders of such ADSs. A significant number of the ADSs are held of record by banks, brokers and/or nominees for the accounts of their customers. As of December 31, 2008,year end 2009, banks, brokers and/or nominees held ADSs on behalf of 361,915240,915 accounts.
According to information known at year-end 2008,2009, almost 8077 percent of our Class A and Class B shares were owned by institutions, Swedish and international.
Our major shareholders do not have different voting rights than other shareholders holding the same classes of shares.
As far as we know, the Company is not directly or indirectly owned or controlled by another corporation, by any foreign government or by any other natural or legal person(s) severallyseparately or jointly.
TOP EXECUTIVES AND DIRECTORS, OWNERSHIP
Number of Class A shares | Number of Class B shares | Voting rights, percent | ||||
Top executives and directors as a group (27 persons) | 1,216 | 3,788,765 | 0.07 |
Number of Class A shares | Number of Class B shares | Voting rights, percent | ||||
Top executives and directors as a group (28 persons) | 2,416 | 3,844,472 | 0.07 |
For individual holdings, see “Corporate Governance Report”.
The table shows the total number of shares in the Parent Company owned by top executives and directors as a group as of December 31, 2008.2009.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The following table sets forthshows share information, as of December 31, 2008,2009, with respect to our 15 largest shareholders, ranked by voting rights, as well as percentage of voting rights as of December 31, 2009, 2008 2007 and 2006.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
2007.
LARGEST SHAREHOLDERS, DECEMBER 31, 20082009 AND PERCENTAGE OF VOTING RIGHTS, DECEMBER 31, 2009, 2008 2007 AND 20062007
Identity of person or group1) | Number of Class A shares | Percentage of total Class A shares | Number of Class B shares | Percentage of total Class B shares | 2008 Voting rights percent | 2007 Voting rights percent | 2006 Voting rights percent | |||||||
Investor AB | 102,664,038 | 39.22 | 61,414,664 | 2.06 | 19.42 | 19.49 | 19.46 | |||||||
AB Industrivärden | 74,400,000 | 28.42 | 0 | 0.00 | 13.28 | 13.36 | 13.35 | |||||||
SHB Pensionsstiftelse | 16,780,600 | 6.41 | 0 | 0.00 | 3.00 | 3.01 | 3.01 | |||||||
Skandia Liv, AB | 14,436,459 | 5.52 | 17,617,586 | 0.59 | 2.89 | 2.75 | 2.54 | |||||||
Swedbank Robur fonder AB | 1,492,591 | 0.57 | 121,941,859 | 4.09 | 2.44 | 1.67 | 1.71 | |||||||
Pens. kassan SHB Förs.fören. | 12,672,000 | 4.84 | 0 | 0.00 | 2.26 | 2.27 | 2.27 | |||||||
Brandes Investment Partners LP | 0 | 0.00 | 116,436,174 | 3.90 | 2.08 | 1.73 | 0.00 | |||||||
AMF Pension | 800,000 | 0.31 | 78,794,438 | 2.64 | 1.55 | 0.89 | 1.07 | |||||||
Oppenheimer Funds Inc. | 0 | 0.00 | 73,368,079 | 2.46 | 1.31 | 1.57 | 1.20 | |||||||
SEB Trygg Försäkring | 4,656,819 | 1.78 | 11,493,600 | 0.39 | 1.04 | 1.04 | 1.01 | |||||||
SHB fonder AB | 92,030 | 0.04 | 56,083,016 | 1.88 | 1.02 | 1.08 | 0.99 | |||||||
Dodge & Cox, Inc. | 0 | 0.00 | 55,174,800 | 1.85 | 0.98 | 0.00 | 0.00 | |||||||
SEB Asset Management | 480,909 | 0.18 | 50,071,310 | 1.68 | 0.98 | 0.78 | 0.77 | |||||||
AllianceBernstein LP | 0 | 0.00 | 50,296,033 | 1.68 | 0.90 | 0.00 | 0.00 | |||||||
Barclays Global Inv. N.A. | 0 | 0.00 | 49,773,521 | 1.67 | 0.89 | 0.67 | 1.05 | |||||||
Others | 33,280,537 | 12.71 | 2,303,572,336 | 77.18 | 45.96 | 49.69 | 51.57 | |||||||
Total | 261,755,983 | 100 | 2,984,595,752 | 100 | 100 | 100 | 100 | |||||||
Identity of person or group1) | Number of Class A shares | Percentage of total Class A shares | Number of Class B shares | Percentage of total Class B shares | 2009 Voting rights percent | 2008 Voting rights percent | 2007 Voting rights percent | |||||||
Investor AB | 102,664,038 | 39.22 | 61,414,664 | 2.04 | 19.33 | 19.42 | 19.49 | |||||||
AB Industrivärden | 76,680,600 | 29.29 | 0 | 0.00 | 13.62 | 13.28 | 13.36 | |||||||
Handelsbankens Pensionsstiftelse | 19,800,000 | 7.56 | 0 | 0.00 | 3.52 | 3.00 | 3.01 | |||||||
Swedbank Robur Fonder AB | 1,510,466 | 0.58 | 157,785,431 | 5.24 | 3.07 | 2.44 | 1.67 | |||||||
Skandia Liv AB | 15,270,077 | 5.83 | 17,079,591 | 0.57 | 3.02 | 2.89 | 2.75 | |||||||
Pensionskassan SHB Försäkringsföreningen | 12,672,000 | 4.84 | 0 | 0.00 | 2.25 | 2.26 | 2.27 | |||||||
BlackRock Advisors, Inc. | 0 | 0.00 | 101,632,540 | 3.38 | 1.81 | 0.00 | 0.06 | |||||||
Brandes Investment Partners LP | 0 | 0.00 | 55,603,761 | 2.54 | 1.36 | 2.08 | 1.73 | |||||||
AMF Pensionsforsakring AB | 800,000 | 0.31 | 65,104,680 | 2.16 | 1.30 | 1.55 | 0.89 | |||||||
OppenheimerFunds, Inc. | 0 | 0.00 | 72,541,045 | 2.41 | 1.29 | 1.31 | 1.57 | |||||||
Dodge & Cox, Inc. | 0 | 0.00 | 29,149,700 | 1.96 | 1.05 | 0.98 | 0.00 | |||||||
Gamla Livförsäkringsbolaget SEB Trygg Liv | 4,675,919 | 1.79 | 8,475,600 | 0.28 | 0.98 | 1.04 | 1.04 | |||||||
Handelsbanken Fonder AB | 2,335 | 0.00 | 52,894,889 | 1.76 | 0.94 | 1.02 | 1.08 | |||||||
Norges Bank Investment Management | 0 | 0.00 | 50,368,857 | 1.67 | 0.89 | 0.46 | 0.35 | |||||||
SEB Investment Management AB | 480,909 | 0.18 | 45,030,567 | 1.50 | 0.89 | 0.98 | 0.78 | |||||||
Others | 27,199,639 | 10.40 | 2,294,514,427 | 74.49 | 44.68 | 47.29 | 49.95 | |||||||
Total | 261,755,983 | 100.00 | 3,011,595,752 | 100.00 | 100.00 | 100.00 | 100.00 | |||||||
1) | Sources: Capital Precision, December 2009 and 2008. Euroclear Sweden AB, |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Telecommunications plays a central role in the daily life of practically every person on earth. It is fundamental to the global economy and increasingly important to the environment. Over the last decade, mobile became a ubiquitous communications service, enabling people from all regions and walks of life to connect at an unprecedented level.
With the widespread adoption of mobile communications for voice and text messaging, the impetus to add more voice subscribers has started to diminish. Growth will continue with more than two billion new mobile voice subscriptions expected over the coming years but these will mainly come from low-usage customers in developing areas or users with multiple subscriptions. This dilutes average revenue per subscription but the underlying growth in minutes of use per user is stronger than the subscription dilution. Thus the total voice traffic continues to grow.
Mobile broadband is fast becoming the main growth driver for operators and equipment suppliers globally. Consumer behavior is changing with the introduction of mobile broadband prompting innovation in a number of areas and driving the need for ever greater bandwidth and data speeds. The industry focus is shifting from connecting places and people to connecting devices and applications.
There are many devices whose utility is enabled by mobile broadband, including mobile phones, personal computers and a growing number of electronic devices and software applications. Wireless connectivity will make broadband mobile and affordable to the majority of people. Particularly in the case of machine-to-machine communications, it will also enable applications for a variety of industries and uses (e.g. smart grids, transportation, financial services and healthcare.) This is far beyond the capability and scope of today’s networks.
We envision 50 billion network connections over the next decade, compared with some 5 billion currently. The underlying network technologies must be enhanced to accommodate such a vast number of connections. We expect Ericsson to benefit from this as network operators and service providers:
Accelerate the transition from legacy technologies to IP- based technologies.
Respond to rising demands for services that aid economic, societal and environmental development.
Invest in mobile and fixed broadband access, multi-service edge routing, IP multimedia subsystems (IMS) based services and Metro optical and/or radio transport.
Prioritize suppliers that combine technology with services for lower total cost, faster time-to-market and reduced project risks.
Outsource more of their network-related activities and operations for increased flexibility and focus more on the consumer experience.
These are all areas where the Company is well positioned and continues to invest heavily. Ericsson is now focused exclusively on serving network operators and service providers while device manufacturers and consumers are addressed via two joint venture companies, i.e. ST-Ericsson and Sony Ericsson.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
ICT, especially mobile, positively affects GDP levels as well as the environment
Even though the benefits of a connected society are difficult to precisely quantify, telecommunications has become as essential to any nation’s infrastructure as water, transportation or electricity. As already well demonstrated by telephony, there is clear evidence that the ubiquitous availability of affordable ICT services has a positive effect on any country’s economy. The ICT industry generates approximately 2 percent of global CO2emissions. However, ICT could potentially reduce the other 98 percent by 15 percent or more.
A higher GDP level obviously enables more broadband adoption but studies of the relationship between broadband penetration and economic development indicate that broadband plays an even more fundamental role than telephony in accelerating the economic and social development of a country. Mobile broadband networks, along with suitable devices and appropriate applications, can accelerate broadband penetration by avoiding the relatively more expensive and time-consuming deployments of fixed networks.
Mobile communications market
Mobile communication is the service of choice for consumers across the world and we believe there is considerable potential for further growth with the introduction of mobile broadband. During 2010, Ericsson expects mobile subscriptions to grow to more than 5.2 billion, mainly driven by voice in developing markets and broadband in more developed markets.
Although at a slower pace than in previous years, mobile communications continued to grow in 2009 with over 600 (670) million new subscriptions added. The number of mobile phones shipped was approximately 1,100 (1,190) million, mainly due to less subscriber additions and longer replacement intervals. Based on vendor reports and Ericsson estimates, the mobile systems market is estimated to have declined by more than 10 percent due to the economic slowdown and weaker demand for GSM. However, we believe investments in mobile communications are below optimal levels—suggesting the possibility of increased spending once the economy recovers.
At the end of 2009, the 4.6 (4.0) billion mobile subscriptions worldwide represented a global subscription penetration of 64 (59) percent (the actual number of mobile users is probably some 20-25 percent less due to inactive and multiple subscriptions). The High Speed Packet Access (HSPA) version of 3G/WCDMA is now deployed in 303 (247) commercial networks across 130 (110) countries. Ericsson supplies 144 (115) of these networks, serving the majority of mobile broadband subscribers.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The number of subscribers covered by commercial 3G/ WCDMA networks remains well below half that of 2G/GSM. Subscribers to mobile broadband services worldwide reached 360 (180) million by the end of 2009. The vast majority of the 360 million are handheld devices and the figure is set to soar with the mass consumer adoption of mobile internet devices such as smartphones and netbooks. This additional demand presents a significant opportunity for network infrastructure and systems integration, areas in which Ericsson has a market-leading position.
Fixed and mobile broadband main market drivers
The number of fixed and mobile broadband subscriptions is expected to increase five times between 2009 and 2015 to approximately 4 billion, of which the vast majority will be subscriptions for mobile broadband. Broadband internet access revenues for fixed operators (including cable operators) are expected to grow from around 25 to around 30 percent of total revenues in the next five years. Similarly, data’s share of mobile operators’ revenue, which is currently some 25 percent, is expected to account for a progressively larger portion of global mobile revenues over the next five years.
These projections assume the cost for mobile data services aligns with subscriber expectations, i.e. data must be priced lower than voice when comparing the amount of bandwidth consumed. Hence, operators may implement cost-efficient solutions for delivering more network capacity with revenues based on service value rather than the amount of capacity. This motivates a next-generation network that offers fixed and mobile convergence and leverages IP technology for a lower cost, higher performance broadband service.
However, operators’ willingness to invest in modernizing their networks can be inhibited by governmental regulations on how they can monetize their investments. For example, open access policies seek to facilitate the entrance into broadband markets for new competitors by requiring existing operators to lease access to their networks at regulated wholesale rates. The basic idea is that the more competitive consumer broadband markets are, the better the service offering, i.e. at lower prices, to more consumers. The alternative approach is to avoid forcing operators to lease network assets to competitors as it can undermine the incentive to invest.
The major challenge is identifying regulatory policies and practices that promote ubiquitous availability without undermining competition by mandating how an operator can monetize usage and capacity consumption.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Mobile broadband creates bottlenecks in parts of the network
The deployment of access nodes that connect devices at ever faster speeds increases subscriber uptake which can quickly create bottlenecks in other parts of the network especially on the backhaul part of the transport network.
Backhaul capacity needs to be provided more dynamically and efficiently than is possible with traditional backhaul solutions. Support of multiple services is required to ensure continuity for existing services as well as allowing new services. Operators want to maximize investments in existing infrastructure while leveraging the capabilities of new technologies.
Roughly two-thirds of backhaul globally is provided via microwave radio with the notable exception of the US and China where fiber is the preferred method. The dynamic nature of multi-service broadband access requires changes in the network technology used—a change from TDM/STM/ATM structures to IP/Ethernet. Ericsson already has a market-leading position in microwave radio systems and with the acquisitions of Marconi and Redback, the Company is well positioned with optical transmission systems and IP/Ethernet products.
Convergence and network transformation in focus
Placing greater emphasis on smarter networks and bundled service offerings, operators are starting the conversion to all-IP broadband networks. An increase in broadband access, routing and transmission deployments, combined with next-generation service delivery and revenue management systems, means operators will be able to offer a broader range of services to key customer segments. Each segment (business, consumer and wholesale) requires a different and varying mix of fixed, mobile and converged services.
Ericsson has developed a network architecture that meets consumer desires and operator requirements for converged services, covering the device ecosystems, fixed and mobile broadband access, transport, control, applications, revenue management, services and operations management. All the components have been integrated for a high performance and scalable end-to-end solution.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Ericsson’s full-service broadband solution has been built from in-house development, e.g. mobile broadband and IMS, and is complemented by the acquisitions of IP-routing products (Redback), optical transport (Marconi), deep fiber access systems (Entrisphere) and IPTV (Tandberg). The Company has also developed a comprehensive network transformation service that leverages professional services such as consulting and systems integration.
The internet is changing TV
The vision of the television industry is a simple one: to let you watch whatever, whenever and wherever you want and to help you discover other interesting programs and share your favorites and comments with other people. We believe that the best way to achieve this is to use internet technology enhanced with telecom-grade performance.
Consumers are already using the internet to find new ways of accessing TV, with interactive on-demand capabilities now a basic expectation. Despite this trend, we do not expect operators to become marginalized as bit pipe providers. Efficient bit pipes will be needed, but to differentiate their services, operators will need to continue to leverage their network capabilities. This is where IMS comes into play to provide the reliability and combination of services required for a portfolio of applications which differentiates from the competition.
Today some 1.2 billion (850 million) households have television services, of which only 25 (20) million are currently served by IPTV. This number is expected to grow to above 130 million by end of 2015. In the same time period, DSL-based broadband access is forecasted to grow from some 300 million to 400 million households and cable-TV-based broadband access is estimated to grow from 90 million to more than 100 million households. FTTx-based broadband access is estimated to increase from 35 million to some 100 million households. Building on the acquisitions of Tandberg Television and Entrisphere, the Company continues to invest in a leading position in IPTV and FTTx broadband access.
Mobility is changing the internet
Today, less than 40 percent of mobile subscribers are also internet users. However, the increasing use of high-speed applications in the fixed environment is stimulating a parallel expectation on the mobile side. When people become accustomed to using bandwidth-intensive applications at home or in the office, they tend to want them everywhere they go.
Multimedia-capable mobile internet devices and affordable mobile broadband access are driving a change in usage. Users will be able to create and discover content of personal interest and instantaneously share ideas and information with friends and colleagues. We see mobile internet devices helping to accelerate consumer demand for wireless internet access. This will have the greatest impact on emerging markets, where household PC penetration is only about 10 percent compared with well over 60 percent in developed markets. This is particularly significant as there are more than three times as many households in emerging markets as there are in more developed markets.
The Company has established a product unit to provide mobile broadband connectivity for notebook PCs and other mobile internet devices. Three of the world’s largest notebook manufacturers are already using Ericsson embedded modules. In addition, Intel, among others, has signed an agreement to use Ericsson’s mobile broadband technology.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operator consolidation and network sharing
Operator consolidation continues in all regions globally. In the Americas, consolidation has substantially reduced the number of operators. In Europe, mergers continue along with other collaborations such as network sharing and outsourcing of network operations. In other regions, operator consolidation has led to the emergence of rapidly growing pan-regional operators, particularly in the CEMA markets (Central and Eastern Europe, Middle East and Africa). Western European-based operators continue to invest in operators in developing markets such as Brazil and India. There have also been attempts to combine certain Indian operators with African operators but with little progress so far.
Despite the trend for operator consolidation, the number of mobile operators has actually increased in many regions over the past few years, with the notable exception of the Americas. The introduction of mobile number portability in many markets has simplified service substitution, leading to fierce competition and declining market share for the top two players in each market. Consequently, mobile operator margins are under pressure from the more intense competition which requires lower costs to compensate.
Network sharing offers potentially significant capex and opex savings to operators. However, the overall impact of network sharing should ultimately be neutral for mobile equipment vendors. To a certain extent, short-term disruption of capital expenditure plans or re-negotiation of contracts with the network sharing companies may be offset by faster coverage buildout, an earlier entry into expansion phases and increased sales of professional services, particularly network integration and managed operations. Over the longer term, the majority of savings come from shared plant and property rather than equipment as the equipment has to be dimensioned for the total traffic load of the combined networks.
Ericsson is well positioned to benefit from operator consolidation with a suite of solutions for network sharing and a well proven capability for outsourcing network operations, consulting and systems integration as well as a strong presence with consolidating companies.
Opportunities in Professional Services
Outsourcing of network operations is another form of consolidation. Operators are able to tap into the global scale and efficiency offered by a company like Ericsson via managed services. Ericsson is well positioned to benefit from this trend for operator consolidation with a suite of professional services and a well proven capability for outsourcing network operations.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Demand for professional services (i.e., managed services, consulting, systems integration, network optimization and modernization) is growing rapidly. The demand for professional services is increasing, driven by operators’ desire to optimize capex investments, take out unnecessary costs and deliver a competitive end-user experience.
The potential market for managed services is larger than the market for network equipment and related deployment services. A mature operator is estimated to typically spend some 5–6 percent of revenues on network equipment and 10–12 percent on operating its network.
More than two-thirds of network operational expenses today are believed to be handled in-house by operators but network operations are increasingly being outsourced as operators realize the competitive advantages and potential cost savings. Therefore, the available market for managed services is expected to continue to show good growth prospects.
Over time, as networks evolve, grow and become more versatile, their complexity increases and so does the number of operations and business support systems. This creates many opportunities to help operators streamline both networks and operations. One aspect of streamlining is reducing the number of support systems needed for the network. The other aspect of streamlining comes from outsourcing operations. Operators may also ask for advice and best-practice to create efficiency in their own operations. An indicator of this streamlining or efficiency trend is the increasing demand for consulting and systems integration services like revenue assurance, operations and business support systems transformation and service assurance.
Replacement rates affect mobile handset sales
With subscriber additions slowing, mobile phone replacements have increasingly become the key market driver, now accounting for roughly two-thirds of shipments and an even higher proportion of sales.
Mobile phone replacement tends to go in tandem with contract renewal. In mature markets, this is often operator driven via subsidies that lower or eliminate the upfront cost of buying a new phone in exchange for multi-year subscription commitments. Many operators are now pushing SIM card only plans to reduce phone subsidies for lower value subscriptions and prioritizing subsidies for smartphones and mobile internet devices that carry much higher value subscriptions. This is slowing the demand for replacement phones, especially in the low- to mid-end price range, as consumers postpone upgrading their mobile phones.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
In emerging markets, operators often subsidize multi SIM card plans rather than handsets. This has stimulated the market for ultra low priced phones rather than curtailing subscription growth or mobile phone usage. With inflationary and other economic pressures rising in these markets, consumers are buying more refurbished or unlicensed phones. Manufacturers of illicit phones enjoy cost advantages because they do not pay for licenses, test their products for safety or provide warranties or offer sales support. Some countries, such as India, are especially concerned about personal safety and national security of unlicensed phones, but enforcement is far less strict in most other emerging markets.
Sony Ericsson has refined its product portfolio and value proposition to target an increased share of the replacement market.
Effects of the macro-economic slowdown
While not a trend, the economic recession affected Ericsson’s business development for networks, but with improving operational efficiency, a market leading position, scale and a solid balance sheet, the Company is in a good position to meet continued tough market conditions.
The macro-economic developments are externally driven and beyond the control or the influence of the Company. But the Company does control the cost structure and is adjusting to a more challenging market environment including the effects of a global recession.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONTENTS
167 | ||
170 | ||
171 | ||
173 |
COMPANY HISTORY AND DEVELOPMENT
Innovating to empower people, business and society
Our origins date back to 1876 when Alexander Graham Bell filed a patent application in the United States for the telephone. The same year, Lars Magnus Ericsson opened a small workshop in Stockholm to repair telegraph instruments and sell his own telephone equipment.
Today, Ericsson is a leading provider of communications equipment, professional services and multimedia solutions. Our customers are operators of mobile and fixed networks worldwide. Over 1,000 networks in more than 175 countries utilize our equipment. More than 40 percent of all mobile traffic goes through Ericsson equipment.
We invest heavily in R&D and promote standardization and open systems. We have a long history of innovation and pioneering future telecommunications technologies. We have one of the industry’s most comprehensive intellectual property portfolios with approximately 25,000 patents.
Ericsson’s vision is “to be the prime driver in an all-communicating world”—a world in which any person can use voice, text, images and video to share ideas and access information whenever and wherever they want. Within a few years, we foresee communications extending beyond places and people to devices. Then everything that benefits from being connected will be. We strongly believe that affordable and generally available telecommunications are a prerequisite for social and economic development, and that the ICT industry is a key enabler for a sustainable and prosperous society and for bridging the digital divide.
Our strategy to realize our vision and reach our goals is to:
Excel with a leading portfolio in mobile and converged networks.
Expand in services by enabling world-class operations and network evolution.
Extend in multimedia, with leading applications and business support solutions.
Successful execution of the strategy is built on (1) close customer relations; (2) technology and services leadership and (3) operational excellence in all we do.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Close customer relations
The foundation for our business is our strong, long-term customer relationships. We have been present in most of our markets for more than 100 years. We work closely with the operators to understand their business, their objectives and technology needs.
We are a major supplier to most of the world’s leading mobile operators and many leading wireline operators. We believe that our ability to offer superior end-to-end solutions and services makes us well positioned to assist operators with their network development and operations. With our significant scale advantage, custom-tailored end-to-end solutions and local presence, we are able to serve as a true partner—providing fast time-to-market and competitive total cost of ownership—helping our customers reach their business objectives.
Ericsson has 82,500 employees across the world, close to our customers. Local operations have strong technical, commercial and administrative support from specialist functions in R&D, supply, network operations centra and Group functions.
Technology and services leadership
Innovation is an important element of our corporate culture. It is key to our competitiveness and future success. We have a long tradition of developing innovative communication technologies. By early involvement in creating new standards we are often first to market with new solutions—a distinct competitive advantage.
We are a market leader in GSM, WCDMA/HSPA, LTE, packet core networks, microwave transmission, revenue management applications and managed services. We are growing in the area of wireline access, metro Ethernet solutions and optical transport, and we are a provider of multimedia solutions and brokering services for both wireless and wireline operators and TV broadcasters. We have recently acquired Nortel’s CDMA and LTE operations in North America.
Within our ambitious R&D program, we have approximately 18,300 (19,800) employees in 17 (17) countries worldwide and in 2009 we invested SEK 27 billion (excluding SEK 6 billion restructuring charges) or 13 percent of sales. Most of this is invested in product development, of which the greater part is in network infrastructure. We have continued to invest in strategically important areas of broadband access, converged core networks, IP technology and multimedia. Our ability to generate world-class innovations is enhanced through cooperation with a variety of partners, including customers, universities and research institutes.
Through many years of development of new technologies we have built up a considerable portfolio of intellectual property rights (IPR). As of December 31, 2009, we held approximately 25,000 (24,000) patents worldwide, including patents essential to the standards GSM, GPRS, EDGE, WCDMA, HSPA, MBMS, TD-SCDMA, cdma2000, WiMAX and LTE. We also hold essential patents for many other areas, e.g. IMS, Voice-over-IP, ATM, Messaging, WAP, Bluetooth, SDH/SONET, WDM and Carrier Ethernet.
Our intellectual property rights are valuable business assets. We license these rights to many other companies (infrastructure equipment suppliers, embedded module suppliers, handset suppliers and mobile application developers) in return for royalty payments and/or access to their intellectual property rights. We believe that we have access to all essential patents that are material to our business in part or in whole.
For more information, please see also Risk Factors, “Market, Technology and Business Risks”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operational excellence in all we do
Ericsson is focused mainly on infrastructure solutions and services for telecom operators. This focus enables us to have a functional organization and leverage our scale to gain competitive advantage. The Group is organized in some 200 legal entities, aligned to a common functional structure, using standardized processes.
Group functions coordinate the Company’s strategies, operations and resource allocation and establish the necessary directives, processes and organization for the effective governance of the Group. They also manage support units, such as Ericsson Research, IT and shared service centers.
The main operational functions/processes are:
Business units:
product management
product/service and solution development
sourcing, manufacturing and supply of products
sales of spare parts and repair.
Market units:
marketing and sales
service delivery
customer support.
Operational excellence is an important competitive advantage. and we focus on three areas:
Speed—to reduce time to market and working capital and to increase flexibility and responsiveness.
Scale—to leverage our market-leading position, enabling us to afford developing best-in-class solutions.
Skills—to work according to standardized processes with highly educated employees and partners.
We continuously focus on improving processes, support systems and our ways of working. Our mission, to empower people, business and society, requires strong change capabilities and efficient and effective processes, delivering innovative, high-quality solutions with low cost of ownership.
The Company culture of innovation and competitiveness and continuous competence development of our employees are key enablers for success. Ericsson Academy is one of our vehicles to achieve this—a new, innovative forum for learning and sharing of ideas and knowledge, open to our employees and available to our customers during 2010. We believe this will sharpen our employees’ skills, enhance performance for our customers, and give us a competitive edge in the new business and technology landscape.
To further increase flexibility and efficiency and reduce cost, we have several partnerships with strong players in outsourced manufacturing, IT services and certain areas of R&D and services. Examples are: Flextronics, HP, IBM and Tieto.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Legal name of the Parent Company:
Telefonaktiebolaget LM Ericsson (publ)
Organization number:
556016-0680
Legal form of the Parent Company:
A Swedish limited liability company, organized under the Swedish Companies Act. The terms “Ericsson”, “the Company”, “the Group”, “us”, “we”, and “our” all refer to Telefonaktiebolaget LM Ericsson and its subsidiaries.
Country of incorporation:
Sweden.
Date of incorporation:
The Parent Company was incorporated on August 18, 1918, as a result of a merger between AB LM Ericsson & Co. and Stockholms Allmänna Telefon AB.
Domicile:
Our registered office is Telefonaktiebolaget LM Ericsson, SE–164 83 Stockholm, Sweden. Our headquarters are located at Torshamnsgatan 23, Kista, Sweden.
Telephone number:
+46 10 719 0000
Website:
www.ericsson.com
Agent in the US:
Ericsson Inc., Vice President Legal Affairs, 6300 Legacy Drive, Plano, Texas 75024. Telephone number: +1 972 583 0000.
Shares:
Ericsson’s Class A and Class B shares are traded on NASDAQ OMX Stockholm. In the US, our American Depository Shares (ADS), each representing one underlying Class B share, are traded on NASDAQ.
Parent Company operations:
The business of the Parent Company, Telefonaktiebolaget LM Ericsson, consists mainly of corporate management, holding company functions and internal banking activities. Parent Company operations also include customer credit management activities performed by Ericsson Credit AB on a commission basis.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Subsidiaries and associated companies:
For a listing of our significant subsidiaries, please see Notes to the Parent Company Financial Statements—Note P9, “Investments”. In addition to our joint ventures Sony Ericsson and ST-Ericsson, we are engaged in a number of other minor joint ventures, cooperative arrangements and venture capital initiatives. For more information regarding risks associated with joint ventures, strategic alliances and third-party agreements please see Risk Factors, “Market, Technology and Business Risks”.
Documents on display:
We file annual reports and other information (normally in Swedish only) for certain domestic legal entities with Bolagsverket (Swedish Companies Registration Office) pursuant to Swedish rules and regulations.
You may order any of these reports from their website www.bolagsverket.se. If you access these reports, please be aware that the information included may not be indicative of our published consolidated results in all aspects. Other than information related to the Parent Company, only consolidated numbers for the Group totals are included in our reports.Filing in the US:Annual reports and other information are filed with the Securities and Exchange Commission (SEC) in the United States, pursuant to the rules and regulations that apply to foreign private issuers. Electronic access to these documents may be obtained from the SEC’s website, www.sec.gov/edgar/searchedgar/webusers.htm, where they are stored in the EDGAR database.
Ericsson has evolved with the changes in the industry:
from equipment driven, to services driven, with close to 40 percent of sales and almost 50 percent of employees now related to services
from hardware to software, with more and more of the functionality in our solutions being software-based
from narrow-band voice to all-IP broadband, with strong focus on converged networks and services capabilities.
Customers
We supply equipment, integrated solutions, multimedia applications and services to almost all major operators globally. We derive most of our sales from large, multi-year agreements with a limited number of significant customers. Out of a customer base of more than 425 network operators, the 10 largest customers account for 42 (42) percent of our net sales and the 20 largest customers account for 57 (61) percent of our net sales. Our largest customer accounted for approximately 5 (6) percent of sales in 2009. For more information, see Risk Factors, “Market, Technology and Business Risks”
Our customers have different needs and demands when interacting with us:
Strategy and business model development in an increasingly complex environment.
Network expansion and evolution in response to subscriber and traffic growth and new technology.
Support, training and spare parts.
Efficient operations to keep operating expenses competitive.
Our own market units are our primary sales channel. They perform most of the sales where the customer is a fixed or mobile telecommunications operator.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
For certain products or solutions we also use other channels:
TV solutions are sold through other equipment vendors as resellers as well as directly by business unit Multimedia to cable-TV operators.
Mobile broadband modules are sold directly by business unit Networks to PC/netbook manufacturers.
For newly acquired entities, certain market channels normally prevail during a transition period, e.g. LHS has maintained its market channels for billing solutions until it is fully owned and integrated.
A central IPR unit is managing sales of licenses to equipment vendors or others who wish to use our patented technology.
Our two joint ventures are the channels to the handset and mobile platform/chipset markets.
Our sales to network operators is normally based on multi-year frame agreements after an initial tender with a system and supplier selection.
During the frame agreement, equipment, software, services and spare parts are called off according to price lists. On a highly selective basis we occasionally provide customer financing. The vast majority of customer financing is provided by third parties, often guaranteed by Swedish export credit agencies. Various types of services, such as training or consulting, are often ordered separately as needed. Managed services contracts are normally also multi-year contracts and negotiated separately as they require extensive scoping and planning for transfer of employees and operations.
We have implemented a strict trade compliance program throughout the Company in order to comply with foreign and domestic laws and regulations, trade embargoes and sanctions in force. Our business activities should not be construed as supporting a particular political agenda or regime in any way.
Seasonality
Our quarterly sales, income and cash flow from operations are seasonal in nature and generally lowest in the first quarter of the year and highest in the fourth quarter. This is mainly a result of the seasonal purchase patterns of network operators. The table below illustrates the average seasonal effect on sales for the five-year period 2005 through 2009.
MOST RECENT 5-YEAR AVERAGE SEASONALITY
First quarter | Second quarter | Third quarter | Fourth quarter | |||||||||
Sequential Change | –20 | % | 13 | % | –6 | % | 29 | % | ||||
Share of annual sales | 22 | % | 25 | % | 23 | % | 30 | % |
Competitors
In the Networks segment, we compete mainly with large and well-established communication equipment suppliers. Our most significant competitors include Alcatel/Lucent, Huawei, Nokia/Siemens, Cisco, ZTE and Juniper. We also compete with numerous local and regional manufacturers and providers of communication equipment and services.
We believe the most important competitive factors in this industry include; existing customer relationships, superior network performance and subscriber experience, technological innovation, product design and cost, and the ability to scale/ upgrade/migrate existing network investments, and the systems integration capability.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Competition in the Professional Services segment includes not only many of the suppliers mentioned above, but also large companies from other industry sectors, such as Accenture, HP/ EDS, IBM, and several India-based off-shore companies, e.g. Tata Consultancy Services and Tech Mahindra, as well as a large number of smaller but specialized companies operating on a local or regional basis.
As this segment grows, we expect to see additional competitors emerge, possibly as a result of network sharing or of network operators attempting to expand their business.
In the Multimedia segment we face significant competition. As the market is rather fragmented, our competitors vary widely depending on the product or service being offered. Competitors include many of the traditional communication equipment and IT suppliers as well as companies from other industries, such as Acision, Amdocs, Comverse, Harmonic, Oracle and Thomson.
Within the handset market, Sony Ericsson’s primary competitors include Nokia, Motorola, Samsung, LG, NEC and Sharp, as well as companies like Apple, HTC and RIM for smartphones. We believe that our joint venture with SONY Corporation creates a distinctive competitive advantage by combining our telecom expertise with their media, content and consumer equipment know-how.
We also compete in the mobile platform/wireless chipset market through our joint venture ST-Ericsson. Here, the largest competitor is Qualcomm. This market is growing in complexity as several new software platforms for handsets and other devices are being launched, e.g. Google’s Android, Microsoft’s Windows and Samsung’s Bada.
For more information on competitive risks, see Risk Factors, “Market, Technology and Business Risks”.
Operating segments
Ericsson is a vendor of solutions and services to telecom operators of fixed and mobile networks. We also provide TV solutions and managed services for television broadcast companies and mobile access modules to netbook manufacturers. Through two joint ventures we address the mobile handset and mobile platform/wireless chipset markets.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
When determining our operating segments, we have looked at which markets and what type of customers our products and services aim to attract as well as what distribution channels they are sold through. We have also considered commonality regarding technology, research and development. To best reflect our business focus and to facilitate comparability with peers, we report five operating segments:
Networks
Professional Services
Multimedia
Sony Ericsson
ST-Ericsson
Segment Networks
Networks includes products/solutions for:
wireless and wireline access
IP core networks
transmission/backhaul
network management
network rollout services
In 2009, we acquired Nortel’s CDMA and LTE operations. Services, other than network rollout, are reported under Professional Services. In 2009, segment Networks accounted for 66 percent of total sales.
Wireless and wireline access
Ericsson provides market-leading wireless access solutions to network operators for reliable, efficient and cost-effective mobile telephony networks. Ericsson also has a strong product portfolio for wireline access. Our
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
leadership in GSM, WCDMA/ HSPA and LTE technologies and now also CDMA enables us to offer tailored solutions regardless of the existing network standard used, delivering superior performance and consumer experience.
We provide wireline access solutions, for both fiber and copper, such as GPON and DSL. In 2009, AT&T appointed Ericsson as a domain vendor for wireline access solutions.
IP core network (switching, routing and control)
Our core network solutions include industry-leading softswitches, IP infrastructure for edge and core routing (Ericsson SmartEdge), IP-based Multimedia Subsystem (IMS) and gateways. GSM and WCDMA/HSPA share a common core network. Therefore operators’ previous investments are preserved as they migrate from voice-centric to multimedia networks. Our switching products have industry-leading scalability and capacity.
Transmission/backhaul
Our MINI-LINK microwave system is one of the world’s most widely deployed mobile backhaul solutions. Transport networks (e.g. MINI-LINK, metro optical networks) are essential elements of our end-to-end solutions.
Network management
Ericsson offers a portfolio of network management tools, supporting vital operator activities for management of existing networks as well as for introduction of new network architectures, technologies and services, such as: configuration, performance monitoring, security management, inventory management and software upgrades. The tools are applicable for fixed and mobile access, transport and core. They are often capable of managing also multi-vendor networks.
Network rollout services
Fast rollout of large networks involves a heavy ramp-up of resources. Ericsson’s Global Services organization uses a mix of local, in-house capabilities, authorized service providers and central specialist resources. We manage our capabilities in a way that has proven to be highly successful, resulting in successful projects and satisfied customers.
Sourcing, manufacturing and supply and availability of materials
Our hardware products largely consist of electronics, such as circuit boards, radio frequency (RF) modules, antennas etc. For manufacturing of products we purchase customized and standardized equipment, components and services from several global providers as well as from numerous local and regional suppliers. We produce certain types of components in-house, such as power modules and cables.
The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies (EMS), of which the vast majority is in low-cost countries. Node production, i.e. assembly, integration and testing of modules into complete radio base stations, mobile switching centers etc., is largely done in-house and on-demand.
Where possible, we rely on alternative supply sources for the purchased elements of our products. This avoids sole source situations and secures sufficient supply at competitive prices. When selecting a new supplier, we try to ensure that our technical standards and other requirements are met, including our supplier code of conduct. Assuming there will only be a moderate increase in near-term market demand, we do not foresee any
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
supply constraints to meet our expected production requirements during 2010. Variations in market prices for copper, aluminum, steel, precious metals, plastics and other raw materials generally have a limited effect on our total cost of goods sold. For more information related to sourcing, see Risk Factors, “Market, Technology and Business Risks”.
We continuously adjust our production capacity to meet expected demand. At year-end 2009, our overall capacity utilization was close to 100 percent. The table “Primary manufacturing and assembly facilities” summarizes where we have major sites as well as the total floor space at year-end. In Sweden, the majority of the floor space within our production facilities is used for node assembly and verification.
Segment Professional Services
Ericsson’s professional services capabilities include expertise in managed services, systems integration, consulting, education and customer support services.
Segment Professional Services accounted for 27 percent of total sales in 2009, up from 23 percent in 2008.
Managed services
We are the industry leader in managed services, managing networks with more than 370 million subscribers. We offer the most comprehensive managed services capabilities within the telecom industry:
Network design and planning.
Network operations; including networks without any Ericsson equipment installed, such as Sprint’s fixed and mobile CDMA/IDEN networks in the US.
Field operations and maintenance of sites.
Shared solutions; e.g. managed backhaul or hosting of platforms like pre-paid or real time billing/charging.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Systems integration
Operators can minimize risk by engaging Ericsson to:
integrate equipment from multiple suppliers
manage technology change programs
design and integrate new solutions.
More and more operators who introduce multimedia services or face challenging technology transformations ask us to serve as prime integrator, ensuring successful deployment of the total solution.
Consulting
With expertise in business, strategy and technology, our consultants support customers in decision-making, planning and execution in order to improve and grow their business. Our Industry Programs package the expertise into end-to-end solutions in the key areas of multimedia, 3G rollout, broadband, value creation and revenue assurance.
Education
We provide our customers with tailored education programs to ensure their employees have the skills and competences necessary for managing today’s and tomorrow’s complex technologies.
Customer support
Having experienced professionals available around-the-clock to provide customer support is a crucial part of our service offering. We support operators across the world with over one billion customers in total.
PRIMARY MANUFACTURING AND ASSEMBLY FACILITIES
2009 | 2008 | 2007 | ||||||||||
Sites | Thousands of sq meters | Sites | Thousands of sq meters | Sites | Thousands of sq meters | |||||||
Sweden | 8 | 224.7 | 8 | 226.0 | 8 | 244.3 | ||||||
China | 4 | 46.4 | 4 | 38.5 | 4 | 33.9 | ||||||
Estonia | 1 | 26.6 | — | — | — | — | ||||||
Italy | 2 | 20.1 | 2 | 20.1 | 2 | 20.1 | ||||||
Brazil | 1 | 23.3 | 1 | 18.0 | 1 | 25.9 | ||||||
India | 1 | 13.6 | 1 | 9.0 | 1 | 6.4 | ||||||
USA | — | — | 1 | 5.0 | 1 | 5.0 | ||||||
Other | — | — | 1 | 0.3 | 1 | 0.3 | ||||||
Total | 17 | 354.7 | 18 | 316.9 | 18 | 335.9 | ||||||
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Segment Multimedia
Sales in segment Multimedia were 6 percent of total sales excluding mobile platforms and PBX business.
Consumer and Business Applications
We provide our operator customers with multimedia solutions for the consumer and business markets. For the consumer segment, we offer Rich Communication Suite (RCS), mobile TV solutions, messaging, a social media portal, and location-based services. In the business communication segment, we provide converged, fixed-mobile, business communication solutions for enterprise needs. Ericsson Business Communication Suite (BCS) is a network operator application for business users.
Multimedia Brokering
Ericsson Multimedia Brokering offers a range of payment, messaging and location-based services solutions: e.g. IPX Payment, IPX Messaging and IPX Subscriber Information services. We offer multimedia brokering solutions, to help network operators monetize their network assets by facilitating payment and distribution of content through interconnection of network operators with content and media companies, information and search services, consumer brands and a variety of enterprises.
Service delivery and provisioning
Our service delivery platforms and provisioning solutions enable operators and service providers to create, sell, and manage multimedia services and multi-play offerings. By combining products, solutions, systems integration and business consulting into one offering, we create a multimedia marketplace for each customer’s specific needs.
Revenue management
We provide revenue management solutions, enabling new business models, utilizing our unique combined competence in prepaid and postpaid. Our convergent charging and billing offering helps operators reduce cost and increase revenues by creating one unified solution to manage all their customers and services.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
TV
We have an industry-leading IMS-enabled middleware in the IPTV market, and also offer a full system integration and solutions delivery role. We have strengthened our compression market leadership through the launch of the next-generation encoding platforms. In the Video on Demand and Content Management area, we extended our product range.
Segment Sony Ericsson
Sony Ericsson delivers innovative and feature-rich mobile phones, and accessories, which allow us to provide end-to-end solutions to our customers. The joint venture, formed in October 2001, combines the mobile communications expertise of Ericsson with the consumer electronic devices and content expertise of SONY Corporation. It forms an essential part of our end-to-end capability for mobile multimedia services.
Sony Ericsson’s results are reported according to the equity method under “Share in earnings of joint ventures and associated companies” in the income statement.
Please also see Notes to the Consolidated Financial Statements—Note C3, “Segment Information”.
Segment ST-Ericsson
Ericsson and STMicroelectronics formed ST-Ericsson as a 50/50 joint venture in February 2009. The combined company has one of the industry’s strongest product offerings in semiconductors and platforms for mobile devices for GSM/ EDGE, WCDMA/HSPA and TD-SCDMA as well as LTE. ST-Ericsson is a leading supplier to the top handset vendors, and its products and technologies enable more than half of all handsets in use today.
ST-Ericsson’s results are reported according to the equity method under “Share in earnings of joint ventures and associated companies” in the income statement.
Please see also Notes to the Consolidated Financial Statements—Note C3, “Segment Information”.
Geographical areas
Sales are reported in five geographical areas; Western Europe, CEMA (Central and Eastern Europe, Middle East and Africa), Asia Pacific, Latin America and North America. The areas have different characteristics in terms of penetration of fixed and mobile telephony, network traffic, sophistication of services, average country GDP and other economic factors. The distribution of sales between the areas mitigates volatility, as a decrease in one area is often offset by an increase in another. No individual country accounts for more than 10 percent of sales. However, due to our improved market position there, the US is expected to account for between 10 and 15 percent of sales next year.
SALES PERRE GIONAN D SEGMENT 2009
SEK billion | Networks | Professional Services | Multi- media | Total | ||||
Western Europe | 23.8 | 18.3 | 2.4 | 44.6 | ||||
CEMA1) | 32.7 | 12.9 | 5.1 | 50.7 | ||||
Asia Pacific | 50.5 | 12.2 | 3.1 | 65.8 | ||||
Latin America | 13.0 | 5.9 | 1.1 | 20.0 | ||||
North America | 17.1 | 6.7 | 1.6 | 25.4 | ||||
Total | 137.1 | 56.1 | 13.3 | 206.5 | ||||
1) | Central and Eastern Europe, Middle East and Africa. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
CONTENTS
180 | ||
182 | ||
182 | ||
183 |
The Remuneration Committee advises the Board of Directors on an ongoing basis on the remuneration of Group Management. This includes fixed salaries, pensions, other benefits and short-term and long-term variable remuneration, all in the context of pay and employment conditions throughout Ericsson. The Remuneration Committee also approves variable remuneration outcomes, prepares remuneration related proposals for Board and shareholder approval and develops and monitors the remuneration policy, strategies and general guidelines for employee remuneration.
During 2009, as the financial crisis hit the world with its full force, there was an increased public focus on compensation and benefits matters. In its work the Remuneration Committee has followed the debate closely. The Committee met seven times during the year. The winter meetings were primarily dedicated to reviewing and implementing a zero salary increase for senior management, the vesting of variable compensation awards and proposals to shareholders at the Annual General Meeting (AGM). In 2009 the policy for senior management remuneration and the Long-Term Variable share-based plans were brought to the AGM with no major changes proposed. During the summer the Committee reviewed short-term targets to ensure that they remained appropriate and challenging. In the fall it began the cycle again with a review of the remuneration strategy, the variable compensation plans and levels of fixed compensation. As is illustrated below, the Committee has also considered market trends, existing and potential remuneration risks, target setting, its working arrangements and investor consultations.
Activities during the second half of 2009 resulted in an updated remuneration policy being brought to the AGM which better demonstrates the basic remuneration principles within Ericsson.
This chapter outlines how the remuneration policy is implemented throughout Ericsson in line with corporate governance best practice, with specific references to senior management. To begin with, the work of the Remuneration Committee and our remuneration policy are explained, followed by descriptions of plans and approaches. More details of the remuneration of senior management and Board members’ fees can be found in the Notes to the Consolidated Financial Statements—Note C29, “Information regarding Members of the Board of Directors, the Management and Employees” (“Note C29”). Senior management comprises the Group Management Team, including the CEO, and will hereafter be referred to as “Group Management”.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
SUMMARIES OF 2009 SHORT- AND LONG-TERM VARIABLE REMUNERATION
What we call it | What is it? | What is the objective? | Who participates? | How is it earned? | ||||
Short-term: Remuneration delivered over 12 months or less | ||||||||
Fixed salary | Fixed remuneration paid at set times | Attract and retain employees, delivering part of annual remuneration in a predictable format | All employees | Market appropriate levels set according to position and evaluated according to individual performance | ||||
Short-Term Variable compensation (STV) | A variable plan that is measured and paid over a single year | Align employees with clear and relevant targets, providing an earnings opportunity in return for variable cost and performance | Managers, including Group Management | Achievements against set targets. Reward can increase to up to twice the target level and decrease to zero, depending on performance | ||||
Local and Sales Incentive Plans | Tailored versions of the STV | As for STV, tailored for local or business requirements, such as sales | Most employees | Similar to STV. All plans have maximum award and vesting limits | ||||
Long-term: Remuneration delivered over 3 years or more | ||||||||
Stock Purchase Plan (SPP) | All-employee stock- based plan | Reinforce a “One Ericsson” and align employees’ interests with those of shareholders | All employees are eligible | Buy one share and it will be matched by one share after 3 years if still employed | ||||
Key Contributor Retention Plan (KC) | Share-based plan for selected individuals | Recognize, retain and motivate key contributors for performance, critical skills and potential | Up to 10 percent of employees | If selected, get one more matching share in addition to the SPP one | ||||
Executive Performance Stock Plan (EPSP) | Share-based plan for senior executives | Remuneration for long-term commitment and earnings performance | Senior executives, including Group Management | Get up to 4, 6 or, for CEO, 8 further matching shares to the SPP one for EPS growth performance |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The Remuneration Committee’s work is the foundation for the governance of our remuneration processes together with our internal systems and audit controls. The Committee is chaired by Michael Treschow and its other members are Nancy McKinstry, Börje Ekholm and Karin Åberg. Karin Åberg replaced Monica Bergström after the 2009 Annual General Meeting. All the members are non-executive directors, independent (except for the employee representative) as required by the Swedish Code of Corporate Governance and have relevant knowledge and experience of remuneration matters.
The Company’s General Counsel acts as secretary to the Committee. The Chief Executive Officer, the Senior Vice President Human Resources & Organization and the Vice President Compensation & Benefits attend the Remuneration Committee meetings by invitation and assist the Committee in its considerations, except when issues relating to their own remuneration are being discussed.
The Remuneration Committee has appointed an independent expert advisor, Gerrit Aronson, to assist and advise the Committee. Gerrit Aronson provided no other services to the Company during 2009. The Remuneration Committee is also provided with national and international pay data collected from external survey providers and can call on other independent expertise, should it so require. The Chairman continues to ensure that contact is maintained, as necessary and appropriate, with principal shareholders on the subject of remuneration.
The purpose and function of the Remuneration Committee will continue going forward and its terms of reference can be found on the Ericsson website (www.ericsson.com). These terms of reference, together with the remuneration policy, are reviewed annually in light of matters such as changes to corporate governance best practice or changes to accounting, legislation, political opinion or business practices among peers. This helps to ensure that the policy continues to provide Ericsson with a competitive remuneration strategy. The policy for senior management remuneration is, in accordance with Swedish law, brought to shareholders annually for approval.
Remuneration at Ericsson is based on the principles of performance, competitiveness and fairness. Our remuneration policy together with the mix of remuneration elements are designed to reflect these remuneration principles by creating a balanced remuneration package. The policy for 2009 can be found in Note C29. The proposed resolution for the 2010 AGM can be found in the Board of Directors’ Report and, together with resolutions relating to the long-term variable remuneration plans, in the Notice of Annual General Meeting on our website. The auditors’ opinion on how we have followed our policy during 2009 is also posted on the website.
SHORT-TERM VARIABLE REMUNERATION STRUCTURE
Short-Term Variable remuneration as percentage of Fixed Salary | Percentage of Short-Term Variable remuneration opportunity | |||||||||||||||||
Target level | Maximum level | Actual paid for 2009 | Group Financial Targets | Unit/Functional Financial Targets | Non-Financial Targets | |||||||||||||
CEO 2009 | 40 | % | 80 | % | 39.5 | % | 90 | % | 0 | % | 10 | % | ||||||
CEO 2010 | 40 | % | 80 | % | — | 90 | % | 0 | % | 10 | % | |||||||
Average Group Management 20091) | 31 | % | 62 | % | 39.0 | % | 62 | % | 23 | % | 15 | % | ||||||
Average Group Management 20101) | 34 | % | 68 | % | — | 73 | % | 16 | % | 11 | % |
1) | Excludes CEO—differences in target and maximum levels from year to year are due to changes in the composition of Group Management |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
For Group Management, total remuneration consists of fixed salary, short-term and long-term variable remuneration, pension and other benefits. If the size of any one of these elements is increased or decreased, at least one other element has to change where the competitive position should remain unchanged.
Fixed salary
Fixed salaries are set to be competitive within an individual’s home market. When setting fixed salaries the Remuneration Committee considers the impact on total remuneration, including pension and associated costs. The absolute levels are determined by the size and complexity of the position and the year-to-year performance of the individual. Together with other elements of remuneration, Group Management salaries are subject to an annual review by the Remuneration Committee, which considers external pay data to ensure that levels of pay remain competitive and appropriate to the remuneration policy.
For 2009 it was decided that it was strategically appropriate not to increase fixed salaries for Group Management and other senior executives.
Variable remuneration
At Ericsson we strongly believe that, where possible, we should encourage variable compensation. First and foremost this aligns employees with clear and relevant targets but it also enables more flexible payroll costs and emphasizes the link between performance and pay. All variable remuneration plans have maximum award and vesting limits.
Short-Term Variable remuneration
The annual variable remuneration is delivered through cash-based programs. Specific business targets are derived from the annual business plan approved by the Board of Directors and, in turn, defined by the Company’s long-term strategy. Ericsson strives to grow faster than the market with best-in-class margins and strong cash conversion and therefore the starting point is to have these as three core targets:
Sales Growth
Operating Income
Cash Flow
For Group Management, targets are thus predominantly financial targets at either Group level or at the individual unit level and may also include operational targets like customer satisfaction and employee motivation. Targets are cascaded to all managers and will vary depending on the specific position.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
All variable remuneration targets have to be objective and measurable and typically refer to a result that is achieved on a collective basis. Each target is, in accordance with our strict governance instructions, defined in a “target specification” and measured over the calendar year. The target setting process is fully integrated with the strategy work and target levels are tested against plans and forecasts up until they are finalized around the turn of the year. The Board of Directors and the Remuneration Committee decide on all Ericsson Group targets, which are cascaded to unit-related targets throughout the Company, always subject to a two levels of management approval process. The Remuneration Committee monitors the appropriateness and fairness of Group target levels throughout the performance year and has the authority to revise them should they cease to be relevant, stretching and/or enhance shareholder value.
During 2009, approximately 65,000 employees participated in short-term variable plans. Of these 6,000 were in the global Short-Term Variable remuneration plan (“STV”) for management, including Group Management, and 4,000 were in the global Sales Incentive Plan. Local plans vary in design according to local competitive practice.
The chart above illustrates how payouts to Group Management have varied with performance over the past five years.
Long-Term Variable remuneration
Share-based long-term variable remuneration plans are submitted each year for approval by shareholders at the Annual General Meeting. All long-term variable remuneration plans are designed to form part of a well-balanced total remuneration and span over a minimum of three years. As these are variable plans, outcomes are unknown and rewards depend on long-term personal investment, corporate performance and resulting share price performance. During 2009, share-based remuneration was made up of three different but linked plans: The all-employee Stock Purchase Plan, the Key Contributor Retention Plan and the Executive Performance Stock Plan.
The Stock Purchase Plan
The all-employee Stock Purchase Plan is designed to offer, where practicable, an incentive for all employees to participate, reinforcing a “One Ericsson” aligned with shareholder interests. Employees can save up to 7.5
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
percent (CEO 9 percent) of gross fixed salary for purchase of class B shares at market price on the NASDAQ OMX Stockholm or ADSs on NASDAQ (contribution shares) over a twelve-month period. If the contribution shares are retained by the employee for three years after the investment and employment with the Ericsson Group continues during that time, the employee’s shares will be matched with a corresponding number of class B shares or ADSs. The plan was introduced in 2002 and employees in 94 countries participate. In December 2009 the number of participants was in excess of 18,000 or approximately 25 percent of eligible employees.
Participants save each month, beginning with August payroll, towards quarterly investments. These investments (in November, February, May and August) are matched on the third anniversary of each such investment and hence the matching spans over two financial years and two tax years.
The Key Contributor Retention Plan
The Key Contributor Retention Plan is part of Ericsson’s talent management strategy and is designed to give individuals recognition for performance, critical skills and potential as well as encourage retention of key employees. Under the program, operating units around the world are given quotas that total no more than 10 percent of employees world-wide. Each unit nominates individuals that have been identified according to performance, critical skills and potential. The nominations are calibrated in management teams locally and reviewed by both local and corporate Human Resources to ensure that there is a minimum of bias and a strong belief in the system. Participants selected obtain one extra matching share in addition to the one matching share for each contribution share purchased under the Stock Purchase Plan during a twelve-month program period. The plan was introduced in 2004.
The Executive Performance Stock Plan
The Executive Performance Stock Plan was also first introduced in 2004. The plan is designed to focus management on driving earnings and provide market competitive remuneration. Senior executives, including Group Management, are selected to obtain up to four or six extra shares (performance matching shares). This is in addition to the one matching share for each contribution share purchased under the all employee Stock Purchase Plan and the performance matching is subject to the fulfillment of an Earnings per Share (EPS) performance target. For the programs since 2006, the CEO is allowed to invest up to 9 percent of fixed salary in contribution shares and may obtain up to eight performance matching shares in addition to the Stock Purchase Plan matching share for each contribution share.
The use of average annual EPS growth with challenging and stretching targets as a performance measure has reflected Ericsson’s ongoing strategy of adding shareholder value through the long-term improvement of profitability.
The Remuneration Committee has been satisfied that the use of an EPS performance target has been preferable to other measures, including those that reflect relative performance. However, alternative measures are being considered for future plans. The performance targets are not capable of being retested after the end of the three-year performance period. If the minimum required performance is not achieved, all matching shares subject to performance will lapse. The Board may also reduce the number of performance matching shares, if deemed appropriate, considering the Company’s financial results and position, conditions on the stock market and other relevant circumstances at the time of matching. The Remuneration Committee analyzes the financial results against those of competitors in the industry.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
REMUNERATION LEVELS AS AT THE BEGINNING OF 2009 (SEK)
2009 Fixed Salary | 2009 Target Short-Term Variable | 2009 Target Long-Term Variable2) | Total Target Remuneration 20093) | Total Target Remuneration 2008 | ||||||
CEO | 15,750,000 | 6,300,000 | 7,087,500 | 29,137,500 | 29,137,500 | |||||
Average Group Management1) | 3,815,272 | 1,234,359 | 1,144,581 | 6,194,212 | 6,620,636 |
1) | Excludes CEO |
2) | Excludes personal investment from net income of up to 7.5% of gross fixed salary (9% CEO). Stock Purchase Plan matching shares plus half the maximum number of matching shares under the Executive Performance Stock Plan |
3) | The cost of pensions and other benefits are shown in Note C29. Swedish vacation pay costs are shown under Salary in Note C29 |
Benefits and terms of employment
Pension benefits follow the competitive practice in the employee’s home country and may contain various supplementary plans, in addition to any national system for social security. Where possible, pension plans are operated on a defined contribution basis. Under these plans, Ericsson pays contributions into a plan but does not guarantee the ultimate benefit, unless local regulations or legislation prescribe that defined benefit plans that do give such guarantees have to be offered.
For the CEO and other members of Group Management employed in Sweden a supplementary pension plan is applied in addition to the occupational pension plan for salaried staff on the Swedish labor market (ITP). The pension age is according to local practice, for Group Management normally 60 years. The pensionable salary for Group Management in Sweden consists of the annual fixed salary including vacation pay and the target value of the Short-Term Variable remuneration. For members of Group Management who are not employed in Sweden similar market competitive pension arrangements apply.
Other benefits, such as company car and medical insurance, are also set to be competitive in the local market. Group Management may not receive loans from the Company.
Group Management members have a mutual notice period of up to six months. Upon termination of employment by the Company, severance pay can amount to up to 18 months fixed salary.
Total remuneration
When we consider the remuneration of an individual, it is the total remuneration that matters. We first consider the total annual cash compensation, looking at target level of short-term variable compensation plus fixed salary. We then add target long-term variable remuneration to get total target remuneration and, finally, pension and other benefits to arrive at the total package.
The remuneration costs for the CEO and Group Management are reported in Note C29 but as those numbers reflect costs recognized in the income statement rather than the remuneration offered or the amounts received, we outline in the tables above and below how the total remuneration adds up in its structure and the alternative viewpoint of what was received during 2009. The table above shows the remuneration levels expected at the beginning of 2009 with the fixed salary level for the year and the expected value of short- and long-term variable remuneration.
The table below shows how much was received during 2009 as remuneration outcomes. This means adding the fixed salary paid; the short-term variable remuneration from the previous year which was paid out in 2009;
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
and the long-term variable remuneration outcomes from the 2002 stock option plan, and parts of the 2005 and 2006 Stock Purchase Plans (the Executive Performance Stock Plan did not vest for either program). The different tables show different aspects but illustrate, in particular, the variability of variable remuneration through the differences of costs, outcomes and expected rewards.
Board of Directors
The remuneration of Directors not employed by Ericsson is handled separately by the Nomination Committee and approved by the Annual General Meeting of shareholders. The remuneration consists of fees for Board and committee work, part of which can be delivered under a synthetic share program. The synthetic shares, which are valued in line with Ericsson’s Class B shares, vest in cash after the publication of the year-end financial statement during the fifth year after award.
REMUNERATION OUTCOMES 2009 (SEK)
2009 Fixed Salary | 2008 Short-Term Variable2) | 2002, 2005 and 2006 Long-Term Variable3) | Total Remuneration Received 20094) | Total Remuneration Received 2008 | ||||||
CEO | 15,750,000 | 630,000 | 646,470 | 17,026,470 | 20,230,551 | |||||
Total Group Management1) | 44,277,637 | 16,287,601 | 3,266,122 | 63,831,360 | 75,170,676 |
1) | Excludes CEO |
2) | The STV payouts for 2009, paid in 2010, were 6,226,920 for the CEO and 15,137,637 for the rest of Group Management |
3) | The CEO did not participate in the 2002 stock option plan. The 2005 and 2006 Long-Term Variable remuneration consists of vesting from the 2005 and 2006 Stock Purchase Plans only as the 2005 and 2006 Executive Performance Stock Plans did not vest |
4) | The cost of pensions and other benefits are shown in Note C29. Swedish vacation pay costs are shown under Salary in Note C29 |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
TheTelefonaktiebolaget LM Ericsson’s shareholders are invited to participate in the Annual General Meeting of Shareholders will take placeto be held on Tuesday, April 13, 2010 at the Annex to the Ericsson Globe, Globentorget, Stockholm,3 p.m. at 3.00 p.m. on Wednesday, April 22, 2009.Kistamässan, Kistagången 1, Kista/Stockholm.
ENTITLED TO ATTEND AND NOTICE OF ATTENDANCERegistration and notice of attendance
Shareholders who wish to attend the Annual General Meeting of Shareholders, must
have been entered intobe recorded in the share register kept by Euroclear Sweden AB (former VPC AB) (the Swedish Securities Registry) as of Thursday,on Wednesday, April 16, 2009;7, 2010; and
give notice of attendance to the Company at the latest on Thursday,Wednesday, April 16, 2009, at the Company’s web site7, 2010. Notice of attendance can be given on Ericsson’s website: www.ericsson.com, at telephone no.:by telephone: +46 8 402 90 54 on weekdays between 10 a.m. and 4 p.m. or at fax no.:by fax: +46 8 21 60 87.
Notice of attendance may also be given by mailin writing to: Telefonaktiebolaget LM Ericsson General Meeting of Shareholders Box 7835, SE-103 98 Stockholm, Sweden
When giving notice of attendance, please state name, date of birth, address, telephone no. and number of assistants.
The meeting will be conducted in Swedish and simultaneously interpreted into English.
SHARES REGISTERED IN THE NAME OF A NOMINEEShares registered in the name of a nominee
Shareholders, whoseIn addition to giving notice of attendance, shareholders who have their shares are registered in the name of a nominee must request the nominee to temporarily enter temporarily the shareholder into the share register as of Thursday April 16, 2009,in order to be entitled to participate atattend the Annual General Meeting of Shareholders. The shareholder is requestedmeeting. In order for such registration to inform thebe effective on Wednesday April 7, 2010, shareholders should contact their nominee well before that day.
PROXYProxy
Shareholders represented by proxy shall issuesubmit to the Company a power of attorney for the representative. To aA power of attorney issued by a legal entity must be accompanied by a copy of the entity’s certificate of registration (or, if(should no such certificate exists,exist, a corresponding document of authority) of the legal entity shallauthority must be attached. Thesubmitted). Such documents must not be olderno more than one year.year old. In order to facilitate the registration at the Annual General Meeting, the power of attorney in its original, certificates of registration and other documents of authority should be sent to the Company in advance. All documents should be sent to the Company at the address above so as to be availablefor receipt by Tuesday,Monday, April 21, 2009.12, 2010. Forms of power of attorney in Swedish and English are available at ouron Ericsson’s website: www.ericsson.com/investors.
DIVIDENDDividend
The Board of Directors has decided to propose the Annual General Meeting of Shareholders to resolve on a dividend of SEK 1.852.00 per share for the year 20082009 and Monday,that Friday, April 27, 2009 as16, 2010 will be the record day for dividend.
FINANCIAL INFORMATION FROM ERICSSONFinancial information from Ericsson
Interim reports 2009:2010: April 30, 200923, 2010 (Q1) July 24, 200923, 2010 (Q2) October 22, 20092010 (Q3) January 25, 20102011 (Q4)
Annual Report 2009:2010: March, 20102011
Form 20-F for the US market 2009: during Q2, 2010
Annual reports and other financial reports are available on our web site:website: www.ericsson.com/investors.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
For printed publications, contact:contact
Strömberg Distribution i Huddinge AB
SE-120 88 Stockholm, Sweden
Phone: +46 8 449 89 57
E-mail:Email: ericsson@strd.se
In the United States, Ericsson’s Transfer Agent Citibank:
Citibank Shareholder Services
Registered holders: +1 877 881 59 69 (toll free within the U.S.)
Interested investors: +1 800 808 80 10781 575 45 55 (outside of the U.S.)
E-mail:Email: ericsson@shareholders-online.com
www.citibank.com/adrwww.citi.com/dr
Ordering a hard copy of the Annual Report:
Phone toll free: +1 866 216 046
http://proxy.georgeson.com/annualreport/ericsson.htm
Contact information:information
Investor Relations for Europe, Middle East, Africa and Asia Pacific:
Telefonaktiebolaget LM Ericsson
SE-164 83 Stockholm, Sweden
Telephone: +46 10 719 00 00
E-mail:Email: investor.relations@ericsson.com
Investor Relations for the Americas:
Ericsson
The Grace Building
1114 Ave of the Americas, Suite #3410
New York, NY 10036, USA
Telephone: +1 212 685 40 30
E-mail:Email: investor.relations@ericsson.com
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Sustainability and corporate responsibility (CR) are integral parts of our business strategy, company culture and overall ways of working. Proactive engagement builds trust and creates opportunities with stakeholders.
SUSTAINABLE BUSINESS APPROACH
Ericsson’s core business boosts social and economic development. Telecommunications enables access to basic services that improve livelihoods and productivity. By replacing energy-intensive travel and delivering virtual products and services, it helps to create a carbon-lean economy.
Our integrated approach to CR is about maintaining the necessary controls to minimize risks, while at the same time creating positive social, economic and environmental business impacts. This makes the Company more competitive and resilient in today’s uncertain economic climate.
BUILDING BUSINESS ADVANTAGE
Energy-optimization and due diligence along the supply chain help differentiate us in a competitive market. Increasingly, customers evaluate us on sustainability performance and many customers have introduced ambitious goals to cut CO2 emissions, and want to secure their supply chains. Investors recognize good governance as a proxy for a well-run company. Several indices and ratings organizations rank Ericsson highly, including the FTSE4Good, the Carbon Disclosure Project and the SAM Corporate Sustainability Assessment.
Our employees value a responsible company. In a recent survey, close to 80 percent stated that CR had a positive influence on how they felt about working for Ericsson.
OUR FOCUS AREAS
Five priority areas are most relevant to our business strategy. These are monitored by our primary stakeholder groups, including customers, investors and analysts, employees, and media. Our challenge is to manage effectively the associated risks and opportunities.
RESPONSIBLE BUSINESS
A strong governance commitment helps ensure integrity. It starts at the top, from the Board of Directors and CEO, and extends to every operation and employee.
Our governance framework is built on the global Ericsson Group Management System (EGMS). This includes corporate responsibility elements such as the Code of Business Ethics, the Code of Conduct, anti-corruption measures and our Group-wide certified Environmental Management System. EGMS is reinforced by training, workshops and monitoring, including a Global Assessment Program run by assurance provider Det Norske Veritas (DNV).
In an increasingly global marketplace, actions in one region have worldwide implications. Company-wide policies build trust and help protect us from reputational risks.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
2008 performance highlights:
The Ericsson Board of Directors participated in the annual corporate responsibility training.
An anti-corruption course was rolled out to employees worldwide.
An internal employee awareness and engagement program for CR was launched, which included support for the Every Human has Rights campaign by the Elders.
Supply chain
Ericsson’s stakeholders expect the same high environmental and social standards, irrespective of whether production is in our own facilities or outsourced. Every supplier must comply with the Ericsson Code of Conduct and the requirements are an integral part of our overall supplier evaluation process.
During 2006–2008, we have established a more intensified Supplier Code of Conduct Program, to prioritize higher-risk suppliers and encourage and monitor supplier improvement. Increased supplier awareness and actions have improved working conditions, reduced environmental impact, and lessened the suppliers’ and Ericsson’s overall business risk.
The focus on local suppliers in 2008 was further intensified following media attention on working conditions with tower suppliers in Bangladesh. Some 85–90 percent of the tower suppliers world-wide have been audited or assessed, and continual improvement is ensured through systematic follow-up.
In 2009 we will monitor critical supplier operations, such as tower manufacturing, installation of equipment at telecom sites, surface treatment of parts, power supply and printed circuit board manufacturing. Local auditor training is also an ongoing priority, as is local capacity building among suppliers. 2008 performance highlights:
Eight auditor training sessions were held, bringing the number of Supplier Code of Conduct auditors to over 50.
Performed more than 400 on-site audits and assessments.
On-line Supplier Code of Conduct “observer” training course completed by more than 1,300 Ericsson employees, exceeding the target that over 90 percent of strategic sourcing personnel should complete training.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Joined Global e-Sustainability E-TASC program, an industry initiative to inform customers about our own performance as a supplier.
Code of Conduct implementation verified by DNV as part of global assessment plan and CR Report assurance process.
Climate change and the environment
Life-cycle assessment shows that our most material environmental impact is energy use. Our greatest carbon impact derives from our products in operation—over two-thirds of total energy consumed occurs when our products are in use. CO2 emissions from our own operations is just 2–3 percent of our total carbon footprint.
Ericsson maintains a leadership position in energy efficiency. For us, as for our customers, low energy consumption offers competitive advantage. Ericsson is also creating new revenue streams by helping markets like China and India leapfrog to carbon-lean technologies. We have also developed services aimed to support operator energy-consumption analysis on both new and deployed networks.
Being climate-smart strengthens our ability to handle risks. Although Ericsson is less vulnerable than most companies, we need to be prepared to address changing legislative demands. With products that have a long life-cycle, being at the forefront of technology is critical.
2008 performance highlights:
Energy-efficiency target for GSM exceeded by 7.5 percent and for WCDMA by 15 percent in 2008.
New Group target was set to reduce life-cycle carbon footprint by 40 percent by 2012.
New sustainable innovations were developed, including Wind Turbine Tower Tube prototype, diesel battery hybrid solution for off-grid radio sites, and a green site in Cambodia, where for the first time ever both radio and transmission equipment is powered by solar energy.
New energy optimization services were introduced.
Joined the UN Global Compact’s Caring for Climate Coalition.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Electronic waste recovery program processed globally via ecology management; over 90 percent of collected electronics were recovered; less than 10 percent directed to landfill.
Meeting the Millennium Development Goals
Connectivity fuels economic growth. Ericsson is extending the benefits of telecom by providing affordable access to basic services that can improve livelihoods, health care, education and other fundamental human rights. In future, the bulk of new mobile subscriptions are expected to come from emerging markets such as Africa, China and India.
Through our presence in emerging markets, we strive to be a force for good. Ericsson is committed to help achieve the eight UN Millennium Development Goals (MDGs), to eliminate extreme poverty by 2015.
2008 performance highlights:
Together with Columbia University’s Earth Institute, we are delivering connectivity to more than half a million people living in the Millennium Villages across 10 African countries.
We conducted market research on mobile content services in India and Uganda. Results showed that 96 percent of the respondents expressed a positive intention to use mobile data services. However, information requirements concerning user’s livelihoods are not met today and lack of applications in local languages are still a barrier to using the services for many.
Market research done in Indonesia, Rwanda and South Africa to understand the impact mobile broadband and Internet has on lives in emerging markets. The research showed clear benefits related to development, resource management and networking for businesses, institutions and people.
Ericsson joined the Business Call for Action to support the MDGs by UK Prime Minister Gordon Brown and was one of only three companies invited to address the UN General Assembly on the MDGs in September.
Employees
By ensuring a fair and safe environment, Ericsson minimizes business risks and positively contributes to our main asset—our people. Ericsson’s core values of professionalism, respect and perseverance remain constant.
With 73 percent of the workforce located outside Sweden, diversity is a hallmark of Ericsson’s culture. It enhances competitiveness by stimulating creativity and openness to change. It also minimizes risks by equipping the Company to meet the demands of a global, dynamic and diverse marketplace.
Currently, women represent 21 percent of the Group’s employees and hold 18 percent of managerial positions. Our challenge is to encourage greater female representation. In 2008, 90 percent of employees participated in our annual employee opinion surveys. The results showed that the Company’s Human Capital Index scores highly according to external benchmarks.
2008 performance highlights include:
Completed Individual Performance Management for 91 percent of employees.
Established global diversity parameters and integrated diversity into Individual Performance Management.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Implemented global on-line “Diversity I-Check” training to increase awareness of why diversity is important.
Health and Safety Group reporting structure was established.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Remuneration at Ericsson is based on the principles of performance, competitiveness and fairness and our remuneration policy together with the mix of several remuneration elements are designed to reflect these remuneration principles in a balanced way by creating an integral remuneration package. For our senior management, total remuneration consists of fixed salary, short-term and long-term variable remuneration, pension and other benefits. If the size of any of these elements should be increased or decreased, at least one other element has to change where the competitive position should remain unchanged.
This chapter outlines with specific references to senior management how we implement our remuneration policy throughout Ericsson in line with corporate governance best practice. Details of Board Directors’ fees and remuneration of senior management comprising the Group Management Team, including the CEO, hereafter referred to as “Group Management” can be found in Notes to the Consolidated Financial Statements—Note C29, “Information regarding Employees, Members of the Board of Directors and Management”. The Company is required to submit the formal remuneration policy for senior management for shareholder approval at the Annual General Meeting. The proposed resolution for 2009, which remains materially the same as the 2008 policy, together with resolutions relating to the Company’s long-term variable remuneration plans are set out in the Notice of Annual General Meeting on Ericsson’s website (www.ericsson.com). The auditors’ opinion on how we have followed our policy during 2008 is also posted on the website.
THE REMUNERATION COMMITTEE
Remuneration processes by the nature of their sensitivity require clear controls. Within Ericsson these controls are built on three foundations: Audit controls, our internal system that requires two levels of managers to approve any remuneration decision and Board of Directors and Remuneration Committee authorization.
The Remuneration Committee advises the Board of Directors on an ongoing basis on the remuneration of Group Management, including fixed salaries, pensions, other benefits and short-term and long-term variable remuneration. The Remuneration Committee also approves variable remuneration outcomes, prepares remuneration related proposals for Board and shareholder approval and develops and monitors the remuneration policy, strategies and general guidelines for employee remuneration. The Committee considers pay and employment conditions throughout the Company when dealing with Group Management remuneration.
The Remuneration Committee is chaired by Michael Treschow and its other members are Nancy McKinstry, Börje Ekholm and Monica Bergström, all of whom are non-executive directors and independent as required by the Swedish Code of Corporate Governance. The Chairman continues to ensure that the Company maintains contact, as necessary, with its principal shareholders on the subject of remuneration.
The Company’s General Counsel acts as secretary to the Committee and the CEO, the Senior Vice President Human Resources & Organization and the Vice President Compensation & Benefits attend the Remuneration Committee meetings by invitation and assist the Committee in its considerations, except when issues relating to their own remuneration are being discussed or decided.
The Remuneration Committee has appointed an independent expert advisor, Gerrit Aronson, to assist and advice the Committee. Gerrit Aronson provided no other services to the Company during 2008. The Remuneration Committee is also provided with national and international pay data collected from external survey providers and can call on other independent expertise should it so require.
The purpose and function of the Remuneration Committee will continue going forward and its terms of reference can be found on our website. These terms of reference, together with the remuneration policy, are reviewed annually in light of matters such as changes to corporate governance best practice or changes to
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
accounting, legislation, political opinion or business practices among peers. This helps to ensure that the policy continues to provide Ericsson with a competitive remuneration strategy and, in accordance with Swedish law, the policy for senior management is brought to shareholders annually for approval.
FIXED SALARY
Fixed salaries are set to be competitive within an individual’s home market, taking into account global remuneration practices. The absolute levels are determined by the size and complexity of the position and the year-to-year performance of the individual. Group Management salaries are, together with other elements of remuneration, subject to an annual review by the Remuneration Committee, which considers external pay data to ensure that levels of pay remain competitive and appropriate in light of the Company’s remuneration policy. When setting fixed salaries the Remuneration Committee considers the impact on total remuneration, including pension contributions and associated costs.
VARIABLE REMUNERATION AND PERFORMANCE
At Ericsson we strongly believe that, where possible, we should encourage variable remuneration throughout the Company to first and foremost align employees with clear and relevant targets and also to enable more flexible payroll costs whilst emphasizing the link between performance and pay.
Performance is specifically reflected in the variable remuneration—both in an annual variable component and in a long-term variable part. Although this may vary over time to take account of pay trends, currently the target level of the short-term variable remuneration for Group Management is between 30 and 40 percent of the fixed salary, but outcomes can vary between zero and twice the target opportunity. The long-term variable remuneration is set to achieve a target of around 30 percent of the fixed salary. In both cases the variable pay is measured against the achievement of specific business objectives, reflecting the judgment of the Board of Directors as to the right balance between fixed and variable pay and the market practice for remuneration of executives. All variable remuneration plans have maximum award and vesting limits.
Short-Term Variable Remuneration
The annual variable remuneration is through cash-based programs, with specific business targets derived from the annual business plan approved by the Board of Directors. The exact nature of the targets will vary depending on the specific position but the aim is for them to support united goals and for individuals to be able to affect outcomes. For Group Management targets are predominantly financial targets at either Group level or at a specific business unit level and may also include operational targets and employee motivation targets.
We operate global short-term variable plans for management and for sales professionals and these plans are adapted to local requirements. The Board of Directors and the Remuneration Committee decide on all Ericsson Group targets, which are cascaded to unit-related targets, all subject to the two level management approval process. The Remuneration Committee monitors the appropriateness and fairness of the target levels throughout the year and has the authority to revise them should they not remain relevant, stretching and/or enhance shareholder value. Employees not covered by global short-term variable plans may be eligible for local plans, which vary in design according to local competitive practice.
Long-Term Variable Remuneration
Share based long-term variable remuneration plans are submitted each year for approval by shareholders at the Annual General Meeting. For Group Management the payout is determined by three specific variables: The individual’s own investment in shares, a long-term financial target at Group level and the share price development.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
All long-term variable remuneration plans are designed to form part of a well-balanced total remuneration and their central role in Ericsson’s remuneration system was positively confirmed in our extensive review during 2007, reported in last year’s annual report. Ericsson has no formal guidelines for equity ownership but the long-term variable remuneration facilitates that Group Management and a large proportion of Ericsson’s employees build up a significant personal ownership in the Company’s stock over time. This is achieved through a combination of personal investment and share-based remuneration made up of three different but linked plans: The all employee Stock Purchase Plan, the Key Contributor Retention Plan and the Executive Performance Stock Plan.
The Stock Purchase Plan
The all employee Stock Purchase Plan is designed to offer, where practicable, an incentive for all employees to participate in the Company, reinforcing a “One Ericsson” aligned with shareholder interests. Employees can save up to 7.5 percent (CEO 9 percent) of gross fixed salary for purchase of Class B shares at market price on the OMX NASDAQ Stockholm or ADSs at NASDAQ (contribution shares) during a twelve-month period. If the contribution shares are retained by the employee for three years after the investment and employment with the Ericsson Group continues during that time, the employee’s shares will be matched with a corresponding number of class B shares or ADSs free of consideration. The plan was introduced 2002 and employees in 94 countries participate. In December 2008 the number of participants was 19,000 or approximately 25 percent of employees.
Participants save each month, beginning with August payroll, towards quarterly investments. These investments (in November, February, May and August) are matched on the third anniversary of each such investment and hence the matching spans over two financial years and two tax years.
The Key Contributor Retention Plan
The Key Contributor Retention Plan is part of Ericsson’s talent management strategy and is designed to give individuals recognition for performance, critical skills and potential as well as encourage retention of key employees. Under the program, operating units around the world are given quotas that total no more than 10 percent of employees world-wide. Each unit then draws up a nominations list of individuals that have been identified according to performance, critical skills and potential. The nominations are moderated in management teams locally and reviewed by both local and corporate Human Resources to ensure that there is a minimum of bias and a strong belief in the system. Participants selected obtain one extra matching share in addition to the one matching share for each contribution share purchased under the Stock Purchase Plan during a twelve month program period. The plan was introduced in 2004.
The Executive Performance Stock Plan
The Executive Performance Stock Plan was also first introduced in 2004. The plan is designed to focus management on driving earnings and provide competitive remuneration. Senior executives, including Group Management, are selected to obtain up to four or six extra shares (performance matching shares) in addition to the one matching share for each contribution share purchased under the all employee Stock Purchase Plan. For the programs since 2006, the CEO is allowed to invest up to 9 percent of fixed salary in contribution shares and may obtain up to eight performance matching shares in addition to the Stock Purchase Plan matching share for each contribution share. The performance matching is subject to the fulfillment of an Earnings per Share (EPS) performance target.
The past and continued use of average annual EPS growth relative to challenging and stretching targets as a performance measure reflects the Company’s ongoing strategy of adding shareholder value through the long-term improvement of profitability. Furthermore, the use of a constant and key financial performance measure
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
alongside the inherent share price focus of the co-investment principle ensures close alignment with the long-term interests of shareholders whilst providing clear, transparent and continuous line-of-sight for participants. The Remuneration Committee has been satisfied that the present approach remains preferable to other measures, including those that reflect relative performance, but alternative measures are considered on an ongoing basis.
The performance targets are not capable of being retested after the end of the three-year performance period. If the minimum required performance is not achieved, all matching shares subject to performance will lapse. The Board may also reduce the number of performance matching shares, if deemed appropriate, considering the Company’s financial results and position, conditions on the stock market and other relevant circumstances at the time of matching.
PENSIONS AND OTHER BENEFITS
Pension benefits follow the competitive practice in the employee’s home country and in addition to any national system for social security, pension benefits may contain various supplementary company plans. The basic principle is that other benefits, such as company car and medical insurance, shall also be competitive in the local market.
To summarize, remuneration at Ericsson is based on the principles of performance, competitiveness and fairness, and the remuneration policy together with the mix of several remuneration elements are designed to reflect these remuneration principles in a balanced way by creating an integral remuneration package. For our senior management, total remuneration consists of fixed salary, short-term and long-term variable remuneration, pension and other benefits. If the size of any of these elements should be increased or decreased, at least one other element has to change where the competitive position should remain unchanged.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
CORPORATE GOVERNANCE REPORT 20082009
CONTENTS
| ||
Internal control over financial reporting |
The more effective and trustworthy our corporate governance and processes are, the more efficiently the Board can address business and strategy issues for sustainable shareholder value creation. Our reliance on the Company’s corporate governance is dependentbased on a strong ethos of ethical business practicespractice that starts at the top and permeates to all employees within the organization. Therefore, theEricsson employees. The Board is committed to high standards of corporate governance and we encourage all employees to followconstantly seek ways of making our example by constantly seeking ways to make the internal controls and our oversight evereven more effective and reliable. It is during challenging times that the quality of a company’s governance truly shows and during the past year we have been able to draw on our strengths in this area.
Michael Treschow
Chairman of the Board of Directors
Corporate governance describes the ways in which rights and responsibilities are distributed among the various corporate bodies according to the laws, rules and processes or laws to which they are subject. Corporate governance defines the decision-making systems and structure through which owners directly or indirectly control a company.
This Corporate Governance Report is rendered in accordance with the Swedish Code of Corporate Governance (the “Code”).Governance. The report has not been reviewed by Ericsson’s auditor and does not constitute a part of the formal annual report.Annual Report.
HIGHLIGHTS OF 20082009
Roxanne S. AustinHans Vestberg, CFO, was electedappointed new Board member at the Annual General Meeting (AGM) 2008.President and CEO succeeding Carl-Henric Svanberg as of January 1, 2010.
The AGM resolved that partJan Frykhammar was appointed new CFO succeeding Hans Vestberg as of the fee to the Directors, in respect of the Board assignment, should be payable in the form of synthetic shares.November 1, 2009.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Three new members joined the Group Management Team.
The AGM resolved on a reverse split of shares 1:5.
The Company’s series B shares have been delisted from the London Stock Exchange.
REGULATION AND COMPLIANCE WITH REQUIREMENTS
As a Swedish public limited-liabilitylimited liability company with securities quoted on NASDAQ OMX Stockholm as well as on NASDAQ, Ericsson is subject to a variety of rules that affect its governance. Major external regulationsrules include:
The Swedish Companies Act.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Listing requirementsRulebook for issuers of NASDAQ OMX Stockholm.
The Swedish Code of Corporate Governance (the “Code”).
NASDAQ Stock Market Rules—including applicable NASDAQ corporate governance requirements, subject to certain exemptions principally reflecting mandatory Swedish legal requirements, as explained in “NASDAQ Corporate Governance Exemptions”.requirements.
Applicable requirements of the US Securities and Exchange Commission including the Sarbanes-Oxley Act.
In addition, to ensure compliance with legal and regulatory requirements and the high ethical standards that we set for ourselves, Ericsson has internal rules that include:
Work procedure of the Board of Directors.
Code of Business Ethics.
Group Steering Documents including Group policies and directives, instructions and business processes for approval, control and risk management.
Code of Conduct whose provisions shallto be applied in the product development, production, supply and support of Ericsson products and services worldwide.
High standardsFurther, the Board of Directors has included internal rules in business ethics
Our Code of Business Ethics sets out how weits work to achieve and maintain our high standards. It summarizes the Group’s fundamental policies and directives governing our relationships with each other and with our stakeholders. This document has been translated into more than 20 languages to ensure that everyone who works for Ericsson understands our policies and directives and the importance of conducting all business activities in an ethical manner. All employees must regularly review the Code of Business Ethics and, by signing a form as part of the recruitment and at regular intervals, acknowledge that they have understood its principles. Through this meticulous process, we strive to ensure that our high ethical standards are upheld by all employees in their daily work, and that employees make it their individual responsibility to ensure that business is conducted in accordance with the rules and guidelines set forth in this document. Our Code of Business Ethics satisfies the applicable requirements of the Sarbanes-Oxley Act of 2002 and NASDAQ.
Code of Business Ethics
The Code of Business Ethics has been translated into more than 20 languages.
The Code of Business Ethics can be found at: www.ericsson.com/ericsson/corporate_responsibility/ employees/code_businessethics.shtml Information on our website does not form part of this document.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
procedure.
Compliance with the Swedish Code of Corporate Governance
The Code has been applied by Ericsson since July 2005. We areEricsson is committed to complying with best-practice corporate governance provisions on a global level wherever possible. This includes continued compliance with the corporate governance provisions expressed by the Code.
An ethical business
Ericsson’s Code without deviations.of Business Ethics sets out how the Group achieves and maintains its high ethical standards and summarizes the Group’s fundamental policies and directives.
The ethical code has been translated into more than 20 languages. This ensures that it is accessible to all employees and underpins the importance of ethical conduct in all business activities. During recruitment employees sign a form to acknowledge that they are aware of the principles of the Code of Business Ethics. This procedure is repeated at regular intervals throughout the term of employment.
Through this meticulous process, Ericsson strives to ensure that high ethical standards are upheld continuously. All employees have an individual responsibility to ensure that business practice adheres to the rules of the Code of Business Ethics. The Code of Business Ethics satisfies the applicable requirements of the Sarbanes-Oxley Act of 2002 and NASDAQ Stock Market rules.
The Code of Business Ethics can be found at: www.ericsson.com/ericsson/corporate_responsibility/ employees/code_businessethics.shtml (information on the Ericsson website does not form part of this Report).
OWNERSHIP STRUCTURESHAREHOLDERS
As of December 31, 2008 Ericsson had, accordingOwnership structure
According to information from the share register kept by Euroclear Sweden AB, (formerly VPC AB), a totalas of 728,333December 31, 2009 Ericsson had 690,726 shareholders. Almost 8077 percent of the shares are owned by institutions, both Swedish and international. Investor and Industrivärden, two public listed Swedish industrial holding companies, with long-term investment cycles, are the largest shareholders with 5.05shareholders. They hold 5.01 and 2.292.34 percent of the share capital and 19.4219.33 and 13.2813.62 percent of the voting rights, respectively.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
A significant number of the shares held by foreign investors are nominee-registered, i.e. held off record by banks, brokers and/or nominees on behalf of their customers.nominees. This means that the actual shareholder is not displayed in the share register and is notor included in the shareholding statistics. As a result, the ultimate shareholder does not show in the shareholder statistics identifying the largest shareholders, e.g.used, for example, for the purposespurpose of appointing the members toof the Nomination Committee.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
For more information on the Company’s shareholders, see the chapter “Share Information” in the Annual Report.
SHARE CAPITAL AND VOTING RIGHTSShares and voting rights
The share capital of Telefonaktiebolaget LM Ericsson consists of threetwo classes of listed shares; A B and C shares.B. Each class A share carries one vote and each class B share carries one tenth of one vote and each C share one-thousandth of one vote. Class A and B shares entitle the holder to the same proportion of assets and earnings and carry equal rights in terms of dividends. In addition, the Parent Company may issue Class C shares are only used for issuance and buy-backin order to financecreate treasury stock to hedge incentive programs resolved by the Company’s long-term variable remuneration program. When the Company has acquired theGeneral Meeting. Class C shares theyheld by Ericsson do not entail rights to dividend or voting rights. The class C shares are converted into class B shares.
To increase transparency asshares before they are transferred to the pricingparticipants of the Company’s Class B share and ADS (American Depositary Shares) respectively, and to obtain a number of shares more suitable for the Company, the Annual General Meeting of Shareholders 2008 resolved on a reverse split 1:5incentive programs.
The members of the Company’s Class ABoard of Directors and B shares. This implied that for five Athe Group Management Team do not have different voting rights on shares and five B shares, shareholders received one A share and one B share, respectively. Apart from having a different quotient value, each new consolidated A and B share carries the same rights as those previously attached to the shares in the respective class of shares.
than other shareholders.
MEETINGS WITH THEGENERAL MEETING OF SHAREHOLDERS
The decision-making rights of Ericsson’s shareholders are exercised at General Meetings. The Annual General Meeting is held in Stockholm. The date and the venue for the meeting areis announced on ourthe Ericsson website at the latestno later than in conjunction with the release of the third-quarter report.
Shareholders who cannot participate in person may be represented by proxy. Additional requirements for participation apply for shareholdersShareholders who have their shares nominee-registered andmust, to be able to vote, request to be entered into the shares must be registeredshare register in the owner’s own name of the owner by the record date for the General Meeting.
The Annual General Meeting is held in Swedish and simultaneously interpreted into English. All informationdocumentation provided by the Company is also available in English.
Resolutions
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The Annual General Meeting gives shareholders the opportunity to raise questions relating to the operations of the Group. Normally, the members of the Board of Directors and the Group Management Team are present to answer such questions. The auditor is always present at the Annual General Meeting. Shareholders and other interested parties may also correspond in writing with the Company at any time.
Most resolutions at General Meetings of Shareholders are normally passed by a simple majority. However, the Swedish Companies Act requires special quorums andqualified majorities in certain cases. For example, qualified majority is required for the resolution to transfer own shares to employees participating in Ericsson’s Stock Purchase Plan must be approved by 90 percentand for amending the articles of the votes cast and by 90 percent of the shares represented at the General Meeting of Shareholders.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
The Annual General Meeting gives shareholders the opportunity to raise questions regarding the Company and the results of the year under review. The members of the Board of Directors, the Group Management Team and the external Auditors are normally present to answer such questions.
Shareholders and other interested parties may also correspond in writing with the Board of Directors or executive management at any time.association.
Ericsson’s Annual General Meeting 20082009
1,135696 shareholders, representing approximately 59 percent of the votes, attended the Annual General Meeting (AGM) held on April 9, 2008,22, 2009. The meeting was held at the Annex to the Ericsson Globe Arena in Stockholm. Ericsson’s
The Board of Directors, members of the Group Management Team and the external auditorsauditor were present at the meeting. Decisions of the AGM 20082009 included:
Payment of a dividend of SEK 0.501.85 per share for 2007.2008.
Re-election of Chairman of the Board of Directors, Michael Treschow.
Re-election of members of the Board of Directors, Roxanne S. Austin, Sir Peter L. Bonfield, Börje Ekholm, Ulf J. Johansson, Sverker Martin-Löf, Marcus Wallenberg, Nancy McKinstry, Anders Nyrén and Carl-Henric Svanberg as members of the Board of Directors.
Re-election of Michael Treschow as Chairman of the Board of Directors, re-election of Marcus Wallenberg and Sverker-Martin-Löf as Deputy Chairmen.
Election of Roxanne S. Austin as a new Board member.Svanberg.
Board of Directors’ fees to remain unchanged i.e.unchanged: Chairman SEK 3,750,000;3,750,000 and other non-employed Board members SEK 750,000 each; in additioneach. SEK 350,000 to the Chairman of the Audit Committee and SEK 250,000 each to the other two non-employed members of the Audit Committee; andCommittee. SEK 125,000 each to the Chairmen and other non-employed members of the Finance and Remuneration committees. Additionally, part of the Directors’ Board fees shallmay be paid in the form of synthetic shares.
Approval of the principles on remuneration to the top executives.policy for senior management.
Implementation of a Long-Term Variable CompensationRemuneration Program.
The minutes
Conditional amendments to the Articles of Association regarding the AGM 2008way General Meetings are available at www.ericsson.com/ericsson/investors/shareholders/agmconvened.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
The minutes of the AGM 2009 are available at: www.ericsson.com/ericsson/investors/shareholders/agm (information on the Ericsson website does not form part of this Report).
A Nomination Committee was elected by the Annual General Meeting for the first time in 2001. Since then, each Annual General Meeting has appointed a Nomination Committee, or resolved on the procedure for appointing the Nomination Committee.
The Annual General Meeting of Shareholders 20082009 resolved that the Nomination Committee shall consist of the Chairman of the Board of Directors and representatives of the four largest shareholders as perby voting power by the end of the month in which the Annual General Meeting is held.was held plus the Chairman of the Board of Directors. However, as further described in the procedure for appointing members toof the Nomination Committee, the Nomination Committeeit may compriseinclude additional members pursuant tofollowing a request by a shareholderlarger shareholder. Such a request must be justified by changes in shareholder structure. Such requests shallthe shareholder’s share ownership and be received by the Nomination Committee no later than December 31 in order to allow for continuity in the work of the Nomination Committee. The fundamental principles that characterize the procedure for appointing members to the Nomination Committee are:31.
Transparency—clear rules and objective procedures shall determine the way the largest shareholders are appointed to the Nomination Committee.
Continuity—there should at all times be a functioning Nomination Committee and its work should be allowed continuity to the fullest extent possible.
Predictability—the time for the reading of the shareholding statistics in view of identifying the largest shareholder has to be predictable, not least in the interest of foreign shareholders.
Members of the Nomination Committee
The current Nomination Committee appointed onconsists of, in addition to the basisChairman of the procedure resolved byBoard of Directors, the Annual General Meeting of Shareholders 2008, consists of four representatives appointed by the four shareholders with the largest voting power as of April 30, 2008: Jacob Wallenberg2009:
These are Petra Hedengran (Investor AB,AB), Carl-Olof By (AB Industrivärden, Svenska Handelsbankens Pensionsstiftelse and Pensionskassan SHB Försäkringsförening, Chairman of the Nomination Committee), Carl-Olof By (AB Industrivärden), Caroline af Ugglas (Livförsäkringsaktiebolagetkrings-aktiebolaget Skandia) and Marianne Nilsson (Swedbank Robur Fonder). Marianne Nilsson replaced Mats Lagerqvist (Swedbank Robur Fonder) and further, Michael Treschow (Chairman of the Board of Directors). No changes in the composition of the Committee have occurred during the year.
The tasks of the Nomination Committee
TheOver the years the tasks of the Nomination Committee have evolved over the years to comply with the requirements of the Code and best-practice provisions. Since the inceptionCode. The main task of the Nomination Committee its main task has beenis to propose candidates for election to the Board of Directors. The Nomination Committee must take into considerationconsider all the variousapplicable rules on the independence of the Board applicable to the Company, which are further described later in this report.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
The Nomination CommitteeIt also proposes a candidateprepares remuneration proposals for election of the Chairman of General Meetings of Shareholders. In addition, the Nomination Committee prepares proposals concerning the level of remuneration forthose Directors elected by the Annual General Meeting of Shareholders but not employed by Ericsson; toEricsson, for the auditors and for members of the Nomination Committee, for resolution by the Annual General Meeting. To date, the Nomination Committee has not proposed that it should be paid any fees. Moreover, in years in whichWhen proposing auditors, are elected, the Nomination Committee proposesselects candidates based on the preparations carried out byin co-operation with the Audit Committee of the Board.
The Committee also proposes a candidate for election of the Chairman of General Meetings.
Work of the Nomination Committee for the Annual General Meeting 20092010
As of February 20,18, 2010 the Nomination Committee has held six meetings. The Committee starts its work by orientating itself on the functioning of the Board work and Ericsson’s strategy and future development. In 2009, the Nomination Committee has held four meetings. Atmet with both the first meeting, plans for the continued work of the Committee was discussedresigning President and CEO, Carl-Henric Svanberg, and the Committee was informed by the Chairmanincoming President and CEO, Hans Vestberg, both of the Board on how the Board work is functioning, as well aswhom have given their views on the Company’s strategydevelopment and future challenges, to befuture. From this basis the Committee is able to make assessments in terms ofon the competence and experience that is required by the Board members.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The Nomination Committee has also been informed of the results of the evaluation process forof the Board work and procedures, including the performance of the Chairman of the Board.
Further, The Committee applies a recruitment procedure where it assesses potential candidates for the NominationBoard of Directors. The Committee has also acquainted itself with the assessments made by the Company and the Audit Committee in terms of Auditorquality and efficiency of external auditor work, as well as the Audit Committee’s recommendation in respect of Auditincluding recommendations regarding audit fees.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
The work of the Nomination Committee is still in progress and more details on its work will be presented at the Annual General Meeting of Shareholders 2009.
The Board of Directors is ultimately responsible for the organization of the CompanyEricsson and the management of the Company’s operations. It develops guidelines and instructions for the day-to-day management of the Company, conductedoperations, managed by the President and CEO. In turn, the President and CEO who ensures that the Board is updated regularly on events of Directors receives regular reports regardingimportance to the Group’sParent Company, including business development, its results, financial position and liquidity and events of importance to the Group.
According to the Articles of Association, Ericsson’sthe Board of Directors shall consist of a minimum ofno less than five directors and a maximum ofno more than 12 directors, with no more than six deputies. Directors are elected by the shareholders at the Annual General Meeting for the periodwill serve from the close of the Annual General Meeting untilwhere they are elected to the close of the following Annual General Meeting, but can serve any number of consecutive terms. In addition, under Swedish law, trade unions have the right to appoint three directors and their deputies to the Ericsson Board of Directors.Board.
While the President and CEO of the Company may be elected as a director onof the Board, the Swedish Companies Act prohibits the President of a public company from being elected Chairman of the Board.
Ericsson abides by strictstrictly follows rules and regulations regarding conflicts of interest. Directors and the President and CEO cannotare disqualified to participate in any decision regarding agreements between themselves and the Company, orEricsson. The same applies for agreements between the CompanyEricsson and any third party or legal entity in which the individualBoard member has an interest.
In addition, in order to ensure independence,compliance with NASDAQ Stock Market Rules, the Audit Committee has implemented a procedure for complying with NASDAQ’s rules on related-party transactions andtransactions. Further, the Audit Committee has established a pre-approval process for non-audit services carried out by the external auditors.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
auditor.
MembersComposition of the Board of Directors
OurThe Board of Directors consists of 10 Directors, including the Chairman of the Board, elected by the shareholders at the Annual General Meeting 2008,2009, for the period until the close of the Annual General Meeting
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
2010, and three employee representatives, each with a deputy, appointed by the trade unions for the same period of time. The President and CEO, Carl-Henric Svanberg, is the only Board member who iswas also a member of the Company’s management.Ericsson’s management during 2009.
Work procedure of the Board of Directors
ComplementaryPursuant to the provisions in the Swedish Companies Act, and the Articles of Association of the Company, the Board of Directors has adopted a work procedure for its activities that outlines rules regardingfor the distribution of tasks between the Board and its Committees as well as between the Board, its Committees and the President and CEO. This complements the regulation in the Swedish Companies Act and the Articles of Association of the Company. The work procedure is reviewed, evaluated and adopted by the Board as required, at least once a year.year as required.
Independence of the Directors
The Board of Directors and its Committees are subject to a variety of independence requirements. Ericsson applies independence rules in applicable Swedish law, the Rulebook for issuers of NASDAQ OMX Stockholm, the Swedish Code of Corporate Governance, the NASDAQ Stock Market Rules and in the Sarbanes-Oxley Act of 2002. However, Ericsson has sought and received exemptions from certain requirements in the Sarbanes-Oxley Act and in the NASDAQ Stock Market Rules, including those that are contrary to Swedish Law.
The composition of Ericsson’sthe Board of Directors meets all applicable independence criteria it is subject to, as described in more detail under “Independence requirements” later in the report. In connection with its proposal tocriteria.
The Nomination Committee concluded before the Annual General Meeting of Shareholders 2008, the Nomination Committee concluded2009, that, for the purposes of the Swedish Code of Corporate Governance, at least five of the following persons that were proposed for electionnominated to the Board were independent of the Company,Ericsson, its senior management and the Company’sits major shareholders:shareholders. These were Roxanne S. Austin, Sir Peter L. Bonfield, Ulf J. Johansson, Nancy McKinstry and Michael Treschow.
Work of the Board of Directors
The work of the Board follows a yearly cycle, starting with the statutory Board meeting which is held in connection with the Annual General Meeting. MembersAt this meeting, members of each of the three Committees of the Board are appointed at the statutory meeting, and the Board resolves on matters such as authorization to sign for the Company. signatory power.
At the next ordinary meeting, the Board handles the first interim report for the year along with the press release related to the report.year. In June, a Board meeting generally takes place away from Companythe headquarters, giving Directors a chance to visit major CompanyEricsson business operations. Towards the end ofIn July, the Board meetsconvenes to handle the interim report for the second- quartersecond-quarter of the year. StrategyParticular strategy matters are frequentlyregularly addressed at any appropriate Board meeting, butmeetings and a two-day Board meeting in Augustfollowing the summer is entirelymainly devoted to the overall strategy of the Group. The Auguststrategy meeting also addresses the overall risk management of the Group. A third-quarter interim report Board meeting is held at the end of October. In orderOctober to allow forhandle the Nomination Committeethird-quarter interim report.
The Board has developed a process to be able to take into account thethoroughly evaluate its own work. The results of the Board work in due time, the Board thoroughly evaluates its own work and the results of this evaluation are presented and discussed atby the October meeting.Board during the fall. The last meeting of the calendar year addresses budget and financial outlook. At the first meeting of the calendar year generally in the end of January, the Board focuses on the financial result of the entire year and also handles the fourth-quarter report. At the second Board meeting in February, which closes the yearly cycle of work, the Board signsconcludes the annual report.Annual Report.
As the Board is responsible for financial oversight, financials are presented and evaluated at each Board meeting. Further, eachEach Board meeting generally also includes reports on committee work by the Chairman of each of the three Committees based on thecommittee. In addition, minutes from the Committeecommittee meetings which are distributed to all Directors prior to the Board meeting.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
A Board meeting also typically includes the President and CEO’s report on general business and market developments, including the financial performance of the Company. The Board is regularly informed of recent developments in legal and regulatory matters and addresses, whenever necessary, the adoption and implementation of various corporate governance rules. Material for each Board meeting is distributed by the
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Board of Directors’ Secretariat according to a pre-established time plan. The time plan is established with due regard for corporate governance requirements, including prompt distribution of the minutes of Board meetings. Unless exceptional circumstances prevent them from doing so, all Directors participate in all Board meetings.importance.
The Board meets with Ericsson’s external auditorsauditor at least once a year to receive and consider the auditors’ observations regarding the Annual Report and internal controls.auditor’s observations. The auditorsauditor also annually prepareprepares reports for the management on the accounting and financial reporting practices of the Company and the Group. Moreover, theThe Audit Committee also meets with the auditorsauditor to receive and consider the auditors’ observations on the interim reports. The Audit Committee reports its findings to the Board. The auditors haveauditor has been instructed to reflect in their reportsreport on whether the Company and Group are organized so that the accounts, the management of funds and the general financial position of the Company and Group in other respects are up to a good standard andwell controlled in a prudent manner. all material respects.
The Board has reviewedalso reviews and assessedassesses the Company’s process for financial reporting, as described later in “Internal control over financial reporting for year 2008”2009”. TheCombined with the internal controls, the Board’s ownand the auditor’s review of interim and annual reports in combination with the Company’s internal controls isare deemed to give reasonable assurance regardingon the quality of the financial reporting.
Training of the Board of Directors
All new Directors receive comprehensive training tailored to their individual requirements. IntroductionIntroductory training typically includes meetings with the heads of the major businesses and functions and if appropriate, training arranged by NASDAQ OMX to enhance knowledge regardingStockholm on listing issues and insider rules. In addition, full-day training sessions are generally held twice a year for all Directors, to assist them in their work for Ericsson by enhancingenhance their knowledge of Groupspecific operations and by covering specific issues as appropriate.
Training sessions organized in 20082009 have provided the Directors with an in-depth knowledge of markets, strategythe industry landscape, new technologies, network transformation and governance within the business area Global Services as well as its products and services.future products. In addition, annual training has been conducted to advise the Board on material issues and key focus areas for the Company pertaining toregarding corporate responsibility and sustainability. These include energy efficiency, climate change,and health, human rights, supply chain management human rights, and telecommunications for social and economic development.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
anti-corruption.
Work of the Board of Directors in 20082009
The work of the Board of Directors is continuously characterized by a high level of activity and 1114 Board meetings were held in 2008. (For attendance at Board meetings see “Directors’ Attendance 2008”).2009. Two meetings were held away from the Company headquarters, one in San José, California, focusing on the acquired operations in Silicon Valley,Geneva, Switzerland and one in Lund, Sweden, with a focusSweden. Both meetings were particularly focusing on the joint ventures ST-Ericsson and Sony Ericsson respectively. For attendance at Board meetings see table on page 203.
2009 has been characterized by the financial turmoil and Ericsson Mobile Platform strategies.
Maintaining technology leadershipuncertainty in the market development. During the year the Board has thoroughly monitored and profitability in an increasingly competitive landscape have beenanalyzed related risk factors. In a market downturn, focus on key strategic areas of focus during the year.such as maintaining technology and services leadership, profitability and risk management has been continuously important. A leading position and effectiveness in research and development is key in the rapid technology evolution. An important part ofevolution and in the strategic work is to identify and assess various internal and external risk factors, a need that is intensified as a result ofincreasingly competitive landscape, sharpened over the year by the uncertainty in the financial turmoil that has characterized the year.market.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Apart from regular matters addressed in line with the annual Board work cycle, the Board addressed various acquisitions that were completed during the futureyear, namely Nortel’s North American CDMA and LTE businesses, Bizitek and certain operations of Ericsson’s mobile platform business (EMP), where EricssonElcoteq and STMicroelectronics plan to merge EMP and ST-NXP Wireless into aalso the establishment of the new joint venture and the divestment of the Enterprise business to Aastra Technologies. ST-Ericsson together with STMicroelectronics.
The Board also addressed other long and short-term goals and strategies with regard to operatorthe joint ventures Sony Ericsson and vendor consolidation, increased data trafficST-Ericsson and a network transformation strategy. Also, in telecom networks, the effects2009, Hans Vestberg was appointed new President and CEO following Carl-Henric Svanberg’s resignation as of migration of networks towards IP technology with increased focus on content and multimedia and the changing competitive landscape among telecom operators, cable TV providers and other data-network operators.January 1, 2010.
The Headsheads of the three business units have provided the Board with thorough presentationsupdates of their respective areas of responsibility to further enhance the Directors’ knowledge of business operations and the strategies of each of the three business units. The Board is also continuously reviewing the Management succession planning.strategies. In terms of remuneration, the Board put forward a proposal for a Long-Term Variable CompensationRemuneration Program 20082009 (LTV) to the Annual General Meeting of Shareholders 2008.2009. For the purposes of financing the LTV, the Board alsofurther proposed a new directed issue and acquisitionre-purchase of Class C shares to be converted into B shares.
The Board is continuously working to improve its ways of working and procedures based on the Board evaluation along withand discussions with the Chairman of the Board and the Committee Chairmen.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Board work evaluation
The objectivesA key objective of the Board evaluation areis to ensure that the Board is well-functioning, to gainfunctioning well. This includes gaining an understanding of the type of issues thatwhich the Board considers should be affordedthinks warrant greater scope to determineand determining areas within the areas in whichBoard where additional competence is needed within the Board.needed. The evaluation also serves as guidance tofor the work of the Nomination Committee.
TheEach year, the Chairman of the Board initiates and leads the evaluation of Board and Committee work and procedures each year.procedures. The evaluation process includestools include detailed questionnaires, as well as interviews and discussions. In 2008,2009, the Chairman held individual meetings with all the Directors, who respondedfollowing their response to threetwo separate written questionnaires; one that coveredcovering the Board work in general and one that coveredcovering the Chairman’s performance, and one that covered the performance of the President and CEO.performance. The Chairman and the President and CEO are neitherwas not involved in the development, compilation or evaluation of the questionnairesquestionnaire which related to their respective performances, nor are theyhis performance. Nor was he present when their respectivehis performance iswas evaluated. The results of the evaluations were thoroughly discussed in order to further improve the work of the Board andBoard. Normally, an evaluation of the CEO.CEO’s work is conducted. However, in view of Carl-Henric Svanberg’s resignation as of January 1, 2010, it was deemed redundant this year.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Committees of the Board of Directors
The Board of Directors has established three Committees: Audit Committee, Finance Committee and Remuneration.Remuneration Committee. Members of each Committee are appointed amongst the Board members.
The work of the Committees is principally preparatory, theymainly to prepare matters for final resolution by the Board. However, the Board has authorized each Committee to determine certain issues in limited areas and may also on occasion provide extended authorization to a Committee to determine specific matters. The
If deemed appropriate, the Board of Directors and each Committee have the right to engage external expertise, either in general or in respect to specific matters, if deemed appropriate.matters.
Prior to eachevery Board meeting, each Committee submits, in addition to minutes, a reportwritten summary to the Board on the issues handled resolved or referred to the Boardresolved since the previous ordinary Board meeting. The reporting byIn addition to the minutes and the written summary, the Chairman of the Committee also reports on the Committee work in addition to the written report is a recurring item at each Board meeting. The minutes of each Committee meeting are attached to the minutes of the Board meeting following each Committee meeting.
The Audit Committee
The Audit Committee, onOn behalf of the Board, the Audit Committee monitors the integrityscope and correctness of the financial statements, compliance with legal and regulatory requirements and the effectiveness of the systems of internal control over financial reporting.
The Audit Committee is also primarily responsible for reviewingreviews the annual and interim financial reports and for overseeingoversees the external audit process, including audit fees.
This involves:
Reviewing, with management and the external auditors,auditor, the financial statements, including conformity with generally accepted accounting principles.
Reviewing, with management, the reasonableness of significant estimates and judgments made in preparing the financial statements, as well as the quality of the disclosures in the financial statements.
Reviewing matters arising from reviews and audits performed.
The Audit Committee itself does not perform audit work. Ericsson has an internal audit function, which reports to the Audit Committee and performs independent audits.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
The AuditWhen applicable, the Committee is also involved in the preparatory work of proposing candidates for the election of auditors, when applicable,auditor. It also monitors Group transactions and monitors theirthe ongoing performance and independence as well as Group transactionsof the auditor to avoid conflicts of interest.
To achieve this, the Audit Committee has implemented approval procedures for audit and other services performed by the external auditorsauditor (see “Audit Committee pre-approval policies and procedures”); a pre-approval. A process for reviewing transactions with related parties and a “whistle-blower”whistle-blower procedure for the reporting of violations in relationrelating to accounting, internal control and auditing matters.matters are also in place.
Alleged violations are investigated by Ericsson’s internal audit function in conjunction with the relevant Group Function. Information regarding any incidents, including measures taken, details of the responsible Group Function and the status of any investigation are reported to the Audit Committee.
Members of the Audit Committee
The Audit Committee consists of four Board members as appointed by the Board from among its members.Board. In 2008,2009, the Audit Committee comprisedcomprised: Ulf J. Johansson (Chairman of the Committee), Sverker Martin-Löf,Roxanne S. Austin, Sir Peter L. Bonfield and Jan Hedlund.
All members, except Jan Hedlund, who is appointed Board member by the employee representative,unions pursuant to Swedish mandatory law, are independent from the Company and senior management. Each member is financially literate and familiar with the accounting practices of an international company comparable tosuch as Ericsson. At least one member must be an audit committee financial expert.expert, in accordance with the Sarbanes-Oxley Act, Section 407. The Board of Directors has determined that Ulf J. Johansson, Sverker Martin-LöfRoxanne S. Austin and Sir Peter L. Bonfield all satisfy these requirements.this requirement.
The Audit Committee hasFormer authorized public accountant, Peter Markborn, is appointed an external expert advisor Peter Markborn, formerly authorized public accountant, to assist and advise the Audit Committee.
Work of the Audit Committee in 2009
The Audit Committee held nineeight meetings in 2008 –2009. Directors’ attendance is reflected in the table “Directors’ Attendance 2008.”on page 203. During the year, the Audit Committee reviewed the scope and results of external financial audits and the independence of the external auditors and monitored the external audit fees. In addition,
Further, certain additional non-audit services other than audits performed by the external auditorsauditor were approved by the Audit Committee Chairman under itsthe Committee’s pre-approval policies and procedures. The Audit Committee approved the annual audit plan for the internal audit function and reviewed its reports. The AuditPrior to publishing, the Committee also reviewed and discussed each interim report with the external auditors each interim report prior to publishing. In addition, the Auditauditor. The Committee also monitored the continued compliance with the Sarbanes-Oxley Act and the internal control and risk management process. The Audit Committee has also approvedreviewed certain related-party transactions in accordance with its pre-approvalestablished process.
Audit Committee pre-approval policies and procedures
The Audit Committee reviews and approves the scope of audits to be performed (external and internal) and analyzes the results and costs of the audits. The Committee makes recommendations to the Board of Directors regarding the auditor’s performance and to the Nomination Committee regarding the external auditor’s fees.
In order to ensure the auditor’s independence, the Audit Committee has established pre-approval policies and procedures for non-audit related services to be performed by the external auditor. Pre-approval authority may
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
not be delegated to management. The policies and procedures include a list of prohibited services and services that require pre-approval by the Committee. Such services fall into two broad categories; general pre-approval and specific pre-approval:
General pre-approval—certain services regarding taxes, transactions, risk management, corporate finance, attestation and accounting and so called general services. These services have received general pre-approval by the Audit Committee, provided that the estimated fee for each project does not exceed SEK 1 million. The external auditor must advise the Audit Committee of services rendered under the general pre-approval policy.
Specific pre-approval—all other non-audit related services must receive specific pre-approval. The Audit Committee Chairman has the delegated authority for specific pre-approval in between Committee meetings, provided that the fee in each case does not exceed SEK 2.5 million. The Chairman reports any pre-approval to the Audit Committee at its next meeting. For matters which may not be handled by the Chairman and, hence, require specific pre-approval by the Audit Committee, the auditor submits an application to the Parent Company for final approval by the Audit Committee.
Finance Committee
The Finance Committee is primarily responsible for:
Handling matters regardingrelated to acquisitions and divestments.
CapitalHandling capital contributions to companies inside and outside the Ericsson Group.
Raising of loans, issuances of guarantees and similar undertakings, and the approval of financial support to customers.customers and suppliers.
ContinuallyContinuously monitoring the Group’s financial risk exposure.
The Finance Committee is authorized to determine matters such as direct or indirect financing, provision of credits, granting of securities and guarantees and certain investments, divestments and financial commitments.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Members of the Finance Committee
The Finance Committee consists of four Board members as appointed by the Board from among its members.Board. In 2008,2009, the Finance Committee comprisedcomprised: Marcus Wallenberg (Chairman of the Committee), Anna Guldstrand, Anders Nyrén, and Michael Treschow.
Work of the Finance Committee in 2009
The Finance Committee held 13seven meetings in 2008 – for2009. Directors’ attendance see “Directors’ Attendance 2008”.
is reflected in the table on page 203. The Committee has devoted considerable time to the increasing uncertainty in the financial market and has thoroughly monitored the Company’s financial position and credit exposure. In order to reduce gross debt and to gain net interest savings, the Committee has approved a premature re-purchase during 2009 of a EUR 471 million bond loan, maturing in November 2010. In view of the large exposure to the currently unstable financial sector over the year, the Committee has executed its strategy to reduce the Company’s credit exposure by re-arrangingre-arranged the investment policy and procedures. procedures to reduce the credit exposure.
During the year the Committee has also approved numerous customer finance and credit facility arrangements, with a continued focus on capital structure, cash flow and cash generating ability.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The Remuneration Committee
The Remuneration Committee’s main responsibility is to adviseprepare for resolution by the Board of Directors matters regarding salary and other remuneration, including retirement compensationremuneration. This includes pension benefits of the President and CEO, the Executive Vice Presidents and other officers reportingwho report directly to the President and CEO. Other responsibilities include:
Developing and monitoring strategies and general guidelines for employee remuneration, including short-term variable plansremuneration and retirement compensation.pension benefits.
ApprovingReviewing the results of short-term variable pay under the previous year’s plan (beginning of each year).plans before pay out.
Preparation of the long-term variable remuneration program for referral to the Board and subsequent resolution by the General Meeting of Shareholders.Meeting.
Preparation of the targets for short-term variable pay for the following year, for resolution by the Board.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
To achieve this, the Committee holds annual strategic remuneration reviews with Company representatives of the Company to determine the strategic direction to follow, allowand align program designs and pay policies to be aligned with the business situation. objectives.
Consideration is given to trends in remuneration, legislative changes, disclosure rules and the general global environment surrounding executive pay. The Committee reviews salary survey data to approvebefore approving any base pay increasesalary adjustment for executives, effective fromCEO direct reports. In addition the following January.Committee prepares salary adjustments for the President and CEO for resolution by the Board.
Members of the Remuneration Committee
The Remuneration Committee consists of four Board members as appointed by the Board from among its members.Board. In 2008,2009, the Remuneration Committee comprisedcomprised: Michael Treschow (Chairman of the Committee), Börje Ekholm, Nancy McKinstry, Monica Bergström and Börje Ekholm.Karin Åberg.
TheGerrit Aronson is appointed by the Remuneration Committee has appointedas an independent expert advisor Gerrit Aronson, to assist and advise the Committee, in particular with regard toparticularly regarding international trends and developments.
Work of the Remuneration Committee in 2009
The Remuneration Committee held seven meetings in 2008—2009. Directors’ attendance is reflected in the table “Directors’ Attendance 2008”.on page 203. The Committee reviewed and prepared for resolution by the Board a proposal for a Long-term Variable CompensationRemuneration Program 2008,2009, which was approved by the Annual General Meeting of Shareholders in April.April 2009. The Committee also prepared proposals forfurther resolved on salaries and short term variable pay for 2008, including2009 for CEO direct reports and prepared for resolution by the Board remuneration ofto the incoming President and CEO.CEO, Hans Vestberg. Also, the Committee prepared a remuneration policy, which was subsequently referred by the Board to the Annual General Meeting for approval. Towards the end of the year, the Committee concluded its analysis of the current Long-Term Variable Remunerationlong-term variable remuneration structure and remuneration policy topolicy. Proposals in respect hereof will be referred to the Annual General Meeting of Shareholders 20092010 for resolution. For further information on remuneration, fixed and variable pay, please see “Remuneration”Note C29 “Information Regarding Members of the Board of Directors, the Management and Employees” in the Annual Report and the “Remuneration Report” included the Annual Report.
Remuneration to Board members
Remuneration to Board members not employed by the Company is proposed by the Nomination Committee for resolution by the Annual General Meeting.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The Annual General Meeting 2009 approved the Nomination Committee’s proposal for fees to the non-employed Board members for Board and Committee work. For information on Board of Directors’ fees 2009, please refer to Notes to the Consolidated Financial Statements—Note C29 “Information Regarding Members of the Board of Directors, the Management and employees” in the Annual Report. The Annual General Meeting 2009 also approved the Nomination Committee’s proposal that non-employed Board members may be paid part of their Board fee in the form of synthetic shares.
A synthetic share gives the right to receive a future cash payment of an amount which corresponds to the market value of a Class B share in Ericsson at the time of payment. The purpose of paying part of the Board of Director’s fee in the form of synthetic shares is to further align the Directors’ interest with shareholder interest. For more information on the terms and conditions of the synthetic shares, please refer to the notice convening the Annual General Meeting 2009 (www.ericsson. com/ericsson/investors/shareholders/agm). (Information on the Ericsson website does not form part of this document.)
DIRECTORS’ ATTENDANCE AND FEES 2009
Fees resolved by the AGM 2009 | Number of Board/Committee meetings attended | |||||||||||
Board member | Board fees4) | Committee fees | Board | Audit Committee | Finance Committee | Remuneration Committee | ||||||
Michael Treschow | 3,750,000 | 250,000 | 14 | 7 | 7 | |||||||
Sverker Martin-Löf1) | 750,000 | 14 | 3 | |||||||||
Marcus Wallenberg | 750,000 | 125,000 | 14 | 7 | ||||||||
Roxanne S. Austin | 750,000 | 250,000 | 13 | 5 | ||||||||
Sir Peter L. Bonfield | 750,000 | 250,000 | 14 | 8 | ||||||||
Börje Ekholm | 750,000 | 125,000 | 13 | 7 | ||||||||
Ulf J. Johansson | 750,000 | 350,000 | 13 | 8 | ||||||||
Nancy McKinstry | 750,000 | 125,000 | 14 | 7 | ||||||||
Anders Nyrén | 750,000 | 125,000 | 12 | 7 | ||||||||
Carl-Henric Svanberg | — | 14 | ||||||||||
Monica Bergström2) | — | 13 | 1 | |||||||||
Jan Hedlund | — | 12 | 6 | |||||||||
Pehr Claesson | — | 14 | ||||||||||
Anna Guldstrand | — | 14 | 7 | |||||||||
Kristina Davidsson | — | 14 | ||||||||||
Karin Åberg3) | — | 13 | 6 | |||||||||
Total number of meetings | 14 | 8 | 7 | 7 | ||||||||
1) | Member of the Audit Committee until April 22, 2009 and thereafter replaced by Roxanne S. Austin |
2) | Deputy employee representative as of April 22, 2009. |
3) | Ordinary employee representative and member of the Remuneration Committee as of April 22, 2009 (replacing Monica Bergström). |
4) | Non-employed Directors can choose to receive part of their Board fee (i.e. exclusive of Committee fees) in the form of synthetic shares. |
MEMBERS OF THE BOARD OF DIRECTORS
Board members elected by the Annual General Meeting of Shareholders 20082009
Michael Treschow (first elected 2002)
Chairman of the Board of Directors
Chairman of the Remuneration Committee
Member of the Finance Committee
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Born 1943, Master of Science, Lund Institute of Technology.Board Chairman:Unilever NV, and Unilever PLC.Board member:ABB Ltd and the Knut and Alice Wallenberg Foundation.Holdings in Ericsson1): 164,000164,008 Class B shares.
Principal work experience and other information: Board Chairman of the Confederation of Swedish Enterprise 2004–2007, President and CEO of AB Electrolux 1997–2002 and Chairman of its Board of Directors 2004–2007. Earlier positions mainly include positions in Atlas Copco, where he served as President and CEO 1991–1997. Member of the Royal Academy of Engineering Sciences.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Marcus Wallenberg (first elected 1996)
Deputy Chairman of the Board of Directors
Chairman of the Finance Committee
Born 1956, Bachelor of Science of Foreign Service, Georgetown University, USA.Board Chairman:Skandinaviska Enskilda Banken, Saab AB and AB Electrolux.Honorary Chairman:International Chamber of Commerce (ICC).Board member:AstraZeneca PLC, Stora Enso Oy, the Knut and Alice Wallenberg Foundation and Temasek Holdings Limited.Holdings in Ericsson1): 142,0001,200 Class A shares and 140,800 Class B shares.
Principal work experience and other information:Positions in Investor AB, where he served as President and CEO 1999–2005. Prior to this he was Executive Vice President at Investor. Previous employers include Stora Feldmühle AG, Citicorp, Citibank and Deutsche Bank.
Sverker Martin-Löf (first elected 1993)
Deputy Chairman of the Board of Directors
Member of the Audit Committee
Born 1943, Doctor of Technology and Master of Engineering, Royal Institute of Technology, Stockholm.Board Chairman:Skanska AB, Svenska Cellulosa Aktiebolaget SCA and SSAB.Deputy Chairman: AB Industrivärden and the Confederation of Swedish Enterprise.Board member:Svenska Handelsbanken.Holdings in Ericsson1): 10,400 Class B shares.
Principal work experience and other information:President and CEO of Svenska Cellulosa Aktiebolaget SCA 1990–2002, where he was employed 1977–1983 and 1986–2002. Previous positions at Sunds Defibrator and Mo och Domsjö AB.
Roxanne S. Austin (elected(first elected 2008)
Member of the Audit Committee
Born 1961, B.B.A. in Accounting, University of Texas, San Antonio USA.Board member: Move Networks Inc., Abbott Laboratories, Teledyne Technologies Inc., Target Corporation.Holdings in Ericsson:Ericsson1):None. 3,000 Class B shares.
Principal work experience and other information:Since 2004, President and CEO of Move Networks Inc. since 2009. President of Austin Investment Advisors.Advisors since 2004. President and CEO of DIRECTV 2001–2003. Corporate Senior Vice President and Chief Financial Officer of Hughes Electronics Corporation 1997–2000, which company she joined in 1993. Prior to joining Hughes, Roxanne Austin was a partner at Deloitte & Touche. Member of the board of trustees of the California Science Center, member of the California State Society of certifiedCertified Public Accountants and the American Institute of Certified Public Accountants.
1) | The number of Class B shares (and Class A shares, if applicable) includes holdings by related natural or legal persons and American Depositary Receipts, where applicable. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Sir Peter L. Bonfield (first elected 2002)
Member of the Audit Committee
Born 1944, Honors degree in Engineering, Loughborough University, Leicestershire, UK.Board Chairman:Chairman: Supervisory Board of NXP.Deputy Chairman: British Quality Foundation.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Board member:Mentor Graphics Inc., Sony Corporation, and TSMC.Holdings in Ericsson1)1):4,400 Class B shares.
Principal work experience and other information:CEO and Chairman of the Executive Committee of British Telecommunications plc 1996–2002. Chairman and CEO of ICL PLC 1990–1996. Positions with STC PLC and Texas Instruments Inc. Member of the International Advisory Board of Citi.Citigroup. Member of the Advisory Boards of New Venture Partners LLP, The Longreach Group and Apax Partners LLP. Non-executive Director of Actis Capital LLP and Dubai International Capital.LLP. Board Mentor of CMi.
Börje Ekholm (first elected 2006)
Member of the Remuneration Committee
Born 1963, Master of Science in Electrical Engineering, Royal Institute of Technology, Stockholm. Master of Business Administration, INSEAD, France.Board member:Investor AB, AB Chalmersinvest, EQT Partners AB, Husqvarna AB, Scania, KTH Holding AB, Lindorff Group AB and the Royal Institute of Technology, Stockholm.Holdings in Ericsson1):21,760 Class B shares.
Principal work experience and other information:President and CEO of Investor AB since 2005. Prior to this, Börje Ekholmhe was Head of Investor Growth Capital IncInc. and New Investments. Previous positions at Novare Kapital AB and McKinsey & Co Inc.
Ulf J. Johansson (first elected 2005)
Chairman of the Audit Committee
Born 1945, Doctor of Technology and Master of Science in Electrical Engineering, Royal Institute of Technology, Stockholm.
Board Chairman:Acando AB, Eurostep Group AB, Novo A/S, Novo Nordisk Foundation, and Trimble Navigation Ltd.Board member:Jump Tap Inc.Holdings in Ericsson1):6,435 Class B shares.
Principal work experience and other information:Founder of Europolitan Vodafone AB, where he was the Chairman of the Board 1990–2005. Previous positions at Spectra-Physics AB where he was theas President and CEO and at Ericsson Radio Systems AB. Member of the Royal Academy of Engineering Sciences.
Nancy McKinstry (first elected 2004)
Member of the Remuneration Committee
Born 1959, Master of Business Administration in Finance and Marketing, Columbia University, USA. Bachelor of Arts in Economics, University of Rhode Island, USA.Board Chairman:CEO and Chairman of the Executive Board of Wolters Kluwer n.v.Board member:The American Chamber of Commerce, the Netherlands, and TiasNimbas Business School.Holdings in Ericsson:None.
Principal work experience and other information:CEO and Chairman of the Executive Board of Wolters Kluwer n.v., President and CEO of CCH Legal Information Services 1996–1999. Previous positions at Booz, Allen & Hamilton, and New England Telephone Company. Member of the Advisory Board of the University of Rhode Island, the Advisory Council of the Amsterdam Institute of Finance, the Dutch Advisory Council of INSEAD, and the Board of Overseers of Columbia Business School.
1) | The number of Class B shares (and Class A shares, if applicable) includes holdings by related natural or legal |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Anders Nyrén (first elected 2006)
Member of the Finance Committee
Born 1954, Graduate of Stockholm School of Economics, Master of Business Administration from Anderson School of Management, UCLA, USA.Board Chairman:Association of Exchange Listed Companies and Association for Generally Accepted Principles in the Securities Market.Deputy Chairman:Sandvik AB and Svenska Handelsbanken.Board member:Svenska Cellulosa Aktiebolaget SCA, AB Industrivärden, SkanskaSSAB, Ernströmgruppen and AB SSAB, and Ernströmgruppen.Volvo.Holdings in Ericsson1):6,686 Class B shares.
Principal work experience and other information:President and CEO of Industrivärden since 2001. CFO and EVP of Skanska AB 1997–2001. Director Capital Markets of Nordbanken 1996–1997. CFO and EVP of Securum AB 1992–1996. Managing Director of OM International AB 1987–1992. Earlier positions at STC Scandinavian Trading Co AB and AB Wilhelm Becker.
Carl-Henric Svanberg (first elected 2003)
Born 1952, Master of Science, Linköping Institute of Technology. Bachelor of Science in Business Administration, University of Uppsala.Board Chairman:member:Sony Ericsson Mobile Communications AB.Board member:TheAB and ST-Ericsson until end of 2009, the Confederation of Swedish Enterprise, Melker Schörling AB, Uppsala University and Uppsala University.BP PLC.Holdings in Ericsson1): 3,202,5283,234,441 Class B shares.
Principal work experience and other information:President and CEO of Telefonaktiebolaget LM Ericsson since 2003.2003–2009. Prior to this, Carl-Henric Svanberg was the President and CEO of Assa Abloy AB (1994–2003). VariousHe held various positions within Securitas AB (1986–1994) and ABB Group (1977–1985). Carl-Henric Svanberg does not have material shareholdings or part ownerships in companies with which the Company has material business relationships.
Board members and deputies appointed by the unions
Monica Bergström (first appointed 1998)
Employee representative
Member of the Remuneration Committee
Born 1961. Appointed by the Unionen union.Holdings in Ericsson1): 1,236 Class B shares.
Jan Hedlund (first appointed 1994)
Employee representative
Member of the Audit Committee
Born 1946. Appointed by the IF Metall union.Holdings in Ericsson1): 566735 Class B shares.
Anna Guldstrand (first appointed 2004)
Employee representative
Member of the Finance Committee
Born 1964. Appointed by the union The Swedish Association of Graduate Engineers.Holdings in Ericsson1): 1,1531,373 Class B shares.
Karin Åberg (first appointed 2007)
Employee representative
Member of the Remuneration Committee
Born 1959. Appointed by the union Unionen.Holdings in Ericsson1): 1,596 Class B shares.
Kristina Davidsson (first appointed 2006)
Deputy employee representative
Born 1955. Appointed by the IF Metall union.Holdings in Ericsson1): 988 Class B shares.
1) | The number of Class B shares (and Class A shares, if applicable) includes holdings by related natural or legal |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Kristina Davidsson (first appointed 2006)
Deputy employee representative
Born 1955. Appointed by the IF Metall union.Holdings in Ericsson1): 837 Class B shares.
Karin Åberg (first appointed 2007)
Deputy employee representative
Born 1959. Appointed by the Unionen union.Holdings in Ericsson1):1,292 Class B shares.
Pehr Claesson (appointed(first appointed 2008)
Deputy employee representative
Born 1966. Appointed by the union The Swedish Association of Graduate Engineers.Holdings in Ericsson1):422 513 Class B shares
Monica Bergström (first appointed 1998)
Deputy employee representative
Born 1961. Appointed by the union Unionen.Holdings in Ericsson1): 1,508 Class B shares.
Carl-Henric Svanberg iswas the only Director who holdsheld an operational management position at Ericsson.Ericsson in 2009. No Director has been elected pursuant to an arrangement or understanding with any major shareholder, customer, supplier or other person.
BOARD OF DIRECTORS’ REMUNERATION
Remuneration to Board members not employed by the Company is proposed by the Nomination Committee for resolution by the Annual General Meeting. Board members who are not employed by Ericsson are not invited to participate in the Group’s share based long-term variable remuneration plans.
The Annual General Meeting 2008 approved the proposal by the Nomination Committee for yearly fees to the non-employed Board members for Board and Committee work. For information on Board of Directors’ fees 2008, please refer to the table in Notes to the Consolidated Financial Statements—Note C29 “Remuneration to the Board of Directors” in the Annual Report. The Annual General Meeting 2008 also approved the Nomination Committee’s proposal that it will be possible for non-employed Board members to be paid part of the fee, in respect of the Board assignment, in the form of so-called synthetic shares. A synthetic share gives the right to receive a future payment of an amount which corresponds to the market value of a Class B share in the Company at the time of payment. The purpose of paying part of the Board of Director’s fee in the form of synthetic shares is to further enhance the Directors’ interest in Ericsson and its financial development and also provides an opportunity for the Directors to have a financial interest in the Company comparable with that of a shareholder. For more information on the terms and conditions of the synthetic shares, please refer to the notice convening the Annual General Meeting 2008 (www.ericsson. com/ericsson/investors/shareholders/agm). Information on our website does not form part of this document.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
DIRECTORS’ ATTENDANCE 2008
Board member | No of Board meetings | No of Audit Committee meetings | No of Finance Committee meetings | No of Remuneration Committee meetings | ||||
Michael Treschow | 11 | 12 | 7 | |||||
Sverker Martin-Löf | 10 | 8 | ||||||
Marcus Wallenberg | 10 | 13 | ||||||
Roxanne S. Austin1) | 8 | |||||||
Sir Peter L. Bonfield | 11 | 9 | ||||||
Börje Ekholm | 11 | 7 | ||||||
Ulf J. Johansson | 11 | 9 | ||||||
Katherine Hudson2) | 3 | |||||||
Nancy McKinstry | 10 | 7 | ||||||
Anders Nyrén | 11 | 12 | ||||||
Carl-Henric Svanberg | 11 | |||||||
Monica Bergström | 10 | 7 | ||||||
Jan Hedlund | 11 | 9 | ||||||
Torbjörn Nyman2) | 3 | 4 | ||||||
Pehr Claesson3) | 8 | |||||||
Anna Guldstrand4) | 10 | 9 | ||||||
Kristina Davidsson | 10 | |||||||
Karin Åberg | 11 | |||||||
Total | 11 | 9 | 13 | 7 |
COMPANY STRUCTURE AND ORGANIZATIONMANAGEMENT
The PresidentPresident/CEO and Chief Executive Officer—operational managementGroup Management
The Board of Directors appoints the President and CEO and the Executive Vice Presidents. ManagementThe President and CEO is responsible for the management of day-to-day operations is the responsibility of the President and CEOis supported by the Group Management Team which, in addition to the President and CEO, consistconsists of the Headsheads of Group Functionsfunctions and the Headsheads of the business units.
The role of the Group Management Team is to:
Establish a long-term vision, Group objectives,a strong corporate culture and group strategies and policies.policies, all based on objectives stated by the Board.
Maximize the Group’s business.Determine targets for operational units, allocate resources and monitor unit performance.
Secure operational excellence and realize global synergies.synergies through efficient organization of the Group.
TheRemuneration of Group Management
Guidelines on remuneration and other employment terms for Group Management Team meets monthly to discuss businesswere approved by the Annual General Meeting 2009. For further information on remuneration, fixed and decisionsvariable pay, see Remuneration Report and to share information of common interest to Ericsson.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Organization and corporate culture
Corporate culture has long been acknowledged as a very important factor for driving behavior, not only for compliance with rules but also in communication, decision making, reaching of objectives and striving for efficiency. Respect, professionalism and perseverance are the values that are the foundation of the Ericsson culture, guiding us in our daily work, how we relate to people and how we do business. Consequently, executive management makes communication and development of the Ericsson culture a key task in the management of the Company.
The organization is operated in two dimensions:
Legal entities: more than 200 companies in more than 100 countries.
Operational units: Group Functions (7), business units (3) and market units (23).
Group Functions
Group Functions coordinate the Company’s strategies, operations and resource allocation and define the necessary directives, processes and organization for the effective governance of the Group. By optimizing common processes, tools and the organization, the Group Functions drive operational excellence across the Company. The Group Functions are: Communication, Finance, Human Resources & Organization, Legal Affairs, Sales & Marketing, Strategy & Operational Excellence and Technology. The Group Functions also manage common units like Ericsson Research, IT and Shared Service Centers. The heads of Group Functions reportNotes to the CEO.
Business units
Business units are innovators, developers and suppliers of competitive, high-quality products, services and customer offerings. Business units define business and product strategies and, by optimizing the product development and supply operations, ensure high-quality and competitive solutions. Business units are responsible for the profitable growth and consolidated results within their respective areas. The business units reflect the product- and service structure of the business: Networks, Global Services and Multimedia. Business unit heads report to the CEO.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Market units
Market units are marketing and sales channels and the Company’s representatives in the local market environment. Market units define customer strategies and, by building excellent relations with customers and local authorities, drive business growth. They manage the complete customer relations ranging from marketing to after-sales and support activities. Heads of market units report to the CEO directly or via a selected member of the Group Management Team.
Efficiency and coordination
Each of the business and market units is supported by an internal steering group. A steering group is chaired by an appointed member of the Group Management Team who reports to the CEO. The chairman selects the participation in the internal steering group to best support the specific needs of the unit.
Joint ventures
In certain areas, the Company has chosen to work with joint venture partners. The mobile handset partnership with SONY Corporation in Sony Ericsson Mobile Communications has been in operation since 2001. During the year, the Company signed a joint venture agreement with STMicroelectronics for mobile platform technology and wireless semiconductors.
Company management
As defined in the Swedish Companies Act and outlined in further detail in the work procedureConsolidated Financial Statements—Note C29, “Information Regarding Members of the Board of Directors, the CEO is managingManagement and Employees” in the Company’s daily operations. The CEO and his appointed Group Function heads have implemented a management system to ensure that the business is managed:Annual Report.
So that the objectives of Ericsson’s major stakeholders (customers, shareholders, employees) are fulfilled.
Within established risk limits and with good internal control.
So that the Company is compliant with applicable laws, listing requirements and governance codes and fulfills is corporate social responsibilities.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
The Ericsson Group Management System
The CEO and heads of Group functions have implemented a management system to ensure that the business is managed:
so that the objectives of Ericsson’s major stakeholders (customers, shareholders, employees) are fulfilled,
within established risk limits and with reliable internal control,
so that the Company is compliant with applicable laws, listing requirements and governance codes and fulfills its corporate social responsibilities.
1) | The number of Class B shares (and Class A shares, if applicable) includes holdings by related natural or legal persons and American Depositary Receipts, where applicable. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Ericsson is ISO 9001 and ISO 14001 certified. The management system is an important foundation and is continuously evaluated and improved in line with ISO requirements.
The Ericsson Group Management System comprises three elements:
Management and control elements,control; i.e. corporate culture, objective setting and strategy formulation, and steering documents, such as Group policies and directives.
Operational processes and IT tools.tools, to support operational excellence and leverage Ericsson’s scale advantages.
Organization and corporate culture.resources.
Ericsson is ISO 9001 certified. TheRisk management system is an important foundation and it is continuously evaluated and improved in accordance withintegrated part of the ISO requirements.Ericsson Group Management System.
Management and control
Ericsson uses balanced scorecards as a tooltools for translating strategic objectives into a set of performance indicators for its operating units focusingunits. These focus primarily on:on market and customer performance, competitive position, internal efficiency, financial performance and employee satisfaction and empowerment. Based on the Company’s annual strategy work, these scorecards are updated with targets for each unit for the next year and communicated throughout the organization. The balanced scorecard is also used as a management tool to align operating unit goals and personal goals to Company goals, follow up progress towards goals and monitor identified risks.
Corporate culture has long been acknowledged as an important factor for driving behavior, not only for compliance but also in communication, decision making, efficiency and the reaching of objectives. Respect, professionalism and perseverance are the values that underpin Ericsson’s culture, guiding daily work, relationships and business. Consequently, executive management makes the communication and development of Ericsson’s culture a key task in the management of the Group.
Group-wide policies and directives govern how the organization works andworks. These include important areas, such as a code of business ethics, policies on roles and responsibilities, segregation of duties, capital expenditures, management of intellectual property rights, financial reporting, environmental matters, and risk management.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Operational Processes and IT tools
As a leading vendor, Ericsson tries to utilize its possiblethe competitive advantages that are gained through scale of operations and therefore has implemented common processes and IT tools across all its operating units. Through management and continuous improvement of these processes and IT tools, Ericsson reduces cost throughcosts with standardized operational internal controls and performance indicators.
Organization and resources
Ericsson is operated in two dimensions:
Legal entities: more than 200 companies in more than 100 countries, each with a board of directors, in many cases also with local non-Ericsson employee members. Ericsson also operates through two joint ventures.
Operational units: business units (4) and market units (23).
In addition, Group functions coordinate Ericsson’s strategies, operations and resource allocation and define the necessary directives, processes and organization for the effective governance of the Group.
For more information on Ericsson’s organization, see chapter “Information on the Company” in the Annual Report.
Risk management
WeRisks are broadly categorize riskscategorized into operational and financial risks. OurEricsson’s risk management is based on the following principles, which apply universally across all business activities and risk types:
Risk management is an integrated part of the Ericsson Group Management System.
Each operational unit is accountable for owning and managing its risks according to policies, directives and process tools, with decisionstools. Decisions are made or escalated according to a well-defined delegation of authority. Financial risks are coordinated through our group functionGroup Function Finance.
Risks are dealt with on three levels: induring the strategy process, in the annual planning and target setting and in theduring operational processes by transaction (customer bid/contract, acquisition, investment, product development project). They are subject to various process controls such as decision tollgates and approvals.
A central security unit coordinates management of certain risks, such as:as business interruption, information security/IT and physical security. A Crisis Management Council deals with ad-hoc events of a serious nature.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
For more information on Ericsson’s risk management, see the “Board of Directors’ Report” in the Annual Report.
MEMBERS OF THE GROUP MANAGEMENT TEAM
Carl-Henric Svanberg
President and CEO until December 31, 2009 and member of the Board of Directors (since 2003)
Born 1952, Master of Science, Linköping Institute of Technology, Bachelor of Science in Business Administration, University of Uppsala. Carl-Henric Svanberg holds honorary doctorates at Luleå University of
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Technology Sweden, and Linköping University of Technology, Sweden.Technology.Chairman:Board member: Sony Ericsson Mobile Communications AB. Board member: TheAB and ST-Ericsson until end of 2009, the Confederation of Swedish Enterprise, Melker Schörling AB, Uppsala University and University of Uppsala.BP PLC.Holdings in Ericsson1):: 3,202,528 3,234,441 Class B shares.
Background:President and CEO of Assa Abloy AB (1994–2003). Various positions within Securitas AB (1986–1994) and ABB Group (1977–1985).
Hans Vestberg
First Executive Vice President until December 31, 2009. President and Chief Financial Officer and HeadCEO as of Group Function Finance (since October 2007)January 1, 2010.
Born 1965, Bachelor inof Business Administration and Economics, University of Uppsala.Board member: Sony Ericsson Mobile Communications AB, Chairman of ST-Ericsson and Svenska Handbollsförbundet.Holdings in Ericsson1): 18,92039,825 Class B shares.
Background: Hans Vestberg was Chief Financial Officer and Head of Group Function Finance until October 31, 2009. Prior to these positions Hans Vestberg was Executive Vice President and Head of Business Unit Global Services (up to December 31, 2007) Hans VestbergServices. He has held various positions in the Company since 1988, including Vice President and Head of Market Unit Mexico and Head of Finance and Control in USA, Brazil and Chile.
Bert NordbergJan Frykhammar
Executive Vice President and ChairmanChief Financial Oficer and Head of RedbackGroup Function Finance (since November 1, 2009) and EntrisphereHead of Business Unit Global Services (since 2008)
Born 1956, Degree in Electronic Engineering, Malmö, Engineer in the Marines, Berga, university courses in International Management, Marketing1965. Bachelor of Business Administration and Finance, INSEAD, France.Board Chairman: Litos Repro i Malmö AB.Economics, University of Uppsala.Holdings in Ericsson1): 22,4822,307 Class B shares.
Background: Prior to assuming this position, Bert Nordberg was Executive Vice President and Head of Group Function Sales and Marketing (since 2004) andJan Frykhammar has held other various positions within Ericsson.Ericsson such as Sales and Business Control in Business Unit Global Services, CFO in North America and Vice President, Finance and Commercial within the Global Customer Account Vodafone.
Johan Wibergh
SeniorExecutive Vice President (as of January 1, 2010) and Head of Business Unit Networks (since 2008)
Born 1963. Master of Computer Science, Linköping Institute of Technology.Holdings in Ericsson1): 8,55514,024 Class B shares.
Background: Prior to assuming this position,these positions, Johan Wibergh was President of Ericsson Brazil. Other former experience includesHe has also been President of Market Unit Nordic and Baltics, Vice President and Head of Sales at Business Unit Global Services.
Jan Wäreby
Senior Vice President and Head of Business Unit Multimedia (since 2007)
Born 1956, Master of Science, Chalmers University, Göteborg.Board member: Sony Ericsson Mobile Communications AB, ST-Ericsson, LHS Telekommunikation.Holdings in Ericsson1): 41,733 Class B shares.
1) | The number of Class B shares (and Class A shares, if applicable) includes holdings by related natural or legal persons. Options and matching rights are reported in Notes to the Consolidated Financial Statements—Note C29, “Information Regarding |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Jan Frykhammar
Senior Vice President and Head of Business Unit Global Services (since 2008)
Born 1965. Bachelor of Business Administration and Economics, University of Uppsala.Holdings in Ericsson1): 906 Class B shares.
Background: Prior to assuming this position, Jan Frykhammar was Head of Sales and Business Control in Business Unit Global Services, CFO in North America and Vice President, Finance and Commercial within the Global Customer Account Vodafone.
Jan Wäreby
Senior Vice President and Head of Business Unit Multimedia (since 2007)
Born 1956, Master of Science, Chalmers University, Göteborg.Board member: Sony Ericsson Mobile Communications AB.Holdings in Ericsson1): 37,698 Class B shares.
Background: From 2002 to 2006, Jan Wäreby was Executive Vice President and Head of Sales and Marketing for Sony Ericsson Mobile Communications.
Magnus Mandersson
Senior Vice President and Head of Business Unit CDMA (since November 2009)
Born 1959, Bachelor of Business Administration, University of Lund.Holdings in Ericsson1): 5,146 Class B shares.
Background:Prior to assuming this position, Magnus Mandersson was Head of Market Unit Northern Europe and Global Customer Account Deutsche Telekom AG.
Cesare Avenia
Chief Brand Officer (since November 2009) and Head of Market Unit South East Europe (since 2006)
Born 1950, Bachelor’s degree of science, Tele Communication, University of Naples, Italy.Board member: Ericsson Telecomunicazioni S.P.A. and sole Director in Ericsson Network Services Italia S.P.A.Holdings in Ericsson1):10,913 Class B shares.
Background:Prior to assuming these positions he was Head of Market Unit Italy.
Carl Olof Blomqvist
Senior Vice President, General Counsel and Head of Group Function Legal Affairs (since 1999)
Born 1951, Master of Law, LLM, University of Uppsala.Board member:Aktiemarknadsbolagens Förening and the Swedish Securities Council (since 2010).Holdings in Ericsson1): 1,216 Class A shares and 24,91131,839 Class B shares.
Background: Prior to assuming this position, Carl Olof Blomqvist was a partner of Mannheimer Swartling law firm.
Håkan Eriksson
Senior Vice President, Chief Technology Officer and Head of Group Function Technology & Portfolio Management (since 2007)2003). As of January 1, 2010 also Head of Ericsson Silicon Valley.
Born 1961, Master of Science and Honorary Ph D, Linköping Institute of Technology.Board member:Linköping University, and Anoto.Anoto, Vestas, Stockholm Chamber of Commerce.Holdings in Ericsson1): 18,61825,500 Class B shares.
Background: Prior to assuming this position,these positions, Håkan Eriksson was Senior Vice President and Head of Research and Development. He has held various positions within Ericsson since 1986.
1) | The number of Class B shares (and Class A shares, if applicable) includes holdings by related natural or legal persons. Options and matching rights are reported in Notes to the Consolidated Financial Statements—Note C29, “Information Regarding Members of the Board of Directors, the Management and employees” in the Annual Report. |
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Douglas L. Gilstrap
Senior Vice President and Head of Group Function Strategy (since September 2009)
Born 1963, Master of Business Administration, Emory University, Atlanta.Holdings in Ericsson1): 385 Class B shares.
Background:Prior to assuming this position, Douglas L. Gilstrap held senior management positions at Equant Networks and Cable and Wireless.
Marita Hellberg
Senior Vice President and Head of Group Function Human Resources and Organization (since 2003)
Born 1955, Bachelor of Human Resources Management, Stockholm University, Advanced Management Program, Cedep, France.Board member: Utbildningsradion.Holdings in Ericsson1): 23,32529,554 Class B shares.
Background: Prior to assuming this position, Marita Hellberg was Senior Vice President of Human Resources of the NCC Group.
Torbjörn Possne
Senior Vice President and Head of Group Function Sales and Marketing (since 2008)
Born 1953. Master of Science, Royal Institute of Technology, Stockholm.Holdings in Ericsson1): 21,874 Class B shares.
Background: Prior to assuming this position, Torbjörn Possne was Head of Market Unit Northern Europe and Global Customer Account Deutsche Telekom. He has held various positions within Ericsson since 1979.
Henry Sténson
Senior Vice President and Head of Group Function Communications (since 2002)
Born 1955, Studied law, sociology and political science, Linköping University and at the Swedish War Academy, Karlberg, Stockholm.Board member: Stronghold.Holdings in Ericsson1): 22,729 Class B shares.
Background: Prior to assuming this position, Henry Sténson was Head of SAS Group Communication.
Up to August 31, 2009, Bert Nordberg was Executive Vice President and Chairman of Redback and Entrisphere, and also Head of Ericsson Silicon Valley and a member of the Group Management Team of the Company. Bert Nordberg joined Sony Ericsson as Co-President on September 1, 2009, to become its President as of October 15, 2009.
According to the Articles of Association, the Parent Company shall have no less than one and no more than three registered public accounting firms as external independent auditors. The auditors are elected by the shareholders at the Annual General Meeting for a period of four years. The auditors report to the shareholders at General Meetings.
1) | The number of Class B shares (and Class A shares, if applicable) includes holdings by related natural or legal persons. Options and matching rights are reported in Notes to the Consolidated Financial Statements—Note C29, “Information Regarding |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Torbjörn Possne
Senior Vice President and Head of Group Function Sales and Marketing (since 2008)
Born 1953. Master of Science, Royal Institute of Technology, Stockholm.Holdings in Ericsson1): 16,586 Class B shares.
Background: Prior to assuming this position, Torbjörn Possne was Head of Market Unit Northern Europe and Global Customer Account Deutsche Telekom and also held other various positions within Ericsson.
Henry Sténson
Senior Vice President and Head of Group Function Communications (since 2002)
Born 1955, Studied law, sociology and political science, Linköping University and at the Swedish War Academy, Karlberg, Stockholm.Board member: Stronghold and the Stockholm Chamber of Commerce.Holdings in Ericsson1): 17,403 Class B shares.
Background:Prior to assuming this position, Henry Sténson was Head of SAS Group Communication.
Joakim Westh
Senior Vice President and Head of Group Function Strategy and Operational Excellence (since 2007)
Born 1961, Master of Science, Royal Institute of Technology, Stockholm, Master of Science within Aeronautics and Astronautics, MIT, Boston, USA. Board chairman: Absolent AB.Board member: VKR Holding A/S.Holdings in Ericsson1): 35,646 Class B shares.
Background: Prior to assuming this position, Joakim Westh was Senior Vice President and Head of Group Function Operational Excellence. Member of Assa Abloy Executive Management Team. Before this, Joakim Westh was a partner with McKinsey & Co. Inc.
Up to June 30, 2008 Kurt Jofs, former Executive Vice President and Head of Business Unit Networks and Björn Olsson, former Executive Vice President and Deputy Head of Business Unit Networks were members of the Group Management Team of the Company.
Ericsson’s external independent auditors are elected by the shareholders at the Annual General Meeting for a period of four years. The auditors report to the shareholders at Shareholders’ Meetings.
The auditors:
Update the Board of Directors regarding the planning, scope and content of the annual audit.
Examine the year-end financial statements and report findings to assess accuracy and completeness of the accounts and adherence to accounting procedures and principles.
Advise the Board of Directors of additionalnon-audit services performed, (non-auditing), the consideration paid and other issues that are needed to determine the auditors’ independence.
For further information on the contacts between the Board and the auditors, please see “Work of the Board of Directors” earlier in the report.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
All Ericsson’s quarterly reports are reviewed by the auditors.
Statutory auditorsCurrent auditor
PricewaterhouseCoopers AB was elected at the Annual General Meeting 2007 for a period of four years until the close of the Annual General Meeting 2011.
PricewaterhouseCoopers AB has appointed Bo Hjalmarsson,Peter Clemedtson, Authorized Public Accountant, to serve as auditor in charge. Bo HjalmarssonPeter Clemedtson is also auditor in charge at other large companies such as Eniro, Sony Ericsson Mobile Communications, Lundin Petroleum, Vostok Nafta, Vostok Gas and Duni.of Skandinaviska Enskilda Banken.
Fees paid to external auditorsthe auditor
Ericsson paid the fees (including expenses) for audit-related and other services listed in the table in Notes to the Consolidated Financial Statements—Note C31, “Fees to auditors”Auditors” in the Annual Report for audit-related and other services.
The Audit Committee reviews and pre-approves any non-audit services to be performed by the external auditors to ensure the auditors’ independence.Report.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURESINTERNAL CONTROL OVER FINANCIAL REPORTING 2009
The Audit Committee makes recommendations to the Board of Directors regarding the auditors’ performance and submits recommendations regarding auditor’s fees to the Nomination Committee. It reviews the scope and execution of audits performed (external and internal) and analyzes the result and the cost.
The Audit CommitteeThis section has established pre-approval policies and procedures for services other than audits performed by the external auditors. For other matters, an auditor submits an application to the CFO. If supported by the CFO, the application is presented to the Audit Committee for final approval.
Pre-approval authority may not be delegated to management. The policies and procedures include a list of prohibited services. Such services fall into two broad headings:
General pre-approval services can be pre-approved by the Audit Committee without consideration to specific case-by-case service. Tax, transaction, risk management, corporate finance, attestation and accounting services and general services have received a general pre-approval of the Audit Committee, provided that the estimated fee level for the project does not exceed SEK 1 million. The external auditors must advise the Audit Committee of services rendered under the general pre-approval policy.
Specific pre-approval—all other audit-related, tax and other services must receive specific pre-approval. The Audit Committee Chairman has the delegated authority for specific pre-approval, provided service fees do not exceed SEK 2.5 million. The Chairman reports any pre-approval decisions to the Audit Committee at its scheduled meetings.
DISCLOSURE CONTROLS AND PROCEDURES
Ericsson has controls and proceduresbeen prepared in place to make sure that information to be disclosed under the Securities Exchange Act of 1934, and under Ericsson’s agreements with NASDAQ OMX Stockholm and NASDAQ, is done so on time, and that such information is provided to management, including the CEO and CFO, so that timely decisions can be made regarding required disclosure.
To assist managers in fulfilling their responsibility with regard to disclosures made by the Company to its security holders and the investment community, a Disclosure Committee was established in 2003. One of the main tasks of the Disclosure Committee is to monitor the integrity and effectiveness of the Company’s disclosure controls and procedures.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Ericsson also has investments in certain entities that we do not control or manage. Our disclosure controls and procedures with respect to such entities are substantially more limited than those we maintain with respect to our subsidiaries.
During the year, management,accordance with the participationSwedish Code of Ericsson’s PresidentCorporate Governance, section 10.5, and CEO and CFO, supervised and participated in an evaluation of the effectiveness of our disclosure controls and procedures. As a result, Ericsson’s President and CEO and CFO concluded that the disclosure controls and procedures were effective at a reasonable assurance level.
There were no changesis limited to our internal control over financial reporting during the period covered by the Annual Report 2008 that have materially affected, or are likely to materially affect, our internal control over financial reporting.
Since Ericsson is listed in the United States, the requirements outlined in the Sarbanes-Oxley Act (SOX) apply. These regulate the establishment and maintenance of internal controls over financial reporting and also management’s assessment of the effectiveness of the controls. In order to comply with SOX, the Company has implemented detailed controls as well as documentation, testing and reporting procedures in accordance with the COSO framework for internal control. The COSO framework is issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s internal control report according to SOX will be included in Ericsson’s Annual Report on Form 20-F and filed with the SEC in the United States. During 2009, the Company has continued to improve the design and execution of its financial reporting controls as well as include operations in acquired entities.
ERICSSON’S DISCLOSURE POLICIESDisclosure policies
Ericsson’s financial disclosure policies are designedaim to facilitateensure transparent, informativerelevant and consistent communication with the investment communityequity and debt investors on a fair and equal basis, whichbasis. This will reflect insupport a fair market value for Ericsson shares. We want our shareholdersEricsson wants current and potential investors to have a good understanding of how ourthe Company works, ourincluding operational performance, our prospects and the risks we face that jeopardize the fulfilment of our opportunities.potential risks.
To achieve these goals, ourobjectives, financial reporting and disclosure must be:
Transparent—our disclosure should enhance understanding of the economic drivers and operational performance of ourthe business, hence buildingbuild trust and credibility.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Consistent—we aim for consistentcomparable in scope and comparable disclosure within andlevel of detail to facilitate comparison between reporting periods.
Simple—information should be provided in as simple a manner as possible, so readers gain the appropriate level ofto support understanding of our business operations and performance.performance and to avoid misinterpretations.
Relevant—wewith focus our disclosure on what is relevant to Ericsson’s stakeholders or required by regulation or listing agreements, to avoid information overload.
Timely—we utilize well-established disclosure controls and procedures to ensure that allwith regular scheduled disclosures are complete, accurate andas well as ad-hoc information, such as press releases on important events, performed on a timely basis.
Fair and equal—we publishwhere all material information is published via press releases to ensure everyonethe whole investor community receives the information at the same time.
AComplete, free from material errors and a reflection of best practice—we strive to ensure that our disclosure is compliant with applicable financial reporting standards and listing requirements and in line with industry norms.
OurEricsson’s website (www.ericsson.com/investors) includes comprehensive information on Ericsson,the Group, including an archive of our annual and interim reports, on-demand-accesson-demand access to recent news and copies of presentations given by senior management at industry conferences. Information(Information on ourthe Ericsson website does not form part of this document.)
INDEPENDENCE REQUIREMENTSDisclosure controls and procedures
The Ericsson Boardhas controls and procedures in place to ensure timely information disclosure under the U.S. Securities Exchange Act of Directors is subject to,1934 and compliesunder agreements with a variety of independence requirements. However, it has sought and received exemptions from certain Sarbanes-Oxley ActNASDAQ and NASDAQ requirements,OMX Stockholm. These procedures also ensure that such information is provided to management, including those that are contrarythe CEO and CFO, so timely decisions can be made regarding required disclosure.
A Disclosure Committee comprising 15 members with various expertise assists managers in fulfilling their responsibility regarding disclosures made to Swedish Law, see “NASDAQ Corporate Governance Exemptions”.
Listing requirements of NASDAQ OMX Stockholm
No more than one memberthe shareholders and the investment community. One of the board elected by the shareholders may work as a senior executive in the company or its subsidiaries.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
The majority of the directors elected by the shareholders’ meetings must be independent of the company and its management.
At least two of the directors who are independent of the company and its management must also be independent of the company’s major shareholders. One of these directors must be experienced in requirements placed on a listed company.
The Swedish Code of Corporate Governance
Independence requirements on the board of directors (excluding employee representatives):
No more than one member of the board elected by the shareholders may work as a senior executive in the company or its subsidiaries.
A majority of the directors elected by the shareholders’ meetings must be independent of the company and its management.
At least two of the directors who are independent of the company and its management must also be independent of the company’s major shareholders.
Independence requirements on the Audit Committee:
The majority of Audit Committee members must be independent of the company and senior management.
At least one membermain tasks of the committee must be independentis to monitor the integrity and effectiveness of the company’s major shareholders.
A board member who is part of senior management maydisclosure controls and procedures. Ericsson has investments in certain entities that the Company does not be a member ofcontrol or manage. With respect to such entities, disclosure controls and procedures are substantially more limited than those maintained with respect to subsidiaries.
During the audit committee.
Independence requirements on the remuneration committee:
Committee members must be independent of the companyyear, Ericsson’s President and CEO and the senior management.
The NASDAQ Marketplace RulesCFO evaluated the disclosure controls and procedures and concluded that they were effective at a reasonable assurance level as at December 31, 2009.
Independence requirements onDuring the board of directors:
A majority ofperiod covered by the members of the board of directors must be independent within the meaning of the NASDAQ rules.
Ericsson has obtained an exemption from NASDAQ allowing employee representative directors to be exempt from NASDAQ’s independence requirements.
Sarbanes-Oxley Act of 2002 and corresponding NASDAQ rules
Independence requirements on the audit committee:
All members of the audit committee must be independent within the meaning of the Sarbanes-Oxley Act of 2002.
The Sarbanes-Oxley Act of 2002 includes a specific exemption for non-executive employee representatives.
NASDAQ Corporate Governance Exemptions
Pursuant to a 2005 amendment to NASDAQ’s Marketplace Rules, foreign private issuers such as Ericsson may follow home-country practice in lieu of certain NASDAQ corporate governance requirements.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Before the amendment was adopted, NASDAQ’s Marketplace Rules provided that foreign private issuers could, upon application, be exempt from certain of its corporate governance requirements when these requirementsAnnual Report 2009, there were contraryno changes to the laws, rulesdisclosure controls and procedures that have materially affected, or regulations, or generally accepted business practices ofare likely to materially affect, the issuer’s home jurisdiction.
Ericsson has received (and is entitled to continue to rely thereon under the 2005 amendment) exemptions from NASDAQ’s corporate governance requirements under the Marketplace Rules in order to allow:
Employee representatives to be elected to the Board of Directors and serve on its Committees (including the Audit Committee), in accordance with Swedish law.
Shareholders to participate in the election of Directors and the Nomination Committee, in accordance with Swedish law and common market practice respectively.
Employee representatives on the Board to attend all Board and all Committee meetings (including the Audit Committee), in accordance with Swedish laws concerning attendance and decision making processes.
In addition, Ericsson relies on the exemption provided by the 2005 amendment to overcome contradictions between NASDAQ and Swedish law requirements regarding quorums for its meetings of holders of common stock.
INTERNAL CONTROL OVER FINANCIAL REPORTING FOR THE YEAR 2008
This section has been prepared in accordance with the Swedish Code of Corporate Governance, section 10.5, and is thereby limited to internal control over financial reporting.
Since the Company is listed in the United States, the requirements for establishing and maintaining internal controls over financial reporting and for management to report on its assessment of the effectiveness of internal controls over financial reporting, outlined in the Sarbanes-Oxley Act (SOX) apply. The Company has implemented detailed controls, documentation and testing procedures in accordance with the COSO framework for internal control, issued by the Committee of Sponsoring Organizations of the Treadway Commission, to ensure compliance with SOX. Management’s internal control report according to SOX will be included in Ericsson’s Annual Report on Form 20-F, which will be filed with the SEC in the United States. During 2008, the Company has continued to work with the improvement in design and execution of its financial reporting controls.
Internal control over financial reporting
Ericsson has integrated risk management and internal control into its business processes. As defined in the COSO framework, components of internal control areincludes components such as a control environment, risk assessment, control activities, information and communication and monitoring.
Changes in Internal Control over Financial Reporting
There were no changes in Ericsson’s internal control over financial reporting that occurred during the year ended December 31, 2009, that have materially affected, or are reasonably likely to materially affect, the Group’s
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
internal control over financial reporting during 2009. On November 13, 2009, Ericsson completed the acquisition of the Nortel operation. The Nortel operation is part of the Network segment and Ericsson is in the process of integrating the Nortel operation into the Ericsson internal control environment.
Control environment
The Company’s internal control structure is based on the division of labor between the Board of Directors and its Committees and the President and CEO and theCEO. The Company has implemented a management system that is based on:
Steering documents, such as policies, directives and a code of business ethics, and a strong corporate culture.
The Company’s organization and mode of operations, with well-defined roles and responsibilities and delegations of authority.
Steering documents, such as policies and directives, and a Code of Business Ethics.
Several well-defined group-wide processes for planning, operations and support.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
The most essential parts of the control environment relative to financial reporting are included in steering documents and processes for accounting and financial reporting. These steering documents are updated regularly to include, among other things, changes to laws, financial reporting standards and listing requirements, such as IFRS and SOX. The processes include specific controls to be performed to ensure high-qualityhigh quality reports. Each reporting legal entity, market unit and business unit has a financial controller function supporting the entity management with execution of controls related to transactions and reporting. A financial controller function is also established on group level, reporting to the CFO.
Risk assessment
Risks related to financial reporting include fraud and loss or embezzlement of assets, undue favorable treatment of counter-parties at the expense of the Company. Other risks of material misstatements in the financial statements canreporting may occur in relation to recognition and measurement of assets, liabilities, revenue and cost or insufficient disclosure. Identified typesOther risks related to financial reporting include fraud, loss or embezzlement of risks are mitigated through segregationassets and undue favorable treatment of duties incounterparties at the Company’s business processesexpense of the Company.
Policies and through appropriate delegation of authority, requiring specific approval of material transactions. Accountingdirectives regarding accounting and financial reporting policies and directives cover areas of particular significance to support correct, complete and timely accounting, reporting and disclosure.
Identified types of risks are mitigated through well defined business processes with integrated risk management activities and segregation of duties and appropriate delegation of authority. This requires specific approval of material transactions and ensures adequate asset management.
Control activities
The Company’s business processes include financial controls regarding the approval and accounting of business transactions. The financial closing and reporting process has controls forregarding recognition, measurement and disclosure, includingdisclosure. These include the application of critical accounting policies and estimates, forin individual subsidiaries andas well as in the consolidated accounts. All legal entities, business units and market units in Ericsson have their own dedicated controller functions which participate in the planning and evaluation of each unit’s performance.
Regular analysisanalyses of the financial results for their respective unitseach subsidiary, market unit and business unit cover the significant elements of assets, liabilities, revenues, costs and cash flow. Together with further analysis of the consolidated financial statements performed at Group level, this important element of internal control ensures that the financial reports do not contain material errors.
For external financial reporting purposes, additional controls performed by athe Disclosure Committee established by Company management ensure that all disclosure requirements are fulfilled.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The Company has implemented controls to ensure that the financial reports are prepared in accordance with its internal accounting and reporting policies and IFRS as well as with relevant listing regulations. To ensure that the Company’s CEO and CFO can assess the effectiveness of the controls in a way that is compliant with SOX. The Company also maintains detailed documentation on internal controls related to accounting and financial reporting, as well as records on the monitoring of the execution and results of such controls. A reviewThis ensures that the CEO and CFO can assess the effectiveness of materiality levels related to the financial reports has resulted in the implementation of detailed process controls and documentation in almost all subsidiaries. Ericsson has also implemented overall entity-wide controls in all subsidiaries related toa way that is compliant with SOX.
Entity-wide controls, focusing on the control environment and compliance with the financial reporting policies and directives, related to financial reporting. are implemented in all subsidiaries. Detailed process controls and documentation of controls performed are also implemented in almost all subsidiaries, covering all items with significant materiality and risk.
To ensure efficient and standardized accounting and reporting processes, the Company has establishedoperates several shared services centers, performing accounting and financial reporting services for subsidiaries basedcenters. Based on a common IT platform, with a common chart of account and common master data.data, the centers perform accounting and financial reporting services for most subsidiaries.
Information and communication
The Company’s information and communication channels support completenesscomplete, correct and correctness oftimely financial reporting by making all relevant internal process instructions and policies regarding accounting and financial reporting accessible to all the employees concerned and through regularconcerned. Regular updates and briefing documents regarding changes in accounting policies, and reporting and disclosure requirements.requirements are also supplied.
Subsidiaries and operating units makeprepare regular financial and management reports to internal steering groups and Company management, includingmanagement. These include analysis and comments on financial performance and risks. The Board of
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Directors receives financial reports monthly. The Audit Committee of the Board has established a “whistle blower”whistle blower procedure for reporting violations in accounting, internal controls and auditing matters.
Monitoring
The Company’s financial performance is reviewed at each Board meeting. The committees of the Board fulfill important monitoring functions regarding remuneration, borrowing, investments, customer finance, cash management, financial reporting and internal control. The Audit Committee and the Board of Directors review all interim and annual financial reports before they are released to the market. The Audit Committee also receives regular reports from the external auditors. The Audit Committee follows up on any actions taken to improve or modify controls.
The Company’s process for financial reporting is reviewed annually by management andthe management. This forms a basis for evaluating the internal management system and internal steering documents to ensure that they cover all significant areas related to financial reporting. The shared service center management continuously monitors the accounting quality through a set of performance indicators. Compliance with policies and directives is monitored through annual self-assessments and representation letters from heads and controllers in all subsidiaries as well as fromin business units and market units.
The Company’s financial performance is also reviewed at each Board meeting. The committees of the Board fulfill important monitoring functions regarding remuneration, borrowing, investments, customer finance, cash management, financial reporting and internal control. The Audit Committee and the Board of Directors review all interim and annual financial reports before they are released to the market. The Company’s internal audit function, which reports to the Audit Committee, performs independent audits. The Audit Committee also receives regular reports from the external auditor. The Audit Committee follows up on any actions taken to improve or modify controls.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Some of the information provided in this material is or may contain forward-looking information such as statements about expectations, assumptions about future market conditions, projections or other characterizations of future events. The words “believe”, “expect”, “anticipate”, “intend”, “may”, “plan”, the negative of such terms, and similar expressions are intended to identify these statements. Although we believe that the expectations reflected in these and other forward-looking statements are reasonable, we can give no assurance that these expectations will prove to be correct and actual results may differ materially. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law or stock exchange regulation. We advise you that Ericsson is subject to risks both specific to our industry and specific to our company that could cause the actual results to differ materially from those contained in our projections or forward-looking statements, including, among others, changing conditions in the telecommunications industry, political economic and regulatory developments in our markets, our management’s ability to develop and execute a successful strategy, various financial risks such as interest rate changes and exchange rate changes, erosion of our market position, structure and financial strength of our customer base, our credit ratings, product development risks, supply constraints, and our ability to recruit and retain quality staff.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Ericsson’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Ericsson’s internal control system related to financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Although the purpose of internal control systems is to enable risks to be optimally managed, all internal control systems, no matter how well designed, have inherent limitations which may result in that misstatements are not prevented or detected. Therefore, even systems determined to be effective can provide only reasonable assurance with respect to the reliability of financial statement preparation and presentation.
Ericsson’s management assessed the effectiveness of Ericsson’s internal control over financial reporting as of December 31, 2008.2009. In making this assessment, management used the criteria set forth in “Internal Control—Integrated Framework”, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management has excluded activities from the acquired Nortel operation from the assessment of internal control over financial reporting as at December 31, 2009, because the Nortel operation was acquired by Ericsson in a purchase business combination during 2009. The Nortel operation is part of the Network segment. The total assets and total net sales of the Nortel operation represent approximately 0.6 percent and 1.3 percent, respectively, of our related consolidated financial statement amounts as at and for the year ended December 31, 2009.
Based on this assessment, management has concluded that, as of December 31, 2008,2009, Ericsson’s internal control over financial reporting was effective. The effectiveness of the Company’s internal control over financial reporting as of December 31, 2008,2009, has been audited by PricewaterhouseCoopers AB, an independent registered public accounting firm. PricewaterhouseCoopers AB has issued an attestation report on Ericsson’s internal control over financial reporting, which appears on page 40.43.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
The following information is provided for purposes of complying with certain requirements of Form 20-F which are not satisfied in full by the information in the Swedish Annual Report.
Exchange rates
The following tables provide information with respect to the exchange rate for SEK per USD 1.00, based on the noon buying rate for cable transfers in SEK as certified for customs purposes by the Federal Reserve Bank of New York. The noon buying rate of April 24, 2009,16, 2010, was SEK 8.08307.1909 per USD 1.00. The average is computed using the noon buying rate on the last business day of each month during the period indicated.
Year ended December 31 | Average | Average | ||
2004 | 7.3320 | |||
2005 | 7.5170 | 7.5170 | ||
2006 | 7.3098 | 7.3098 | ||
2007 | 6.7232 | 6.7232 | ||
2008 | 6.6424 | 6.6424 | ||
2009 | 7.6232 |
Month | High | Low | ||
September 2008 | 6.9459 | 6.5066 | ||
October 2008 | 8.0805 | 6.9107 | ||
November 2008 | 8.4380 | 7.5957 | ||
December 2008 | 8.4858 | 7.6754 | ||
January 2009 | 8.3951 | 7.7658 | ||
February 2009 | 9.0240 | 7.9905 | ||
March 2009 | 9.2863 | 7.9558 |
Month | High | Low | ||
September 2009 | 7.2470 | 6.8049 | ||
October 2009 | 7.0508 | 6.7908 | ||
November 2009 | 7.1360 | 6.7950 | ||
December 2009 | 7.3322 | 6.8419 | ||
January 2010 | 7.3852 | 7.0217 | ||
February 2010 | 7.4777 | 7.1010 | ||
March 2010 | 7.2712 | 7.0597 |
We describe the effects of exchange rate fluctuations on our business in the Board of Directors’ Report under the heading “Risk Management” and in the Notes to the Consolidated Financial Statements—Note C20, “Financial Risk Management and Financial Instruments.”
OPERATING RESULTSOperating results
Years ended December 31, 20072008 and 20082009
Please refer to Board of Directors’ Report.
Years ended December 31, 20062007 and 20072008
Net Sales
Consolidated
Consolidated net sales increased by SEK 411 percent, to SEK 208.9 billion in 2008 from SEK 187.8 billion in 2007, from SEK 179.8 billion in 2006, driven by higher Networks and professional services sales. Acquisitions contributed an estimated 1.5 percentage points. With the average USD exchange rate some 9 percent lower, fluctuationsFluctuations in foreign exchange rates had a rather significant negative effect on reported sales asduring the first nine months of the year although the trend shifted in the fourth quarter, resulting in a limited effect for the full year.
In an increasingly challenging macro-economic environment, the Company adjusts it’s cost base continuously. The cost reduction targets launched in 2008 were exceeded. In February 2008, a cost reduction plan of targeting SEK 4 billion in annual savings was announced, including estimated charges of the same size. All activities with related charges were launched by the third quarter, and it was announced that further charges would be made in the fourth quarter. Charges for the full year 2008 amounted to SEK 6.7 billion in total. This has resulted in annual savings of approximately 50 percent of sales were USD related.SEK 6.5 billion from year end. The activities to reduce costs has been continued in 2009.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Primary Segments
Ericsson has reorganized its operating structure as from January 1, 2007. The following segment information is restated accordingly.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Networks
Net sales in segment Networks increased by 110 percent, to SEK 142.0 billion in 2008 from SEK 129.0 billion in 2007 from SEK 127.5 billion in 2006. Mobile network buildouts, especially in emerging markets, represented the majority of sales.2007. Sales of related network rollout services grew 1316 percent to SEK 18.521.5 (18.5) billion during 2007, reflecting2008. Mobile network build-outs, especially in high-growth markets, continued to represent the majority of sales. Sales of mobile broadband solutions increased demandduring the year, driven by consumer need for turnkey projecthigher speeds and a larger market share in mobile systems. The Company reported mobile systems sales growth of 3 percent; however, using constant currencies, management estimates that such sales grew by approximately 9 percent.better coverage. Networks’ business continued to grow where network build-outs and break-in contracts were predominant and price competition was the most intense.
Professional Services
Net Sales in segment Professional Services increased by 1614 percent during 2007,2008, to SEK 49.0 billion in 2008 from SEK 42.9 billion in 2007 from SEK 36.8 billion in 2006.2007. Growth measured in local currencies amounted to 1913 percent compared with an estimated marked growth of some 12-1410 percent. Managed services sales grew by 2817 percent to 12.2 (9.5)14.3 (12.2) billion, as the Company continued to win contracts for network operations and hosting services.
Multimedia
Net sales in segment Multimedia increased by 1413 percent during 2007,for comparable units i.e. excluding divestment of the enterprise PBX operations, to SEK 17.9 billion in 2008 from SEK 15.9 billion in 2007 from SEK 13.9 billion in 2006 mainly driven by acquisitions. Organic2007. Revenue management and Service Delivery & Provisioning continued to show good growth while the mobile platform business was 2 percent and reflects a challenging comparisonstarting to prior years’s results.experience effects of the weakening handset market.
Phones
Since the transfer of the operation of the Phones segment to Sony Ericsson Mobile Communications, on October 1, 2001, net sales are not reported for this segment.
Secondary Segments
The following regions increased their sales: North America by 34 percent, Latin America by 25 percent, Asia Pacific sales by 14 percent, Latin America by 12 percent16 Percent, and Central and Eastern Europe Middle East and Africa by 59 percent. North America and Western Europe decreased their sales by -15–2 percent and -1 percent respectively..
MarginsFinancial Results of Operations
In the external communication for 2008 non-IFRS measures are used in the income statement to provide meaningful supplemental information to the IFRS results. Since there were significant restructuring costs during 2008, but with relatively little benefit and operating expensesconsequently a significant impact on reported results and margins, and as there were insignificant restructuring charges in 2007, non-IFRS measures excluding restructuring charges are presented to facilitate analysis by indicating Ericsson’s underlying performance. However, these measures should not be viewed in isolation or as substitutes to the IFRS measures.
The gross margin was 36.8 percent in 2008 compared to 39.3 percent in 2007 compared to 41.7 percent in 2006.
Operating expenses in 2007 were SEK 52.0 billion compared to SEK 49.0 billion in 2006. Operating expenses, measured as a percentage, increased from 27.2 percent in 2006 to 27.7 percent in 2007.
Research and development and other technical expenses increased by SEK 1.3 billion, or 5 percent, to SEK 28.8 billion in 2007 compared with SEK 27.5 billion in 2006.
Selling and administrative expenses increased by SEK 1.8 billion, or 8 percent, to SEK 23.2 billion in 2007, compared with SEK 21.4 billion in 2006.
Other operating income and expenses decreased to SEK 1.7 billion in 2007 compared with SEK 3.9 billion in 2006.
Share in earnings of joint ventures and associated companies before tax increased by SEK 1.3 billion, mainlyexcluding restructuring charges. The decline was due to a larger contribution from Sony Ericsson Mobile Communications. Ericsson’s 50 percent share in earningbusiness mix with high proportion of network rollout project which often also include significant third party content. A higher proportion of managed services sales with lower than group average gross margins contributed to the joint venture before tax increased from SEK 5.9 billion in 2006 to 7.2 billion in 2007.decline.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Operating Income decreased byexpenses in 2008 excluding restructuring charges were SEK 5.2–56.4 billion fromcompared to SEK 35.8–52.0 billion in 20062007. Operating expenses excluding restructuring charges measured as a percentage, changed from 28 percent in 2007 to 27 percent in 2008.
Excluding restructuring charges operating income declined by 22 percent to SEK 30.623.9 (30.6) billion with an operating margin of 11.4 (16.3) percent. The main reasons were the decline in gross income, and a negative contribution from Sony Ericsson of SEK –0,5 billion, compared with SEK 7.1 billion in 2007.
Operating margin in 2007Earnings per share (EPS) diluted was 16.3 percent comparedSEK 3.52 (6.84) down 49 percent. EPS declined substantially as EPS includes restructuring charges. Based on Ericsson’s strengthened market position relative to 19.9 percent in 2006. Excluding Sony Ericssonits peers, the marginBoard considered the underlying earnings capacity and the financial position to be strong and proposed a dividend also for 2008, however reduced to SEK 1.85 (2.50) per share.
Financial Position
Net Cash was 12.5 percent in 2007 compared to 16.7 percent in 2006.SEK 34.7(24.3) billion. The operating marginimproved net cash position was lower aslargely a result of Network’s gross margin facing unexpected pressurethe favorable cash flow from operations reflecting working capital efficiency improvements during 2008.
Working Capital was SEK 100 (86) billion. Results of efforts to improve working capital efficiencies relating to receivables, inventories and payables were been partly offset by strong movements in currency translation effects. The improvement of cash contributed to the second half of the year. Professional Services operating margins were stable at 15 percentincrease in 2007working capital.
Return on Equity was 8.2(17.2) percent. The return on equity, including restructuring charges developed unfavorably compared to 14 percent in 2006 even with the strong sales growth of managed services. Multimedia showed results over the year and in general is performing at a break-even level despite the large investments in IPTV and IMS.
Financial net decreased slightly from SEK 0.2 billion in 2006 to SEK 0.1 billion in 2007.
Income after financial items decreased from SEK 36.0 billion in 2006 to SEK 30.7 billion in 2007.
Tax cost was SEK 8.6 billion in 2007 compared with SEK 9.6 billion in 2006. The effective tax rate was 28.0 percent in 2007.
Deferred tax assets decreased by SEK 1.9 billion from SEK 13.6 billion in 2006 to SEK 11.7 billion in 2007. This is duedevelopment was a major reason for the continued efforts to utilizationimprove profitability through continued focus on a more competitive product portfolio, harvesting of tax loss carryforwardsmarket share gains and timing differences.
Net income attributable to minority interest after taxes was SEK 0.3 billion in 2007, compared to SEK 0.2 billion in 2006.
As a result principally of the above factors, the net income decreased by SEK 4.3 billion from SEK 26.4 billion in 2006 to SEK 22.1 billion in 2007. Diluted earnings per share were SEK 6.84 in 2007 compared to SEK 8.23 in 2006.acquisitions made as well as continued cost reductions.
Cash Flow
CashIn 2008 cash flow from operating activitiesoperations was SEK 19.2 billion in24.0 (19.2) billion. The improvement from 2007 comparedwas largely attributable to SEK 18.5 billion in 2006,a more favorable development of net operating assets which SEK 12 billion in 2007 compared to SEK 11 billion in 2006 was generated in the fourth quarter. The strong ending of 2007 is mainly due to the decrease in working capitalgrew substantially less than Net Sales, as a result of a high completion rate for turnkey projects.increased focus on working capital management. In 2008 Ericsson received SEK 3.6 (3.9) billion in dividends from Sony Ericsson.
Cash Flowflow from investing activities was SEK -27.5–8,5 (–27.5) billion. During 2008, the company divested/acquired operations with less than SEK 1 (–26) billion net cash received. This was partly offset by short-term investments of SEK –7.2 (–3.5) billion related to cash management.
In 2008 the cash flow from financing activities reached SEK –7.2 (6.3) billion. The negative cash flow was largely attributable to the dividend paid to shareholders.
Restructuring in 2008 and 2009
Impact on Networks operating income due to restructuring amounted to SEK 8.7 billion in 20072009 compared with SEK 5.1 billion in 2008. This increase was primarily due to SEK -14.94.2 billion (SEK 0.5 billion) in 2006 of whichimpairment losses relating to the restructuring program decision to phase out certain products.
The impact on Professional Services in relation to restructuring was SEK -26.32.0 billion (SEK 1.3 billion) and for Multimedia SEK 0.4 billion (SEK 0.3 billion). Professional Services recognized no impairment losses, neither 2009 nor 2008 while the impact on restructuring for Multimedia was used for acquisitions compared to SEK-18.1SEK 0.1 billion in 2006.(SEK 0.0 billion).
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
MEMORANDUM AND ARTICLES OF ASSOCIATIONMemorandum and Articles of Association
Telefonaktiebolaget LM Ericsson is entered under no. 556016-0680556016–0680 in the Company Register kept by the Swedish Companies Registration Office. Our Company’s objective and purposes are described in §2 of the Articles of Association.
Our Articles of Association do not stipulate anything regarding
a) a director’s power to vote on a proposal, arrangement, or contract in which the director is materially interested, b) our directors’ power to vote for compensation to themselves, c) our directors’ borrowing powers, d) retirements rules for our directors or e) the number of shares required for a director’s qualification. Applicable provisions are found in the Swedish Companies Act, as referred to in “Certain Powers of Directors and the President” below.
There are no age limit restrictions for directors and they are not required to own any shares in the Company.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Share Capital, Increases of Share Capital and Preferential Rights of Shareholders
The Articles of Association of Ericsson provide that the share capital of the Company may not be less than SEK 6,000 million nor more than SEK 24,000 million, and that the number of shares in the Company shall amount to no less than 3,000,000,000 and no more than 12,000,000,000. The registered share capital is SEK 16,231,758,67816,366,758,678 and the Company has in total issued SEK 3,246,351,7353,273,351,735 shares.
The Company’s shares are divided into three series: Class A shares, Class B shares and Class C shares; however, no Class C shares are currently outstanding. Under the Swedish Companies Act of 2005, applicable as of January 1, 2006 (the “Swedish Companies Act”), shareholders must approve each issue of additional shares either by deciding on the share issue at a shareholders’ meeting, or by a shareholders’ approval of a decision on a share issue by the Board, or by giving an authorization to the Board to decide about a share issue. If we decide to issue new Class A, Class B and Class C shares by means of a cash issue, or an issue against payment through set-off of claims, Class A, Class B and Class C shareholders (except for Ericsson and its subsidiaries, in the event they hold shares in Ericsson) have a primary preferential right to subscribe for new shares of the same type in relation to the number of shares previously held by them. Shares not subscribed for through a preferential right shall be offered to all shareholders for subscription on a pro rata basis. If we decide to issue new shares of only one series by means of a cash issue or an issue against payment through set-off of claims, all shareholders, regardless of whether their shares are Class A, Class B or Class C, are entitled to a preferential right to subscribe for new shares in proportion to the number of shares previously held by them. Shareholders may vote to waive shareholders’ preferential rights at a general meeting.
If we decide to issue warrants or convertibles through a cash issue or an issue against payment through set-off of claims, the shareholders have preemptivepreferential rights to subscribe to warrants as if the issue were of the shares that may be subscribed to pursuant to the warrant and, respectively, preemptivepreferential rights to subscribe to convertibles as if the issue were of the shares that the convertibles may be converted to.
The above does not constitute any restriction to waive the shareholders’ preferential rights when deciding on either a cash issue, an issue against payment through set-off of claims, an issue of warrants or an issue of convertibles.
Dividends
Our Class A and Class B shareholders have the same right to dividends, while Class C shareholders have a right to a yearly dividend as described in article 15 of our Articles of Association. No Class C shares are currently outstanding.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Under Swedish law, only a general meeting of shareholders may decide on payment of dividends, which may not exceed the amount proposed by the Board of Directors (except in certain limited circumstances), and may only be paid from funds legally available for that purpose. Under Swedish law, no interim dividends may be paid in respect of any fiscal period for which audited financial statements of the company have not yet been adopted by the annual general meeting of shareholders. The market practice in Sweden is for dividends to be paid annually. Under the Swedish Companies Act, dividends to shareholders and other transfers of value from a company—such as purchases of own shares (see below)—may only be made in case the company’s restricted equity remains fully covered after the transfer of value has been made. The calculation shall be based upon the most recently adopted balance sheet, and any changes in the restricted equity that has occurred after the balance sheet date shall be taken into account. In addition, dividends to shareholders and other transfers of value from the company may only be made if this is justifiable taken into account the type of business activities of the company, their scope and risks related thereto and the company’s need for financial resources, its liquidity and financial position. In respect of parent companies, also the business activities of the group, their scope and risks related thereto and the group’s need for financial resources, its liquidity and financial position should be taken into account.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
The Company’s shares are registered in the computerized book-entry share registration system administered by VPCEuroclear Sweden AB (“VPC”Euroclear”). The rights attached to shares eligible for dividends accrue to those persons whose names are recorded in the register of shareholders on the record day. The dividends are then sent to a specified account as directed by the person registered with VPC,Euroclear, or to the address of that person. The relevant record day must, in most circumstances, be specified in the resolution declaring a dividend or resolving upon a capital increase or any similar matter in which shareholders have preferential rights, or the Board of Directors must be authorized to determine the relevant record day.
Where the registered holder is a nominee, the nominee receives, for the account of the beneficial owner, dividends and, on issues of shares with preferential rights for the shareholders, shares, as well as rights. Dividends are remitted in a single payment to the nominee who is responsible for the distribution of such dividends to the beneficial owner. A similar procedure is adopted for share issues. Specific authority to act as a nominee must be obtained from VPC.Euroclear. The nominee must issue a public report to Euroclear every third month, listing all beneficial holders of more than 500 shares. VPCEuroclear is required to keep a register with regard to any holding on behalf of a single beneficial owner in excess of 500 shares in any one company. This list must reveal the names of the beneficial owner and must be open to public inspection.
Voting
In a general meeting of Ericsson, each Class A share shall carry one vote, each Class B share one tenth of one vote and each Class C share one-thousandth of one vote.
We are required to publish notices to attend annual general meetings no earlier than six weeks and no later than four weeks prior to the general meeting and the same notice period requirements apply regarding extraordinary general meetings concerning changes in our articles of association. Notices to attend other types of extraordinary general meetings must be published no earlier than six weeks and no later than two weeks prior to the general meeting.
Directors are elected during the annual general meeting for a period of one year at a time and do not stand for reelection at staggered intervals.
A shareholder may attend and vote at the meeting in person or by proxy. Proxies are not valid for longer than a year from the date of issuance. Any shareholder wishing to attend a general meeting must notify us no later than on the day specified in the notice, preferably before 4:00 p.m. (CET). We are required to accept all notifications of attendance received at least five business days (Saturdays normally included) prior to the
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
meeting. A person designated in the register as a nominee (including the depositary of the ADSs) is not entitled to vote at a general meeting, nor is a beneficial owner whose share is registered in the name of a nominee (including the depositary of the ADSs) unless the beneficial owner first arranges to have such owner’s own name entered in the register of shareholders maintained by Euroclear no later than the designated record day.
Under the Swedish Companies Act, resolutions are passed by a simple majority of votes cast at the meeting with the chairman of the meeting having a decisive vote (except in respect of elections), unless otherwise required by law or a company’s articles of association. Under the Swedish Companies Act, certain resolutions require special quorums and majorities, including, but not limited to, the following:
A a resolution to amend the articles of association requires a majority of two-thirds of the votes cast as well as two-thirds of the shares represented at the meeting, except in those circumstances described in B–D below;
B a resolution to amend the articles of association which reduces any shareholder’s rights to profits or assets, restricts the transferability of shares or alters the legal relationship between shares, normally requires the unanimous approval of the shareholders present at the meeting and who hold nine-tenths of all outstanding shares;
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
C a resolution to amend the articles of association for the purpose of limiting the number of shares with which a shareholder may vote at a general meeting or allocating part of the net profit for the fiscal year to a restricted fund or limiting the use of the company’s profits or assets in a liquidation or dissolution, normally requires the approval of shareholders representing two-thirds of the votes cast and nine-tenths of the shares represented at the meeting;
D a resolution of the kind referred to under B or C above may, however, be taken with a lower supermajority requirement if the amendments referred to therein will only adversely affect specific shares or classes of shares. In such cases, the requirement under a above will apply together with the following separate supermajority: (a) where only a class of shares is adversely affected, approval of the owners of one-half of all shares of such class and nine-tenths of the shares of such class represented at the meeting, or (b) where the shares adversely affected do not constitute a class of shares, the unanimous approval of all such affected outstanding shares present at the meeting and who hold nine-tenths of all outstanding shares adversely affected;
E a resolution to issue, approve or authorize the issuance for cash of new shares, warrants or convertibles with a deviation from the -preferential right for existing shareholders requires a two-thirds -majoritytwo-thirds-majority of votes cast at the meeting as well as two-thirds of the shares represented at the meeting;
F a resolution to reduce the outstanding share capital requires a two-thirds majority of votes cast at the meeting as well as two-thirds of the shares represented at the meeting. In case there are several classes of shares in a company, the above described majority requirement shall apply also within each share class represented at the meeting and for which the rights of the shares are adversely affected; and
G a resolution to approve a merger requires a two-thirds majority of the votes cast at the meeting and two-thirds of the shares represented at the meeting (however, under certain circumstances a higher majority is required).
At a general meeting of shareholders, a shareholder or proxy for one or more shareholders may cast full number of votes represented by the holder’s shares.
Purchase ofOf Own Shares
A Swedish public limited liability company whose shares are traded on a regulated market place within the European Economic Area (“EEA”) or a market place comparable to a regulated market place outside the EEA is entitled to purchase its own shares under certain conditions. A purchase by us of our own shares may take place
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
only if (a) the purchase has been decided upon by a general meeting of shareholders or the Board has been authorized by a general meeting of shareholders, in both cases by a two thirds majority of votes cast at the meeting as well as two-thirds of the shares present or represented at the meeting, (b) the purchase is effected on a regulated market place within the EEA or a market place comparable to a regulated market place outside the EEA (in the latter case with the approval of the Swedish Financial Supervisory Authority the “SFSA”) or pursuant to an offer to all shareholders or holders of a specific class of shares, (c) the Company’s restricted equity will still be fully covered and the purchase is justifiable taken into account the type of business activities of the Company and the group, their scope and risks related thereto and the Company’s and the group’s need for financial resources, its liquidity and financial position, and (d) we and our subsidiaries do not hold or, as a result of purchase, will not hold in excess of 10 percent of all our outstanding shares. As of December 31, 2008,2009, the Company held an aggregate of 61,066,06778,978,533 treasury stock of Class B shares.
Investment Restrictions
There are no limitations imposed by Swedish law or by our Articles of Association in respect of the rights of non-residents or foreign persons to purchase, own or sell securities issued by us.
There are, however, certain flagging and ownership examination rules that apply, irrespective of nationality.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Pursuant to the Swedish Financial Instruments Trading Act any change in a holding of shares, depository receipts with voting rights or financial instruments that entitle the holder to acquire shares in issue in a Swedish limited liability company whose shares are admitted for trading on a regulated market place within the EEA shall be reported by the holder to the company and the SFSA, where the change entails that the holder’s portion of all shares or votes in the company reaches, exceeds or falls below any of the limits of 5, 10, 15, 20, 25, 30, 50, 66 2/3 or 90 per cent. Such a change should, as a main rule, be reported not later than the trading day following the day on which the party with a duty to report has entered into an agreement for the acquisition or transfer of shares or any other change to the shareholding has occurred.
In addition, the Act on Reporting Obligations Regarding Certain Holdings of Financial Instruments requires, among other things, certain individuals who own shares representing 10 percent or more of the share capital or the voting rights in a Swedish public limited liability company whose shares are traded on a regulated market within the EEA to report such ownership to the SFSA, which keeps a public register based on the information contained in such reports, and also to report any changes in such ownership within five business days.
EXCHANGE CONTROLSExchange controls
There is no Swedish legislation affecting a) the import or export of capital or b) the remittance of dividends, interest or other payments to non-resident holders of our securities except that, subject to the provisions in any tax treaty, dividends are subject to withholding tax.
TAXATIONTaxation
General
The taxation discussion set forth below does not purport to be a complete analysis or listing of all potential tax effects relevant to the acquisition, ownership or disposition of Class B shares or ADSs. The statements of United States and Swedish tax laws set forth below are based on the laws in force as of the date of this report and may be subject to any changes in United States or Swedish law, and in any double taxation convention or treaty between the United States and Sweden, occurring after that date, which changes may then have retroactive effect.
Specific tax provisions may apply for certain categories of tax payers. Your tax treatment if you are a holder of Class B shares or ADSs depends in part on your particular situation. If you are a holder of Class B shares or
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
ADSs, you should therefore consult a tax advisor as to the tax consequences relating to your particular circumstances resulting from the ownership of Class B shares or ADSs.
The tax consequences to holders of ADSs, as discussed below, apply equally to holders of Class B shares.
Certain Swedish Tax Considerations
This section describes the material Swedish income and net wealth tax consequences for a holder of ADSs or Class B shares who is not considered to be a Swedish resident for Swedish tax purposes. This section applies to you only if you are a holder of portfolio investments representing less than 10 percent of capital and votes and is not applicable if the ADSs or Class B shares pertain to a permanent establishment or fixed place of business in Sweden.
Taxation on Capital Gains
Generally, non-residents of Sweden are not liable for Swedish capital gains taxation with respect to the sale of ADSs or Class B shares. However, under Swedish tax law, capital gains from the sale of shares in Swedish companies and certain other securities by an individual may be taxed in Sweden at a rate of 30 percent if the
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
seller has been a resident of Sweden or has lived permanently in Sweden at any time during the year of the sale or the 10 calendar years preceding the year of the sale (absent treaty provisions to the contrary). The provision is applicable on ADSs or Class B shares. From 1 January 2008 the rule has been extended so that it also applies to shares in foreign companies, provided that the shares were acquired during the time that the person was liable to tax in Sweden.
This provision may, however, be limited by tax treaties that Sweden has concluded with other countries. Under the tax treaty between Sweden and the United States (the “U.S. Tax Treaty”), this provision applies for ten years from the date the individual became a non-resident of Sweden.
Taxation on Dividends
A Swedish dividend withholding tax at a rate of 30 percent is imposed on dividends paid by a Swedish corporation, such as us, to non-residents of Sweden. The same withholding tax applies to certain other payments made by a Swedish corporation, including payments as a result of redemption of shares and repurchase of stock through an offer directed to its shareholders. Exemption from the withholding tax or a lower tax rate may apply by virtue of a tax treaty. Under the U.S. Tax Treaty, the withholding tax on dividends paid on portfolio investments to eligible U.S. holders is reduced to 15 percent.
Under all Swedish tax treaties, except the tax treaty with Switzerland, withholding tax at the applicable treaty rate should be withheld by the payer of the dividends. With regard to dividends paid from shares in corporations registered with the VPC (such as our shares), a reduced rate of dividend withholding tax under a tax treaty is generally applied at the source by the VPC or, if the shares are registered with a nominee, the nominee, as long as the person entitled to the dividend is registered as a non-resident and sufficient information regarding the tax residency of the beneficial owner is available to the VPC or the nominee.
In those cases where Swedish withholding tax is withheld at the rate of 30 percent and the person who received the dividends is entitled to a reduced rate of withholding tax under a tax treaty, a refund may be claimed from the Swedish tax authorities before the end of the fifth calendar year following the year that the distribution was made.
Taxation on Interest
No Swedish withholding tax is payable on interest paid to non-residentsnonresidents of Sweden.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Net Wealth Taxation
The Swedish net wealth tax has been abolished from 1 January 2007.
Certain United States Federal Income Tax Consequences
The following discussion is a summary of the material United States federal income tax consequences relevant to the ownership and disposition of ADSs or Class B shares. This discussion is based on the tax laws of the United States (including the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations thereunder, published rulings and court decisions) as in effect on the date hereof, all of which are subject to change, possibly with retroactive effect. The discussion is not a full discussion of all tax considerations that may be relevant to the ownership and disposition of ADSs or Class B shares. The discussion applies only if you will hold the ADSs and/or the Class B shares as capital assets and you use the USD as your functional currency. It does not deal with the tax treatment of investors subject to special rules, such as grantor trusts, real estate investment trusts, regulated investment companies, banks, brokers or dealers in securities, traders in securities or currencies that elect to use a mark-to-market method of recording for their
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
securities holdings, financial institutions, insurance companies, tax-exempt entities, investors liable for alternative minimum tax, holders (either actually or constructively) of 10 percent or more of our Class B shares, persons holding ADSs and/or Class B shares as part of a hedging, straddle, conversion or constructive sale transaction and persons who are resident or ordinarily resident in Sweden. In addition, investors holding ADSs and/or Class B shares indirectly through partnerships are subject to special rules not discussed below. You should consult your own tax advisers about the United States federal, state, local and foreign tax consequences to you of the ownership and disposition of the ADSs or Class B shares.
The discussion below applies to you only if you are a beneficial owner of ADSs and/or Class B shares not resident in Sweden for purposes of the U.S. Tax Treaty and you are, for United States federal income tax purposes, (1) a citizen or resident of the United States, (2) a corporation or any other entity treated as a corporation that is organized in or under the laws of the United States or its political subdivisions, (3) a trust if all of the trust’s substantial decisions are subject to the control of one or more United States persons and the primary supervision of the trust is subject to a United States court or if a valid election is in effect with respect to the trust to be taxed as a United States person, or (4) an estate the income of which is subject to United States federal income taxation regardless of its source.
The discussion below assumes that the representations contained in the deposit agreement are true and that the obligations in the deposit agreement and any related agreement will be complied with in accordance with the terms. If you hold ADSs, you will be treated as the holder of the underlying Class B shares represented by those ADSs for United States federal income tax purposes.
Taxation of ADSs or Class B shares
Dividends
Subject to the passive foreign investment company rules discussed below, the gross amount of dividends paid (before reduction for any Swedish withholding taxes) with respect to the ADSs or Class B shares generally will be included in your gross income as ordinary income from foreign sources to the extent paid out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes). Distributions in excess of earnings and profits will be treated as a non-taxable return of capital to the extent of your adjusted tax basis in the ADSs or Class B shares and thereafter as capital gain. The dividends will not be eligible for the dividends received deduction available to corporations in respect of dividends received from other U.S. corporations. The amount of any dividend paid in SEK will be the U.S. dollar value of the dividend payment based on the exchange rate in effect on the date of receipt by you (or constructive receipt), in the case of Class B shares or by the depositary, in the case of ADSs, whether or not the payment is converted into USD at that time. Your tax basis in the SEK received will equal such USD amount. Gain or loss, if any, recognized on a subsequent sale or conversion of the SEK will be U.S. source ordinary income or loss.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
If you are a non-corporate holder of ADSs or Class B shares, dividends you receive on the ADSs or Class B shares for taxable years beginning before January 1, 2011, may be taxed at the lower applicable capital gains rate provided that (1) we are not a passive foreign investment company (as discussed below) for either our taxable year in which the dividend was paid or the preceding taxable year, (2) certain holding period requirements are met and (3) either (a) our ADSs continue to be listed on the Nasdaq Stock Market (or a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934, as amended) or (b) we are eligible for the benefits of the U.S. Tax Treaty. You should consult your own tax advisors regarding the availability of the lower rate for dividends paid with respect to ADSs or Class B shares.
Subject to certain limitations, you will generally be entitled to receive credit against your United States federal income tax liability (or a deduction against your United States federal taxable income) with respect to any Swedish tax withheld in accordance with the U.S. Tax Treaty and paid over to Sweden. If a refund of the tax
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
withheld is available to you under the laws of Sweden or under the U.S. Tax Treaty, the amount of tax withheld that is refundable will not be eligible for such credit against your United States federal income tax liability (and will not be eligible for the deduction in computing your United States federal taxable income). For foreign tax credit limitation purposes, the dividend will be income from sources without the United States, and will generally be treated as “passive category income” (or, in the case of certain holders, “general category income”).
Sale or Exchange of ADSsAdss or Class B sharesShares
Subject to the passive foreign investment company rules discussed below, you will generally recognize capital gain or loss on the sale or other disposition of the ADSs or Class B shares equal to the difference between the USD value of the amount realized and your adjusted tax basis (determined in USD) in the ADSs or Class B shares. Such gain or loss will be capital gain or loss and will generally be treated as arising from U.S. sources for foreign tax credit limitation purposes.
The amount realized on a disposition of ADSs or Class B shares will generally be the amount of cash you receive for the ADSs or Class B shares (which, in the case of payment in a non-U.S. currency, will equal the USD value of the payment received determined on (a) the date of receipt of payment if you are a cash basis taxpayer and (b) the date of disposition if you are an accrual basis taxpayer). If the ADSs or Class B shares are treated as traded on an “established securities market,” if you are a cash basis taxpayer (or, if you are an accrual basis taxpayer, if you so elect) you will determine the USD value of the amount realized by translating the amount received at the spot rate of exchange on the settlement date of the sale.
You will have a tax basis in any foreign currency received equal to the USD amount realized. Any gain or loss you realize on a subsequent conversion of foreign currency will be U.S. source ordinary income or loss.
Passive Foreign Investment Company Status
A non-U.S. corporation is a passive foreign investment company (a “PFIC”) in any taxable year in which, after taking into account the income and assets of certain subsidiaries, either (a) at least 75 percent of its gross income is passive income or (b) at least 50 percent of the quarterly average value of its assets is attributable to assets that produce or are held to produce passive income. Based on the market value of our shares, the composition of our assets and income and our operations, we believe we were not a PFIC during the year 2008.2009. However, whether or not we will be considered a PFIC will depend on the nature and source of our income and the value of our assets, as determined from time to time. If we are treated as a PFIC, we will not provide information necessary for the “qualified electing fund” election as the term is defined in the relevant provisions of the Code. You should consult your own tax advisors about the consequences of our potential classification as a PFIC.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
If we were a PFIC, for any taxable year in which you held ADSs or Class B shares, you would be subject to special rules with respect to:
any gain realized on the sale or other disposition of ADSs or Class B shares; and
any “excess distribution” made to you (generally, any distributions to you in respect of ADSs or Class B shares during a single taxable year that are, in the aggregate, greater than 125 percent of the average annual distributions received by you in respect of ADSs or Class B shares during the three preceding taxable years or, if shorter, your holding period for ADSs or Class B shares).
Under these rules:
the gain or excess distribution would be allocated ratably over your holding period for ADSs or Class B shares;
the amount allocated to the taxable year in which the gain or excess distribution was realized and any year before we became a PFIC would be taxable as ordinary income and
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
the amount allocated to each prior year, other than the current year and any taxable year prior to the first taxable year in which we were a PFIC, would be subject to tax at the highest applicable marginal tax rate in effect for each such year; and an interest charge would be imposed.
If we are a PFIC for any taxable year, you will also be deemed to own shares in any of our subsidiaries that are also PFICs in such a year. As an alternative to the special rules described above, holders of “marketable stock” in a PFIC may elect mark-to-market treatment with respect to their ADSs or Class B shares. ADSs or Class B shares will not be considered marketable stock unless they are regularly traded on a qualified exchange or other market. If the mark-to-market election is available and you elect mark-to-market treatment you will, in general, include as ordinary income each year an amount equal to the increase in value of your ADSs or Class B shares for that year (measured at the close of your taxable year) and will generally be allowed a deduction for any decrease in the value of your Class B shares for the year, but only to the extent of previously included mark-to-market income. However, a mark-to-market election would likely be unavailable with respect to your proportionate share in any of our subsidiaries that are PFICs.
If you own ADSs or Class B shares during any year in which we are a PFIC, you are required to make an annual return on IRS Form 8621 regarding distributions received with respect to ADSs or Class B shares and any gain realized on the disposition of your ADSs or Class B shares.
Information reporting and backup withholding
In general, information reporting requirements may apply to dividends paid in respect of ADSs or Class B shares and the proceeds received on the sale or exchange of the ADSs or Class B shares within the United States or by a broker with certain United States connections. Backup withholding, currently at a rate of 28 percent may apply to payments to you of dividends paid in respect of ADSs or Class B shares or the proceeds of a sale or other disposition of ADSs or Class B shares if you fail to provide an accurate taxpayer identification number (certified on IRS Form W-9)W–9) or, upon request, to certify that you are not subject to backup withholding, or otherwise to comply with the applicable requirements of backup withholding. The amount of any backup withholding from a payment to you will be allowed as a credit against your United States federal income tax liability and a refund of any excess amount withheld under the backup withholding rules may be obtained by filing the appropriate claim for refund with the IRS and furnishing any required information.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Depositary fees and charges
Fees and charges payable by ADS holders
Service | Rate | By Whom Paid | ||||
1) | Receipt of deposits and issuance of receipts | USD 5 per 100 American Depositary Shares of fraction thereof | Party to whom receipts are issued | |||
2) | Delivery of deposited shares against surrender of receipts | USD 5 per 100 American Depositary Shares or fraction thereof | Party surrendering receipts | |||
3) | Payments of dividends distributions or rights offering is respect of shares | No charge | Not applicable |
Except as otherwise provided in the Deposit Agreement, any and all other expenses of the Depositary, including , without limitation, expenses or charges for printing, stationery, postage, insurances, cables, etc, are to be borne by the Depositary, or by the Company in accordance with agreements entered into from time to time with the Company.
Fees payable by the Depositary to the Issuer
Citibank, as depositary, has agreed to reimburse Ericsson USD 5 million per year for expenses related to our ADS program (the “Program”), including Program-related legal fees, expenses related to investor relations in the US, US investor presentations, ADS-related financial advertising and public relations, fees and expenses of Citibank as administrator of the ADS Direct Plan, fees in relation to our Form 20-F and SOX compliance.
Citibank has further agreed to waive other ADS program related expenses amounting to USD 36,000 associated with the administration of the Program.
Independence requirements
The Ericsson Board of Directors is subject to, and applies, a variety of independence requirements. However, it has sought and received exemptions from certain Sarbanes-Oxley Act and NASDAQ requirements, including those that are contrary to Swedish Law, see “NASDAQ Corporate Governance Exemptions” for more information.
NASDAQ Marketplace Rules
Independence requirements on the board of directors:
A majority of the members of the board of directors must be independent in line with the NASDAQ rules. Ericsson has obtained an exemption from NASDAQ which means employee representative directors can be exempt from NASDAQ’s independence requirements.
Sarbanes-Oxley Act of 2002 and corresponding NASDAQ rules
Independence requirements on the audit committee:
All members of the audit committee must be independent in line with the Sarbanes-Oxley Act of 2002.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
The Sarbanes-Oxley Act of 2002 includes a specific exemption for non-executive employee representatives. The Company does not consider that reliance on the exemption adversely affect the ability of the Audit Committee to act independently or satisfy other SEC requirements.
NASDAQ Corporate Governance Exemptions
Following a 2005 amendment to NASDAQ’s Marketplace Rules, foreign private issuers such as Ericsson may follow home-country practice in lieu of certain NASDAQ corporate governance requirements.
Before the amendment was adopted, NASDAQ’s Marketplace Rules stated that, upon application, foreign private issuers could be exempt from certain corporate governance requirements. This only applied when the requirements were contrary to the laws, rules or regulations, or generally accepted business practices of the issuer’s home jurisdiction.
Ericsson has received exemptions from NASDAQ’s corporate governance requirements under the Marketplace Rules (and is entitled to continue to rely thereon under the 2005 amendment). This is in order to allow:
Employee representatives to be elected to the Board of Directors and serve on Committees (including the Audit Committee), in accordance with Swedish law.
Shareholders to participate in the election of Directors and the Nomination Committee, in accordance with Swedish law and common market practice respectively.
Employee representatives on the Board to attend all Board and Committee meetings (including those of the Audit Committee), in accordance with Swedish laws concerning attendance and decision making processes.
The Company does not consider that reliance on the exemption from the audit committee independence requirements adversely affects the ability of the Audit Committee to act independently or satisfy other SEC requirements.
In addition, Ericsson relies on the exemption provided by the 2005 amendment to overcome the requirements regarding quorums for its General Meetings of Shareholders since they are contrary to Swedish law.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
INVESTMENTS
The following listing shows certain shareholdings owned directly and indirectly by the Parent Company as of December 31, 2008.2009. A complete listing of shareholdings, prepared in accordance with the Swedish Annual Accounts Act and filed with the Swedish Companies Registration Office (Bolagsverket), may be obtained upon request to: Telefonaktiebolaget LM Ericsson, External Reporting, SE-164 83 Stockholm, Sweden.
SHARES OWNED DIRECTLY BY THE PARENT COMPANY
Type | Company | Reg. No. | Domicile | Percentage of ownership | Par value in local currency, million | Carrying value, SEK million | Company | Reg. No. | Domicile | Percentage of ownership | Par value in local currency, million | Carrying value, SEK million | ||||||||||||||
Subsidiary companies | Subsidiary companies | Subsidiary companies | ||||||||||||||||||||||||
I | Ericsson AB | 556056-6258 | Sweden | 100 | 50 | 20,645 | ||||||||||||||||||||
I | Ericsson Shared Services AB | 556251-3266 | Sweden | 100 | 361 | 2,216 | Ericsson AB | 556056-6258 | Sweden | 100 | 50 | 20,731 | ||||||||||||||
I | Ericsson SverigeAB | 556329-5657 | Sweden | 100 | 100 | 102 | Ericsson Shared Services AB | 556251-3266 | Sweden | 100 | 361 | 2,216 | ||||||||||||||
I | Netwise AB | 556404-4286 | Sweden | 100 | 2 | 306 | Netwise AB | 556404-4286 | Sweden | 100 | 2 | 306 | ||||||||||||||
II | AB Aulis | 556030-9899 | Sweden | 100 | 14 | 6 | AB Aulis | 556030-9899 | Sweden | 100 | 14 | 6 | ||||||||||||||
III | Ericsson Credit AB | 556326-0552 | Sweden | 100 | 5 | 5 | Ericsson Credit AB | 556326-0552 | Sweden | 100 | 5 | 5 | ||||||||||||||
Other (Sweden) | — | — | 1,299 | Other (Sweden) | — | — | 2,058 | |||||||||||||||||||
I | Ericsson Austria GmbH | Austria | 100 | 4 | 665 | Ericsson Austria GmbH | Austria | 100 | 4 | 115 | ||||||||||||||||
I | Ericsson Denmark A/S | Denmark | 100 | 90 | 216 | Ericsson Danmark A/S | Denmark | 100 | 90 | 216 | ||||||||||||||||
I | Oy LM Ericsson Ab | Finland | 100 | 13 | 196 | Oy LM Ericsson Ab | Finland | 100 | 13 | 196 | ||||||||||||||||
II | Ericsson Participations France SAS | France | 100 | 26 | 524 | Ericsson Participations France SAS | France | 100 | 26 | 524 | ||||||||||||||||
I | Ericsson GmbH | Germany | 100 | 20 | 3,884 | |||||||||||||||||||||
I | Ericsson JVD GmbH | Germany | 100 | — | 104 | Ericsson GmbH | Germany | 100 | 20 | 4,227 | ||||||||||||||||
I | Ericsson Hungary Ltd. | Hungary | 100 | 1,301 | 120 | Ericsson Hungary Ltd. | Hungary | 100 | 1,301 | 120 | ||||||||||||||||
II | LM Ericsson Holdings Ltd. | Ireland | 100 | 2 | 15 | LM Ericsson Holdings Ltd. | Ireland | 100 | 2 | 15 | ||||||||||||||||
I | Ericsson Telecomunicazioni S.p.A. | Italy | 53 | 1) | 23 | 3,151 | Ericsson Telecomunicazioni S.p.A. | Italy | 53 | 1) | 23 | 3,151 | ||||||||||||||
II | Ericsson Holding International B.V. | The Netherlands | 100 | 222 | 3,200 | Ericsson Holding International B.V. | The Netherlands | 100 | 222 | 3,200 | ||||||||||||||||
I | Ericsson A/S | Norway | 100 | 156 | 237 | Ericsson A/S | Norway | 100 | 75 | 114 | ||||||||||||||||
II | TANDBERG Television ASA | Norway | 100 | 161 | 1,788 | TANDBERG Television ASA | Norway | 100 | 161 | 1,788 | ||||||||||||||||
I | Ericsson Corporatia AO | Russia | 100 | 5 | 5 | Ericsson Corporatia AO | Russia | 100 | 5 | 5 | ||||||||||||||||
I | Ericsson AG | Switzerland | 100 | — | — | Ericsson AG | Switzerland | 100 | — | — | ||||||||||||||||
II | Ericsson Holding Ltd. | United Kingdom | 100 | 328 | 4,094 | Ericsson Holding Ltd. | United Kingdom | 100 | 328 | 4,094 | ||||||||||||||||
Other (Europe, excluding Sweden) | — | — | 208 | Other (Europe, excluding Sweden) | — | — | 428 | |||||||||||||||||||
II | Ericsson Holding II Inc. | United States | 100 | 2,817 | 28,956 | Ericsson Holding II Inc. | United States | 100 | 2,817 | 29,006 | ||||||||||||||||
I | Cía Ericsson S. A.C.I. | Argentina | 12 | 2) | 13 | 10 | Cía Ericsson S.A.C.I. | Argentina | 95 | 2) | 60 | 260 | ||||||||||||||
I | Ericsson Telecom S.A. de C.V. | Mexico | 100 | n/a | 1,550 | Ericsson Telecom S.A. de C.V. | Mexico | 100 | n/a | 1,550 | ||||||||||||||||
Other (United States, Latin America) | — | — | 59 | Other (United States, Latin America) | — | — | 61 | |||||||||||||||||||
II | Teleric Pty Ltd. | Australia | 100 | 20 | 100 | Teleric Pty Ltd. | Australia | 100 | 20 | 100 | ||||||||||||||||
I | Ericsson Ltd. | China | 100 | 2 | 2 | Ericsson Ltd. | China | 100 | 2 | 2 | ||||||||||||||||
I | Ericsson (China) Company Ltd. | China | 100 | 65 | 475 | Ericsson (China) Company Ltd. | China | 100 | 65 | 475 | ||||||||||||||||
I | Ericsson India Private Ltd. | India | 100 | 725 | 147 | Ericsson India Private Ltd. | India | 100 | 725 | 147 | ||||||||||||||||
I | Ericsson (Malaysia) Sdn. Bhd. | Malaysia | 70 | 2 | 4 | Ericsson (Malaysia) Sdn. Bhd. | Malaysia | 70 | 2 | 4 | ||||||||||||||||
I | Ericsson Telecommunications Pte. Ltd. | Singapore | 100 | 2 | 1 | Ericsson Telecommunications Pte. Ltd. | Singapore | 100 | 2 | 1 | ||||||||||||||||
I | Ericsson Taiwan Ltd. | Taiwan | 80 | 240 | 20 | Ericsson Taiwan Ltd. | Taiwan | 80 | 240 | 20 | ||||||||||||||||
I | Ericsson (Thailand) Ltd. | Thailand | 49 | 3) | 90 | 17 | Ericsson (Thailand) Ltd. | Thailand | 49 | 3) | 90 | 17 | ||||||||||||||
Other countries (the rest of the world) | — | — | 244 | Other countries (the rest of the world) | — | — | 382 | |||||||||||||||||||
Total | — | 74,571 | Total | — | 75,540 | |||||||||||||||||||||
Joint ventures and associated companies | Joint ventures and associated companies | Joint ventures and associated companies | ||||||||||||||||||||||||
I | Sony Ericsson Mobile Communications AB | 556615-6658 | Sweden | 50 | 50 | 4,136 | Sony Ericsson Mobile Communications AB | 556615-6658 | Sweden | 50 | 50 | 4,136 | ||||||||||||||
II | ST-Ericsson Holdings AG | Switzerland | 50 | 436 | 8,325 | |||||||||||||||||||||
III | ST-Ericsson AT Holding AG | Switzerland | 50 | 5 | 275 | |||||||||||||||||||||
I | Ericsson Nikola Tesla d.d. | Croatia | 49 | 65 | 330 | Ericsson Nikola Tesla d.d. | Croatia | 49 | 65 | 330 | ||||||||||||||||
Total | — | 4,466 | Total | — | 13,066 | |||||||||||||||||||||
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
SHARES OWNED BY SUBSIDIARY COMPANIES
Type | Company | Reg. No. | Domicile | Percentage of ownership | ||||
Subsidiary companies | ||||||||
| ||||||||
II | Ericsson Cables Holding AB | 556044-9489 | Sweden | 100 | ||||
I | Ericsson France SAS | France | 100 | |||||
I | LHS Telekommunikation GmbH & Co. KG | Germany | ||||||
I | LM Ericsson Ltd. | Ireland | 100 | |||||
II | Ericsson Nederland B.V. | The Netherlands | 100 | |||||
I | Ericsson Telecommunicatie B.V. | The Netherlands | 100 | |||||
I | Ericsson España S.A. | |||||||
| Spain | 100 | ||||||
I | Ericsson Telekomunikasyon A.S. | Turkey | 100 | |||||
I | Ericsson Ltd. | United Kingdom | 100 | |||||
I | Ericsson Canada Inc. | Canada | 100 | |||||
I | Ericsson Inc. | United States | 100 | |||||
I | Ericsson IP Infrastructure Inc. | United States | 100 | |||||
I | Ericsson Amplified Technologies Inc. | United States | 100 | |||||
| United States | 100 | ||||||
I | United States | 100 | ||||||
I | Redback Networks Inc. | United States | ||||||
| 100 | |||||||
I | Ericsson Telecommunicações S.A. | Brazil | 100 | |||||
I | Ericsson Australia Pty. Ltd. | Australia | 100 | |||||
I | Ericsson (China) Communications Co. Ltd. | China | 100 | |||||
I | Nanjing Ericsson Panda Communication Co. Ltd. | China | 51 | |||||
I | Nippon Ericsson K.K. | Japan | 100 | |||||
I | Ericsson Communication Solutions Pte Ltd. | Singapore | 100 |
Key to type of company
I | Manufacturing, distribution and development companies |
II | Holding companies |
III | Finance companies |
1) | Through subsidiary holdings, total holdings amount to 100% of Ericsson Telecomunicazioni S.p.A. |
2) | Through subsidiary holdings, total holdings amount to 100% of Cia Ericsson S.A.C.I. |
3) | Through subsidiary holdings, total holdings amount to 100% of Ericsson (Thailand) Ltd. |
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
Capital employed
Total assets less non-interest-bearing provisions and liabilities.
Capital turnover
Net sales divided by average Capital employed.
Cash conversion
Cash flow from operating activities divided by net income reconciled to cash—expressed in percent.
Cash dividends per share
Dividends paid divided by average number of shares, basic.
Compound annual growth rate (CAGR)
The year-over-year growth rate over a specified period of time.
Days sales outstanding (DSO)
Trade receivables balance at quarter end divided by Net Sales in the quarter and multiplied by 90 days. If the amount of trade receivables is larger than last quarter’s sales, the excess amount is divided by Net Sales in the previous quarter and multiplied by 90 days, and total days outstanding (DSO) are the 90 days of the most current quarter plus the additional days from the previous quarter.
Earnings per share
Basic earnings per share:share; profit or loss attributable to stockholders of the Parent Company divided by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share; the weighted average number orof shares outstanding are adjusted for the effects of all dilutive potential ordinary shares.
EBITDA margin
Earnings Before Interest, Taxes, Depreciation and Amortization, divided byas a percentage of Net sales.Sales.
Equity ratio
Equity, expressed as a percentage of total assets.
Gross Cash
Gross cash consists, in addition to cash and cash equivalents plus short-term cash investments less interest-bearing liabilities and post-employment benefits, also of short-term investments held for cash management purposes.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Inventory turnover days (ITO-days)
Cost of Sales365 divided by inventory turnover, calculated as total adjusted cost of sales divided by the average Inventory.inventories for the year (net of advances from customers).
Net cash
Cash and cash equivalents plus short-term cash investments less interest-bearing liabilities and post-employment benefits.
ERICSSON ANNUAL REPORT ON FORM 20-F 2008
Payable days
The average balance of Trade payablepayables at the beginning and at the end of the year divided by Cost of sales for the year, and multiplied by 365 days.
Payment readiness
Cash and cash equivalents and short-term investments less short-term borrowings plus long-term unused credit commitments. Payment readiness is also shown as a percentage of Net Sales.
Return on capital employed
The total of Operating income plus Financial income as a percentage of average capital employed (based on the amounts at January 1 and December 31).
Return on equity
Net income attributable to stockholders of the Parent Company as a percentage of average Stockholders’ equity (based on the amounts at January 1 and December 31).
Stockholders’ equity per share
Stockholders’ equity divided by the number of shares outstanding at end of period, basic.
Trade receivables turnover
Net sales divided by average Trade receivables.
Value at Risk (VaR)
A statistical method that expresses the maximum potential loss that can arise with a certain degree of probability during a certain period of time.
Working capital
Current assets less current non-interest-bearing provisions and liabilities.
ERICSSON ANNUAL REPORT ON FORM 20-F 20082009
GLOSSARY
2G
First digital generation of mobile systems, includes GSM, TDMA, PDC and cdmaOne.
3G
3rd generation mobile system, includes WCDMA/HSPA, EDGE, CDMA2000 and TD-SCDMA.
4G
See LTE.
All-IP
A single, common IP infrastructure that can handle all network services, including fixed and mobile communications, for voice and data services and also video services such as TV.
ATM
(Asynchronous Transfer Mode) A communication standard for transmission and management of high-speed packet-switched networks.
Backhaul
Transmission between radio base stations and the core network.
Broadband
Data speeds that are high enough to allow transmission of multimedia services with good quality.
Capex
Capital expenditure.
CDMA
(Code division multiple access ) The cdmaOne (2G) and CDMA2000 (3G) mobile communication standards are both based on CDMA.
DSL access
Digital Subscriber Line technologies for broadband multimedia communications in fixed line networks. Examples: IP-DSL, ADSL and VDSL.
EDGE
A 3G mobile standard, developed as an enhancement of GSM. Enables the transmission of data at speeds up to 250 kbps.
Emerging market
Defined as a country that has a GNP per capita index below the World Bank average and a mobile subscription penetration below 60 percent.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
Evo RAN
A Radio Access Network (RAN) solution to run GSM, WCDMA and LTE as a single network.
Exabyte
= billion gigabytes.
FTTx
Fiber-To-The-x, e.g. FTTH (Fiber-to-the-home) refers to fiber optic broadband connections to individual homes.
GDP
Gross domestic product the total annual cost of all finished goods and services produced within a country.
GPON
(Gigabit Passive Optical Network) Used for fiber-optic communication to the home (FTTH).
GPRS
(General Packet Radio Service) A packet-switched technology (2.5G) that enables GSM networks to handle mobile data communications at rates up to 115 kbps.
HSPA
(High Speed Packet Access) Enhancement of 3G/WCDMA that enables mobile broadband. A subscriber can download files to a 3G mobile device at speeds of several Mbps.
ICT
Information and Communication Technology.
IMS
(IP Multimedia Subsystem) A standard for offering voice and multimedia services over mobile and fixed networks using internet technology (IP).
IP
(Internet Protocol) Defines how information travels between network elements across the internet.
IPTV
(IP Television) A technology that delivers digital television via fixed broadband access.
IPX
(Internet Payment eXchange) The global payment and messaging delivery solution for SMS, MMS, Web and WAP.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
JV
(Joint venture) A business enterprise in which two or more companies enter a partnership.
LTE
(Long-Term Evolution) The next evolutionary step of mobile technology beyond HSPA, allowing data rates above 100 Mbps.
Managed services
Management of operator networks and/or hosting of their services.
Opex
Operating expenses.
PBX
(Private Branch eXchange) A telephone exchange that serves a particular business or office.
Packet switching
A method of switching data in a network where individual packets are accepted by the network and delivered to their destinations. The method is used by the Internet and replaces traditional circuit switching.
Penetration
The number of subscriptions divided by the population in a geographical area.
Softswitch
A software-based system for handling call management functionality. Integrates IP-telephony and the legacy circuit-switched part of the network.
TDM
Time division multiplexing, legacy technology for circuit switching.
Telecom grade
99.999 percent availability; performance requirement on telecom networks.
VoIP
Voice over IP, same as IP telephony.
WCDMA
(Wideband Code Division Multiple Access) A 3G mobile communication standard. WCDMA builds on the same core network infrastructure as GSM.
WDM
(Wavelength division multiplexing) Uses multiple light wavelengths to increase the transmission capacity of fiber cables for optical networks.
ERICSSON ANNUAL REPORT ON FORM 20-F 2009
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
TELEFONAKTIEBOLAGET LM ERICSSON
April 28, 200921, 2010
By: | /s/ ROLAND HAGMAN | |
Roland Hagman Vice President GroupFunction Financial Control |
By: | /s/ CARL OLOF BLOMQVIST | |
Carl Olof Blomqvist Senior Vice President and General Counsel |
232239