Report on Company's business situation and comments on the financial statements for the first nine months 2009

 

Highlights:

• Orders booked MHRK 1,074.2
• Sales revenues MHRK 1,008.6
• Gross margin 11.3%*
• Operating profit MHRK 31.3
• Financial income MHRK 48.3
• Net profit MHRK 79.6
• Earnings per share HRK 60.67
• Return on sales before taxes 7.9%
• Cash flow from operating activities MHRK 190.7

* During 2009, the Company has continued to make investments in development projects related to E-Health and E-government. In our Annual report these costs are reported within Gross profit. In order to ensure consistency of disclosure, we now include the cost of these projects within our definition of Gross Margin in our Quarterly results update.

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

 

„In the current economic climate we have witnessed a slowdown of investments on the part of our customers and partners, budget cuts and postponement of deals regarding network development or implementation of new functionalities in the ICT segment. However, user demand for new services and broadband access are on the increase, so introduction of new technologies is a process which should undoubtedly be continued and this is where I see good prospects for the Company's future.

 

As regards the Company's performance during the first nine months of the year, we find ourselves in situation that was almost unthinkable before the crisis, where despite the fact that we have not lost any business or customers and have even increased our market share in most markets, our business volume is reduced. However, we have maintained financial stability, have achieved a solid net profit and have generated strong operating cash flow, which I believe to be a good result. We have undertaken various measures to ensure an increasingly strong focus on cost, working capital and operational efficiency. We have implemented cost efficiency programs at all levels of the organization and the results are already visible as we push hard to reduce unnecessary cost wherever possible. At the same time, we have continued to invest into development projects and new business segments, such as informatization of enterprise and government bodies and, in my opinion, these investments are justified and necessary and are an important part of the Company's future business development.

 

Since, in view of the current situation, it becomes ever harder to finalize numerous marketing and commercial activities in the markets significantly affected by the crisis, I am extremely pleased about new export deals agreed during Q3, as described further in the report below. As regards the Croatian market, despite a significant economic slowdown and new taxes introduced, sales results are so far stable, but slightly lower year-over-year since leading operators' continuously invest (although less) into network/services development and modernization. The internal Ericsson market where we participate in technology development and implementation of technological changes continues to perform strongly and represents an increasing proportion of our total business as total company’s volumes have reduced. We continue to strive for the best possible results through continued focus on new sales opportunities, managing working capital, optimising cost structure and continually improving operational efficiency,“ said Gordana Kovačević.

 

During the reporting period, Ericsson Nikola Tesla performed as follows:

 

• As expected, orders booked and sales revenues went down compared to the same period last year due to significant reduction or postponement of operators' investments in export markets as a consequence of uncertainty caused by economic crisis.
• Domestic market accounts for 38.5%, export to Ericsson for 29.8% while the other export markets account for 31.7% of total sales revenue.
• Gross margin for the 9 months ended Sep 09 is 11.3% and compares with gross margin of 10.9% for the 6 months ended June 09 and of 16.2% for the 9 months ended Sep 08. The 4.9% year-over-year decline in gross margin reflects the year-over-year net impact on decline in sales, continued price pressure in domestic and export markets, changes in product mix as well as investments on development projects.
• Selling, General & Administration costs amount to MHRK 89.1, down 10% year-over-year reflecting reduced variable costs and the Company's focus on overall cost reduction.
• Operating profit totals MHRK 31.23, considerably lower year-over-year due to lower gross margin.
• Net financial income amounts to MHRK 48.3 compared to MHRK 10.6 realized in the same period last year. The increase in financial income continues to reflect foreign exchange gains and release of impairment reserves into financial income (due to amortisation of discount according to the net present value method of impairment).
• We report net profit of MHRK 79.6.
• Company's liquidity is maintained at stable levels. Operational cash flow is positive MHRK 190.7, cash assets total MHRK 393.4.
• Sales results in three business segments are as follows: Networks with network rollout services included accounts for 67.9%, Professional services for 28% and Multimedia (including enterprise) for 4.1% of total sales revenue. Sales decreased in Networks and Multimedia while Services recorded almost the last year's level.
• Major transactions with Ericsson Group companies may be structured as follows: sales of products and services amount to MHRK 306.4 (compared to MHRK 316.3 in the first nine months 2008) while purchase of products and services amounts to MHRK 380.6 (MHRK 613.9 in the first nine months 2008).
• Receivables towards Ericsson Group companies amount to MHRK 51.9 as at 30 Sep 2009 (MHRK 59.1 as at 31 Dec 2008) while liabilities amount to MHRK 99.9 (MHRK 69.7 as at 31 Dec 2008).
• Disclosure about Customer Financing Risks:
  As of the Balance Sheet date, the Company has total amounts of MHRK 458 outstanding in respect of short and long term Customer Financing commitments. In the current economic climate there is increased risk and uncertainty with regards to the ultimate collectability of some of these balances. However, while indicators of impairment in respect of some of these balances exist, at the Balance Sheet date, the Company has no reliable basis on which to measure any impairment and as such has made no additional provisions. The Company will continue to monitor this situation closely and will provide an update in the full year results.
  

In the domestic market, the Company continued to collaborate with T-HT, Vipnet and Tele2 on further modernization and extension of telecommunications networks and reported sales of MHRK 388.5; down 6.75% year-over-year. Underlying volume of products and services sold was higher compared to the same period in the prior year, however, continuous price pressure resulted in lower sales revenue.

 

The Company and T-HT have continued their collaboration on broadband access network infrastructure based on optical fibres and modern access networks, backbone networks and transformation of fixed-line voice network into new-generation network. In addition to activities on further extension and modernization of 2G and 3G infrastructure, the Company's collaboration with Vipnet involves Core Networks and transmission systems. The Company and Tele2 continued to collaborate on 2G and 3G infrastructure and implementation of new functionalities, with special emphasis on mobile broadband access.

 

As regards Enterprise business, intensive activities on upgrading the national ICT primary healthcare system and realization of Cadastre and Land Database joint information system have been going on. However, due to reduced/postponed investments in the ICT segment there were no major contracts signed during Q3 despite high-quality product and services offering.

 

In the regional market (Bosnia and Herzegovina, Montenegro and Kosovo), the Company reported sales of MHRK 172.9, down 48.3% year-over-year. This reflects significantly reduced investments in the telecom segment and the focus of operators primarily on cost reduction. However, as opposed to the first half of the year, when operators almost stopped investing, Q3 indicated a slight market recovery. During Q3, Ericsson Nikola Tesla and BH Telecom, the biggest telecom operator in Bosnia and Herzegovina, signed a few contracts related to mobile networks including the extension of 2G mobile network infrastructure, which is a prerequisite for user base increase. In addition, the Company agreed deals regarding 3G network extension as well as core upgrade of BH telecom network. Continued collaboration confirms customer satisfaction with quality of service in the initial phase of 3G technology implementation.

 

Ericsson Nikola Tesla and HT Mostar signed a contract for mobile network extension with new base stations and upgrade with 3G functionalities.

 

The contract signed with T-Mobile Montenegro includes delivery of equipment for 2G and 3G mobile network extensions as well as additional transmission equipment and services and a modernized charging system, while the contract signed with T-Com Montenegro includes delivery of equipment for extension of fixed broadband access and transmission networks as well as rendering of services.

 

In the Commonwealth of Independent States (CIS), the Company reported sales of MHRK 147, down 41% year-over-year. The economic crisis, having deeply affected this market, had also a direct impact on reduction of customer investments what resulted in lower business volume in our main markets, Russia and Belarus.

 

During Q3, the Company signed several contracts in the CIS market relating to fixed and mobile telephony and enterprise systems. They include extension of the existing GSM core, radio and transmission networks as well as professional services. An enterprise-related contract was signed in Kazakhstan between Ericsson Nikola Tesla and Intelligent Computer Services for delivery of IP solutions for enterprise users as well as upgrade of existing exchanges. A contract relating to transmission systems was signed with Bikada while a contract for SDH transmission system delivery to Kazakhstan Railways was signed with Transtelecom. A contract relating to extension and modernization of international wireline network was signed with Kyrgyz Telecom, a national operator of Kyrgyzstan.

 

In addition, it should be noted that an IPTV supply contract was signed with MagtiCom, the biggest Georgian mobile operator, which is an important step forward in our collaboration with this customer. The contract comprises delivery of end-to-end IPTV solution as well as professional services. It will provide the Georgians with a high-quality TV reception including advanced functionalities such as broadband video delivery.

 

In Ericsson market, the Company reported sales of MHRK 300.2, down 2.5% year-over-year.

 

The Research and Development Center was engaged in projects relating to new-generation servers for mobile networks and media gateways where it has deals of key importance. Several functional packages have been upgraded and verified within its responsibility regarding wireline network servers.

 

Research projects and work on prototypes have been successfully continued.

Ericsson Nikola Tesla's major shareholders (as at 30 Sep 2009)

 

	Number of shares	Percentage of share capital
Telefonaktiebolaget LM Ericsson	653,473	49.07
Hypo Alpe-Adria-Bank d.d. / Raiffeisen Mandatory Pension fund .	113,918	8.55
Zagrebačka banka d.d. / custodian client account for Unicredit Bank Austria AG	32,.217	2.49
Societe Generale-Splitska banka d.d. / Erste Plavi Mandatory Pension Fund	32,963	2.48
Hypo Alpe-Adria-Banak d.d. / PBZ Croatia osiguranje d.d. obvezni mirovinski fondHypo Alpe-Adria-Bank d.d. / PBZ Croatia osiguranje d.d. Mandatory Pension Fund	30,015	2.25
Societe Generale-Splitska banka d.d. / Allianz ZB d.o.o. Mandatory Pension Fund	19,562	1.47
Ericsson Nikola Tesla d.d.	18,862	1.42
PBZ d.d. / custodian client account	17,901	1.34
Erste & Steiermarkische bank d.d. / CSC	12,344	0.93
Croatian Privatization Fund	11,.848	0.89
Other	388,547	29.11

 

Q3 2009 share price information:

 

Highest (HRK)	Lowest (HRK)	Closing (HRK) 30 Sep 2009	Market capitalization (in MHRK)
1,540	1,112	1,499	1,996.1

 

Communication Ericsson Nikola Tesla