Report on company's business situation and comments on the financial statements for 1H 2009

• Orders booked 774.9 MHRK
• Sales revenues 616.3 MHRK
• Gross margin 16.6%
• Operating profit 4.97 MHRK
• Financial income 38.5 MHRK
• Profit before tax 43.5 MHRK
• Net profit 34.8 MHRK
• Earnings per share 26.6 HRK
• Return on sales before taxes 7.1%
• Cash flow from operating activities 69.9 MHRK

In the evaluation of company's performance Gordana Kovačević, president of Ericsson Nikola Tesla, pointed out the following:

 

„The global recession undoubtedly impacts the telecommunications market which experiences a sharp decline in activities and operators' investments, however at continued price pressures. In the markets where national currency considerably weakened we saw operators postpone their planned investments; other operators became very cautious with regard to long-term investments. Still, the majority of our customers are well-to-do.

Due to the current financial crisis in the markets we are in an awkward position we ever experienced: no contracts lost, our market share still the same, however, no new investments and postponed old ones. It is quite uncertain when and to what extent operators would start investing again. Disregarding the current situation which does not benefit anyone I maintain the opinion that ICT is and remains a very promising area that will continue to develop in the future. All current trends indicate the need for further technology and market development and accordingly, for a speedy and more intensive ICT implementation in all segments of everyday life.

Telecommunications segment is a key developmental factor in a society; accordingly, the wireline and wireless broadband technologies are obligatory items in development programs of many countries.

 

In the Croatian telecommunication market investments into building and developing the 2nd and 3rd generation mobile systems, introducing broadband access to the Internet and building an optical fibre network are continued. As we look to the future we see the 4th generation mobile networks (LTE) being introduced and the existing networks transformed to the new-generation ones. Speaking of achievements so far - the evaluation given by the EU Commission says that Croatian legal and regulatory provisions regarding the electronic communication meet global standards. I also think that Ericsson Nikola Tesla contributed and still contributes to this rating with its telecom solutions implemented by its business partners - major operators in Croatia. A new tax on telecommunications to be imposed within the anti-recession measures of the Government of the Republic of Croatia will for certain have a negative impact on all telecom stakeholders - users, operators, and telecom solutions providers such as Ericsson Nikola Tesla.

Regarding our performance in the first half of the year, we maintained our financial stability and achieved a solid net profit, despite the much harder situation for business. Due to our focus to maintain liquid assets at high levels we achieved a positive cash flow from operating activities amounting to nearly 70 MHRK. Simultaneously the cost optimization and business processes improvement was carried on.

In times of crisis various business scenarios are implemented. We are focused on market situation analysis, marketing and new collaborative business models with partners and customers. We continue to invest into competence development and we invest in new business areas and developmental projects. I wish to emphasize that with our top quality solutions and with the commitment of people in the Research and Development Center, Global Service Delivery Center and other expert centers we maintained our position in Ericsson market.

Considering the market situation in the first half of the year we see a positive change in the summer months and new significant contracts in our export markets coming up. More about this in the press information to be issued today,” said Gordana Kovačević.

 

Ericsson Nikola Tesla performed in the reported period as follows:

• Orders booked and sales revenues went down compared to the same reporting period last year, due to the financial crisis and slowdown in operators' investments, esp. in export markets. Domestic market and knowledge export to Ericsson account for the largest share in our sales, 39.9% and respectively 32% of sales revenues.
• Gross margin went down from 18.3% to 16.6% year-over-year, caused by price pressures and changed product mix.
• Operating cost (SG&A) amounts to 68.3 MHRK, down 1.2% year-over-year. The cost structure shows intensified sales activities aiming at getting new orders.
• Operating profit totals 4.9 MHRK, considerably lower year-over-year, due to smaller business volume and lower gross margin.
• Financial income amounts to 38.5 MHRK compared to 15.9 MHRK achieved in the same reporting period last year. Increase in financial income is due to foreign exchange gains and higher release of impairment reserves for doubtful receivables.
• Profit before tax amounts to 43.5 MHRK, down year-over-year due to smaller operating profit.
• Company liquidity after dividend payout of 91.8 MHRK is maintained at stable levels. Positive cash flow from operating activities was achieved, cash assets total 267.6 MHRK.
• Considering the sales revenues in our three sales segments the situation is as follows: network infrastructure including network building services accounts for 69.5%, professional services for 27.3%, and multimedia solutions (including enterprise) for 3.2% in total sales revenues. Sales decreased in all business segments; however, services recorded a slight decrease in sales.
• Major transactions with Ericsson companies may be structured as follows: products and services sales amount to 206.3 MHRK (compared to 218.1 MHRK in 1H 2008), whereas the purchase of products and services amounts to 231.7 MHRK (compared to 343 MHRK in 1H 2008).

Ericsson Nikola Tesla continued to collaborate with key operators in domestic market - T-HT, Vipnet and Tele2 - who continued their investments in telecom systems development, despite the current economic situation. With T-HT the company has been working on a broadband access network, optical fibre infrastructure development, and wireline network modernization. In collaboration with Vipnet we work on broadening and modernizing the 2G and 3G infrastructure and transmission systems. In the Tele2 network the company implemented a solution that includes HSDPA and Enhanced uplink, also an all-IP transport network that is a global front runner because it enables a speedy and efficient transmission of vast quantities of data. The experience gained in implementing all-IP and HSPA evolution technologies should make the implementation of even faster broadband technologies much easier; in these technologies Ericsson is a market and technology leader and Ericsson Nikola Tesla a confirmed global development and services center.

 

In the enterprise segment the company signed a contract for upgrading the national ICT primary healthcare information system. The contract includes the maintenance, installation and implementation of new functionalities in the given primary e-healthcare system in the Republic of Croatia that became operational early in 2007. Contractual activities are to be carried out in 3 phases: the first includes the delivery of hardware and software and new functionalities. The second is networking the pharmacies and primary healthcare labs into a central system and providing the reporting system for the Ministry of Health and Social Welfare, Croatian National Institute of Public Health, the Croatian Institute for Health Insurance, etc. In the final phase all medical specialists, gynecologists, pediatricians, school doctors, dentists' offices, and central ordering units in sixty and six Croatian hospitals shall be networked.

In domestic market the company achieved sales revenues of 246 MHRK, 13.5% down year-over-year.

 

End of first quarter we announced new business activities and investments in the regional market (Bosnia and Herzegovina, Montenegro and Kosovo); however, the planned contract execution with major customers was postponed to the 2nd half of the year. In the regional market the company achieved sales revenues of 84.1 MHRK, down 61.5% year-over-year.

In 2Q the company made deals with the operators T-Com Montenegro and T-Mobile Montenegro. With T-Com Montenegro we contracted a capacity expansion in wireline network, further expansion of broadband access and service provisioning. In the network of T-Mobile Montenegro the company shall introduce new advanced functionalities; the company also contracted service provisioning.

 

In the Commonwealth of Independent States the company achieved 88.7 MHRK sales revenues, up 8.4% compared to the same reporting period last year. During the 2nd quarter we signed a couple of smaller contracts with customers in Russia, Belarus and Moldova for a delivery of modern solutions and equipment for wireless and wireline systems and IP solutions for enterprises.

With Kodotel (operator) we contracted the initial phase of GSM implementation in the Voronezh region, with operator MegaFon we signed several contracts for exchanges upgrading and their extension with new media gateways for IP network.

No major contracts were signed in the first half of the year: due to the economic crisis and strong depreciation of national currencies, esp. in Russia and Kazakhstan, operators' investments were considerably reduced or postponed.

 

In Ericsson market the company achieved 197.5 MHRK sales revenues, down 6.4% year-over-year. In the reported period the Research and Development Center broadened its activities to Radio Products development. The Center obtained new responsibilities for the maintenance and implementation support for the entire production line of traffic routers for wireline networks. Development activities relating to the new-generation MSS and TSS for mobile networks were continued, with Ericsson Nikola Tesla playing a dominant role in this development. Work on several research projects was continued.

Because of its work achievements and continuous growth in the Customer Support area, the Global Services Delivery Center, GSDC, Croatia obtained new responsibilities in wireline networks area. The company is a confirmed wireline services center in the market units EMEA North and EMEA South (Europe, Middle East and Africa), also Ericsson's leading wireline services provider and the 2nd ranking services provider in mobile networks in the region.

The Annual Shareholders Meeting of the joint stock company (held on 26 May 2009) adopted a decision on ordinary dividend of 20 HRK per share and an extraordinary dividend of 50 HRK per share. The dividend was paid on 24 June 2009.

 

Ericsson Nikola Tesla's major shareholders (as of 30 June 2009)

 

	Number of shares	Percentage of share capital
Telefonaktiebolaget LM Ericsson	653.473	49,07
Hypo Alpe-Adria-Bank d.d. / Raiffeisen Pension Fund for Mandatory Pension Fund (joint stock company) management	113.209	8,50
Zagrebačka banka d.d. / custodian client account for Unicredit Bank Austria AG	32.767	2,46
Societe Generale-Splitska banka d.d. / Erste Plavi Mandatory Pension Fund	32.619	2,45
Hypo Alpe-Adria-Bank d.d. / PBZ Croatia osiguranje d.d. Mandatory Pension Fund	29.915	2,25
Ericsson Nikola Tesla d.d.	20.697	1,55
Societe Generale-Splitska banka d.d. / Allianz ZB d.o.o. for AZ Mandatory Pension Fund	19.562	1,47
PBZ d.d. / custodian client account	17.690	1,33
Erste & Steiermarkische bank d.d. / CSC	12.344	0,93
Croatian Privatization Fund	11.848	0,89
Other shareholders	387.526	29,10

 

Share price variation in 1Q 2009:

 

Highest (HRK)	Lowest (HRK)	Closing (HRK)	Market capitalization (in MHRK)
1.575	1.082,1	1.250	1.664,6

 

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