Table of Contents
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, 2014
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 10 719 53 80, Email: roland.hagman@ericsson.com
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 (each representing one B share) | 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 5.00 nominal value) |
3,043,295,752 | |||
| A shares (SEK 5.00 nominal value) |
261,755,983 | |||
| 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ 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 ¨
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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| 48 | ||||
| 55 | ||||
| MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING |
94 | |||
| 95 | ||||
| 103 | ||||
| 105 | ||||
| 132 | ||||
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Table of Contents
Ericsson Annual Report on Form 20-F 2014
FORM 20-F 2014 CROSS-REFERENCE TABLE
This document comprises the English version of our Swedish Annual Report for 2014 and our Annual Report on Form 20-F for the year ended December 31, 2014. Reference is made to the Form 20-F 2014 cross-reference table on pages i to vi hereof and the Supplemental Information beginning on page 142, which contains certain other information required by Form 20-F. Only (i) the information in this document that is referenced in the Form 20-F 2014 cross-reference table, (ii) the Supplemental Information, (iii) the section entitled “Forward-looking statements” and (iv) the Exhibits required to be filed pursuant to the Form 20-F shall be deemed to be filed with the Securities and Exchange Commission for any purpose, including incorporation by reference into the Registration Statement on Form F-3 filed on April 23, 2012 (File No. 333-180880) and any other document filed by us pursuant to the Securities Act of 1933, as amended, which incorporates by reference the 2014 Form 20-F. Any information herein which is not referenced in the Form 20-F 2014 cross-reference table or filed as an exhibit thereto shall not be deemed to be so incorporated by reference.
This annual report includes financial measures that were not calculated or presented in accordance with IFRS, and we refer to these measures as non-IFRS financial measures. Reconciliations of these non-IFRS financial measures to the most directly comparable IFRS financial measures can be found on pages 155-156 of this annual report.
Market data and certain industry forecasts used herein were obtained from internal surveys, market research, publicly available information and industry publications. While we believe that market research, publicly available information and industry publications we use are reliable, we have not independently verified market and industry data from third-party sources. Moreover, while we believe our internal surveys are reliable, they have not been verified by any independent source.
The information included on the websites that appear in the Annual Report on Form 20-F is not incorporated by reference in the report.
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 Document |
Page Number |
||||||||
| PART I |
||||||||||
| 1 |
Identity of Directors, Senior management and advisers. | N/A | ||||||||
| 2 |
Offer statistics and timetable |
N/A | ||||||||
| 3 |
Key information |
|||||||||
| A | Selected financial data |
Five-year summary | 157 | |||||||
| Reconciliations to IFRS | 155-156 | |||||||||
| Financial terminology | 159 | |||||||||
| Supplemental information | ||||||||||
| Exchange rates |
142 | |||||||||
| B | Capitalization and indebtedness |
N/A | - | |||||||
| C | Reason for offer and use of proceeds |
N/A | - | |||||||
| D | Risk factors |
Risk factors | 95-102 | |||||||
| 4 |
Info on the Company |
|||||||||
| A | History and development of the Company |
Our Business | ||||||||
| Ericsson in brief |
1 | |||||||||
| 2014 in review |
2 | |||||||||
| Board of Directors’ Report | ||||||||||
| Business in 2014 |
34 | |||||||||
| Capital expenditures |
37 | |||||||||
| Notes to the Consolidated financial statements | ||||||||||
| Note C26—Business combinations |
85-86 | |||||||||
| Note C32—Events after the reporting period |
93 | |||||||||
i
Table of Contents
Ericsson Annual Report on Form 20-F 2014
| Form 20-F Item Heading |
Location in Document |
Page Number |
||||||||
| Supplemental information | ||||||||||
| General facts on the Company |
142 | |||||||||
| Company history and development |
142 | |||||||||
| B | Business overview | |||||||||
| Our business | ||||||||||
| Ericsson in brief |
1 | |||||||||
| This is Ericsson |
6-8 | |||||||||
| The strategic direction |
9-10 | |||||||||
| Core business |
11-15 | |||||||||
| Targeted areas |
16-20 | |||||||||
| Resource allocation |
21 | |||||||||
| The IPR portfolio |
22 | |||||||||
| Business structure |
23-26 | |||||||||
| Regional development |
27 | |||||||||
| Board of Directors’ report | ||||||||||
| Financial highlights—Research and development, patents and licensing |
37 | |||||||||
| Financial highlights—Seasonality |
37 | |||||||||
| Business results—Segments |
38 | |||||||||
| Business results—Regions |
39 | |||||||||
| Material contracts |
41 | |||||||||
| Sourcing and supply |
41 | |||||||||
| Sustainability and corporate responsibility |
42-43 | |||||||||
| Notes to the consolidated financial statements | ||||||||||
| Note C3—Segment information |
62-65 | |||||||||
| Risk factors | ||||||||||
| Market, technology and business risks |
95-100 | |||||||||
| Regulatory, compliance and corporate governance risks |
100-102 | |||||||||
| Corporate governance report 2014 | ||||||||||
| Regulation and compliance |
106 | |||||||||
| Form 20-F 2014 cross-reference table | i | |||||||||
| Supplemental information | ||||||||||
| Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (ITRA) |
152 | |||||||||
| C | Organizational structure |
|||||||||
| Supplemental information | ||||||||||
| General facts on the company |
142 | |||||||||
| Investments |
153-154 | |||||||||
| D | Property, plants and equipment |
|||||||||
| Our business | ||||||||||
| Sustainability and corporate responsibility |
31-32 | |||||||||
| Supplemental information | ||||||||||
| Primary manufacturing and assembly facilities |
143 | |||||||||
| Notes to the consolidated financial statements | ||||||||||
| Note C11—Property, plant and equipment |
70 | |||||||||
| Note C27—Leasing |
87 | |||||||||
| Board of Directors’ report | ||||||||||
| Financial highlights—Capital expenditures |
37 | |||||||||
| Sustainability and corporate responsibility |
42-43 | |||||||||
| Risk factors | ||||||||||
| Regulatory, compliance and corporate governance risks |
100-102 | |||||||||
| 4A |
Unresolved staff comments | - | ||||||||
| 5 |
Operating and financial review and prospects |
- | ||||||||
| A | Operating results | |||||||||
| Our business |
||||||||||
| Ericsson in brief |
1 | |||||||||
| This is Ericsson |
6 | |||||||||
| Business structure |
23-28 | |||||||||
| Five-year summary |
157 | |||||||||
| Board of Directors’ report |
||||||||||
| Business in 2014 |
34 | |||||||||
| Financial highlights |
35-37 | |||||||||
| Business results—Segments |
38 | |||||||||
| Business results—Regions |
39 | |||||||||
| Risk management |
41 | |||||||||
ii
Table of Contents
Ericsson Annual Report on Form 20-F 2014
| Form 20-F Item Heading |
Location in Document |
Page Number |
||||||||
| Notes to the consolidated financial statements |
||||||||||
| Note C1—Significant accounting policies |
55-61 | |||||||||
| Note C20—Financial risk management and financial instruments—Foreign exchange risk |
81-83 | |||||||||
| Risk Factors | ||||||||||
| Market, technology and business risks |
95-100 | |||||||||
| Supplemental information | ||||||||||
| Operating results for the years ended December 31, 2012 and 2013 |
143-146 | |||||||||
| B | Liquidity and capital resources |
|||||||||
| Board of Directors’ report | ||||||||||
| Financial highlights—Working capital |
36 | |||||||||
| Financial highlights—Cash flow |
36 | |||||||||
| Financial highlights—Financial position |
36 | |||||||||
| Financial highlights—Seasonality |
37 | |||||||||
| Financial highlights—Capital expenditures |
37 | |||||||||
| Notes to the consolidated financial statements | ||||||||||
| Note C19—Interest-bearing liabilities |
80 | |||||||||
| Note C20—Financial risk management and financial instruments |
81-83 | |||||||||
| Note C25—Statement of cash flows |
84 | |||||||||
| Supplemental information | ||||||||||
| Operating results for the years ended December 31, 2012 and 2013—Balance sheet and other performance indicators |
144 | |||||||||
| C | R&D, Patents and licenses, etc. |
|||||||||
| Five-year summary | 157 | |||||||||
| Our business | ||||||||||
| Resource allocation |
21 | |||||||||
| The IPR portfolio |
22 | |||||||||
| Board of Directors’ report | ||||||||||
| Financial highlights—Research and development, patents and licensing |
37 | |||||||||
| Supplemental information | ||||||||||
| Operating results for the years ended December 31, 2012 and 2013—Research and development, patents and licensing |
144 | |||||||||
| Consolidated financial statements | ||||||||||
| Consolidated income statement |
48 | |||||||||
| D | Trend information |
Our business | ||||||||
| This is Ericsson—Transformation |
7-8 | |||||||||
| The strategic direction |
9-10 | |||||||||
| E | Off-balance sheet arrangements |
|||||||||
| Board of Directors’ report | ||||||||||
| Financial highlights—Off-balance sheet arrangements |
37 | |||||||||
| Notes to the consolidated financial statements |
||||||||||
| Note C14—Trade receivables and customer finance, Transfers of financial assets |
72 | |||||||||
| Note C24—Contingent liabilities |
84 | |||||||||
| F | Tabular disclosure of contractual obligations |
|||||||||
| Notes to the consolidated financial statements |
||||||||||
| Note C31—Contractual obligations |
93 | |||||||||
| 6 | Directors, senior management and employees | |||||||||
| A | Directors and senior management |
|||||||||
| Corporate governance report 2014 | ||||||||||
| Members of the Board of Directors |
117-120 | |||||||||
| Members of the Executive Leadership Team |
125-128 | |||||||||
| B | Compensation | |||||||||
| Board of Directors’ report |
||||||||||
| Corporate governance—Remuneration |
40-41 | |||||||||
| Corporate Governance Report 2014 |
||||||||||
| Remuneration to Board members |
116 | |||||||||
| Remuneration report | 132-135 | |||||||||
| Notes to the consolidated financial statements |
||||||||||
| Note C17—Post-employment benefits |
75-78 | |||||||||
| Note C28—Information regarding members of the Board of Directors, the Group management and employees |
88-92 | |||||||||
iii
Table of Contents
Ericsson Annual Report on Form 20-F 2014
| Form 20-F Item Heading |
Location in Document |
Page Number |
||||||||
| C | Board practices | |||||||||
| Notes to the consolidated financial statements |
||||||||||
| Note C28—Information regarding members of the Board of Directors, the Group management and employees—Comments to the table |
88 | |||||||||
| Corporate governance report 2014 |
||||||||||
| Board of Directors—Composition of the Board of Directors |
110 | |||||||||
| Committees of the Board of Directors—Audit committee |
113-114 | |||||||||
| Committees of the Board of Directors—Remuneration committee |
115 | |||||||||
| Remuneration report—The Remuneration Committee |
132 | |||||||||
| D |
Employees | |||||||||
| Five-year summary | 157 | |||||||||
| Notes to the Consolidated financial statements | ||||||||||
| Note C28—Information regarding members of the Board of Directors, the Group management and employees—Employee numbers, wages and salaries |
92 | |||||||||
| E |
Share ownership | |||||||||
| Share Information | ||||||||||
| Shareholders |
141 | |||||||||
| Corporate governance report 2014 | ||||||||||
| Shareholders |
107-108 | |||||||||
| Members of the Board of Directors |
117-120 | |||||||||
| Members of the Executive Leadership Team |
125-128 | |||||||||
| Remuneration report | ||||||||||
| Total remuneration |
133-135 | |||||||||
| Notes to the consolidated financial statements | ||||||||||
| Note C28—Information regarding members of the Board of Directors, the Group management and employees |
88-92 | |||||||||
| 7 |
Major shareholders and related party transactions |
|||||||||
| A | Major shareholders | |||||||||
| Corporate governance report 2014 | ||||||||||
| Shareholders |
107 | |||||||||
| Share information | ||||||||||
| Shareholders |
141 | |||||||||
| B | Related party transactions | |||||||||
| Notes to the consolidated financial statements | ||||||||||
| Note C29—Related party transactions |
93 | |||||||||
| C | Interests of experts and counsel | N/A | ||||||||
| 8 |
Financial information |
|||||||||
| A |
Consolidated statements and other financial information |
|||||||||
| Board of Directors’ report | ||||||||||
| Legal proceedings |
43-44 | |||||||||
| Parent company—Proposed disposition of earnings |
45 | |||||||||
| Consolidated financial statements |
48-54 | |||||||||
| Please see also Item 17 cross-references |
||||||||||
| Report of independent registered public accounting firm | 47 | |||||||||
| Notes to the consolidated financial statements | 55-93 | |||||||||
| Supplemental information | ||||||||||
| Memorandum and articles of association—Dividends |
146 | |||||||||
| Five-year summary | 157 | |||||||||
| B |
Significant changes | N/A | ||||||||
| 9 |
The offer and listing |
|||||||||
| A |
Offer and listing details | |||||||||
| Share Information | ||||||||||
| Share and ADS prices |
140 | |||||||||
| B |
Plan of distribution | N/A | ||||||||
| C |
Markets | |||||||||
| Share Information | ||||||||||
| Share trading |
138 | |||||||||
| D |
Selling shareholders | N/A | ||||||||
| E |
Dilution | N/A | ||||||||
| F |
Expenses of the issue | N/A | ||||||||
iv
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Ericsson Annual Report on Form 20-F 2014
| Form 20-F Item Heading |
Location in Document |
Page Number |
||||||||
| 10 |
Additional information | |||||||||
| A | Share capital | N/A | ||||||||
| B | Memorandum and articles of association | |||||||||
| Supplemental information |
||||||||||
| Memorandum and articles of association |
146-148 | |||||||||
| C | Material contracts | Board of Directors’ report |
||||||||
| Material contracts |
41 | |||||||||
| Notes to the consolidated financial statements |
||||||||||
| Note C31—Contractual obligations |
93 | |||||||||
| D | Exchange controls | |||||||||
| Supplemental information |
||||||||||
| Exchange controls |
148 | |||||||||
| E | Taxation | |||||||||
| Supplemental information |
||||||||||
| Taxation |
148-149 | |||||||||
| F | Dividends and paying agents | N/A |
||||||||
| G | Statement by experts | N/A |
||||||||
| H | Documents on display | |||||||||
| Supplemental information |
||||||||||
| General facts on the Company |
142 | |||||||||
| I | Subsidiary information | — |
||||||||
| 11 |
Quantitative and qualitative disclosures about market risk |
|||||||||
| A | Quantitative information about market risk | |||||||||
| Notes to the consolidated financial statements |
||||||||||
| Note C20—Financial risk management and financial instruments |
81-83 | |||||||||
| B | Qualitative information about market risk | |||||||||
| Board of Directors’ Report |
||||||||||
| Risk management |
41 | |||||||||
| Notes to the consolidated financial statements |
||||||||||
| Note C20—Financial risk management and financial instruments |
81-83 | |||||||||
| Corporate governance report 2014 |
||||||||||
| Management—Risk management |
122-124 | |||||||||
| C | Interim periods | N/A |
||||||||
| D | Safe harbor | N/A |
||||||||
| E | Small business issuers | N/A |
||||||||
| 12 |
Description of securities other than equity securities |
|||||||||
| A | Debt securities | N/A |
||||||||
| B | Warrants and rights | N/A |
||||||||
| C | Other securities | N/A |
||||||||
| D | American Depositary Shares | |||||||||
| Supplemental information |
||||||||||
| Depositary fees and charges |
151 | |||||||||
| PART II |
||||||||||
| 13 |
Defaults, Dividends, Arrearages and Delinquencies |
N/A |
||||||||
| 14 |
Material modifications to the rights of security holders and use of proceeds |
N/A |
||||||||
| 15 |
Controls and Procedures | |||||||||
| A | Disclosure controls and procedures | |||||||||
| Corporate governance report 2014 |
||||||||||
| Disclosure controls and procedures |
129 | |||||||||
| B | Management’s annual report on internal control over financial reporting |
|||||||||
| Management’s report on internal control over financial reporting |
94 | |||||||||
| C | Attestation report of the registered public accounting firm |
Report of Independent Registered Public Accounting Firm |
47 | |||||||
| D | Changes in internal control over financial reporting |
|||||||||
| Corporate governance report 2014 | ||||||||||
| Internal control over financial reporting 2014—Internal control over financial reporting |
129 | |||||||||
| Management’s report on internal control over financial reporting |
94 | |||||||||
v
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Ericsson Annual Report on Form 20-F 2014
| Form 20-F Item Heading |
Location in Document |
Page Number |
||||||||
| 16 |
Reserved | |||||||||
| A |
Audit Committee financial expert | |||||||||
| Corporate governance report 2014 | ||||||||||
| Committees of the Board of Directors—Audit Committee—Members of the Audit Committee |
114 | |||||||||
| B |
Code of Ethics | |||||||||
| Our business | ||||||||||
| Sustainability and corporate responsibility |
31 | |||||||||
| Corporate governance report 2014 | ||||||||||
| Code of business ethics |
106 | |||||||||
| Form 20-F 2014 cross-reference table | ||||||||||
| Part III—Item 19—Exhibit 11 |
vi | |||||||||
| Board of Directors’ report | ||||||||||
| Corporate governance—Business integrity |
40 | |||||||||
| C |
Principal accountant fees and services | |||||||||
| Supplemental information | ||||||||||
| Audit committee pre-approval policies and procedures |
152 | |||||||||
| Notes to the consolidated financial statements | ||||||||||
| Note C30—Fees to auditors |
93 | |||||||||
| D |
Exemptions from the listing standards for Audit Committees |
|||||||||
| Supplemental information | ||||||||||
| NASDAQ and SEC Corporate governance requirements |
151 | |||||||||
| E |
Purchase of equity securities by the issuer and affiliated purchasers |
– | ||||||||
| F |
Change in registrant’s certifying accountant |
– | ||||||||
| G |
Corporate governance | |||||||||
| Supplemental information | ||||||||||
| NASDAQ and SEC corporate governance requirements |
151 | |||||||||
| H |
Mine safety disclosure | N/A | ||||||||
| PART III |
||||||||||
| 17 |
Financial statements | |||||||||
| Consolidated income statement and Consolidated statement of comprehensive income |
48-49 | |||||||||
| Consolidated balance sheet | 50 | |||||||||
| Consolidated statement of cash flows | 51 | |||||||||
| Consolidated statement of changes in equity | 52-54 | |||||||||
| Notes to the consolidated financial statements | 55-95 | |||||||||
| Report of independent registered public accounting firm | 47 | |||||||||
| 18 |
Financial statements | N/A | ||||||||
| 19 |
Exhibits | |||||||||
| Exhibit 1 | Articles of Association * | |||||||||
| Exhibit 2 | Second Amended and Restated Deposit Agreement Among Telefonaktiebolaget LM Ericsson (publ) and Deutsche Bank Trust Company Americas, as depositary, and holders of American Depositary Receipts, dated as of January 7, 2014 |
|||||||||
| Exhibit 6 | Please see Notes to the consolidated financial statements, Note C1 Significant accounting policies |
55-61 | ||||||||
| Exhibit 7 | For definitions of certain ratios used in this report, please see Financial terminology |
159 | ||||||||
| Exhibit 8 | Please see Supplemental Information—Investments | 153-154 | ||||||||
| Exhibit 11 | Our Code of business ethics is included on our web site at www.ericsson.com/code-of-business-ethics |
|||||||||
| Exhibit 12 | 302 Certifications | |||||||||
| Exhibit 13 | 906 Certifications | |||||||||
| Exhibit 15.1 |
Consolidated Financial Statements of ST Ericsson SA for the year ended December 31, 2013, including notes to the consolidated financial statements and auditor’s report ** |
|||||||||
| Exhibit 15.2 |
Consent of PriceWaterhouseCoopers AB with respect to the consolidated financial statements of Telefonaktiebolaget LM Ericsson (publ) | |||||||||
| Exhibit 15.3 |
Consent of PriceWaterhouseCoopers SA with respect to the consolidated financial statements of ST Ericsson SA as of and for the year ended December 31, 2013 | |||||||||
| * | (Incorporated herein by reference to Exhibit 1 to the Annual Report on Form 20-F for the year ended December 31, 2011 filed by the registrant on April 4, 2012 (File No. 000-12033).) |
| ** | (Incorporated herein by reference to Exhibit 15.2 to Amendment No. 1 to the Annual Report on Form 20-F for the year ended December 31, 2013 filed by the registrant on June 19, 2014 (File No. 000-12033).) |
vi
Table of Contents
Ericsson Annual Report on Form 20-F 2014
Ericsson is a driving force behind the Networked Society – a world leader in communications technology and services. The Company’s long-term relationships with every major telecom operator in the world allow people, businesses and societies to fulfill their potential and create a more sustainable future. Ericsson’s services, software and infrastructure – especially in mobility, broadband and the cloud – are enabling the telecom industry and other sectors to do better business, increase efficiency, improve the user experience and capture new opportunities. With more than 115,000 professionals and customers in more than 180 countries, Ericsson combines global scale with technology and services leadership. Investments in research and development ensure that Ericsson’s solutions – and its customers – stay in the forefront. The Company provides support for networks with more than 2.5 billion subscribers. Approximately 40% of the world’s mobile traffic is carried through networks delivered by Ericsson.
Founded in 1876, Ericsson has its headquarters in Stockholm, Sweden. The Ericsson share is listed on Nasdaq Stockholm and NASDAQ New York.
Global presence
Ericsson is a global company supporting more than 500 operator customers and an increasing number of non-operator customers. The Company has been present in many countries, such as China, Brazil and India, for more than 100 years. The ten largest customers, half of which are multinational, account for 47% of Ericsson’s net sales.
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Examples of what Ericsson has achieved, and of business highlights from around the world during 2014.
January – March
| • | Ericsson and Samsung reached cross-license agreement. The agreement includes global cross licensing of patents relating to GSM, UMTS and LTE standards for networks and handsets. (Jan. 27) |
| • | Ericsson announced the acquisition of Azuki Systems. The acquisition helps Ericsson to deliver on the Networked Society’s demand for TV Anywhere services – on any screen, any time, across any network. (Feb. 6) |
| • | Ericsson announced the industry’s first coordinated network-wide software launch. A software-driven network evolution enables operators to respond to quickly changing network requirements. (Feb. 12) |
| • | Century Link, a large US operator, signed a contract with Ericsson for operations and business support systems (OSS & BSS) software suite Service Agility. The solution enables quick delivery of new applications to customers. (Feb. 24) |
| • | Ericsson and Royal Philips jointly launched an innovative connected LED street lighting solution which integrates telecom equipment into light poles. The Zero Site provides energy-efficient public lighting and improved network performance in dense urban areas. (Feb. 24) |
| • | Ericsson announced several operator trials of the Radio Dot System. Radio Dot System is a small-cell architecture for enterprise buildings and public venues. (Feb. 24) |
| • | At the Mobile World Congress in Barcelona, Ericsson showed innovations and its technology and service capabilities. Ericsson leads the way with solutions that drive the development in mobility, broadband and the cloud, creating the foundation for eco-systems and transformation across industries. (Feb. 24) |
| • | Ericsson was awarded a five-year network transformation contract by Vodafone. The contract includes products and services and is a part of Vodafone’s growth plan, called Spring. (Feb. 26) |
April – June
| • | Ericsson completed the acquisition of Red Bee Media, a media services company in the UK. The acquisition, announced in 2013, strengthens Ericsson’s broadcast services business and expands the customer list. (May 12) |
| • | New Ericsson Campus in Silicon Valley to drive innovation. Ericsson will bring together approximately 2,000 R&D staff to accelerate the development of IP, TV and media innovation. (May 28) |
| • | Ericsson announced OSS and BSS software suite Cloud Manager 2.0. It supports operators in the transformation to virtualized network infrastructure. (June 2) |
| • | Ericsson won a long-term managed services agreement with T-Mobile for Service Agility, the pre-integrated OSS and BSS software suite. The solution allows T-Mobile to create, launch, deliver and manage services efficiently while at the same time reduce overall operational costs. (June 2) |
| • | Taiwanese operator Far EasTone selected Ericsson as the major supplier for its LTE radio and core network. The contract also includes network optimization and 4G Cell Broadcast System for disaster warning services. (June 5) |
July – September
| • | Through a seven-year contract for managed services with operators in Romania, Ericsson is responsible for operations of networks and OSS systems and network maintenance. Ericsson helps Romtelecom (extended contract) and Cosmote (new contract) to improve network quality and quality of service. (July 1) |
| • | Live, over-the-air demonstration of pre-standard 5G technology achieves 5 Gbps speeds in the 15 GHz frequency band. Faster speeds, lower latency and better performance in urban areas address the mobile data growth and next-generation machine-to-machine applications. (July 1) |
| • | Ericsson prepared Telefonica network for the 2014 FIFA World Cup in Brazil. Ericsson’s Key Event Experience solution for events with high mobile traffic when network capacity is key, was used for the first time. (July 17) |
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| • | Ericsson acquired MetraTech to accelerate cloud and enterprise billing capabilities. The acquisition broadens Ericsson’s software portfolio with billing-platform based on metadata architecture. (July 29) |
| • | MTV, a Finnish media company, selected Ericsson for broadcast and media services, including media management and playout. The five-year agreement and establishment of a purpose-built media hub in Helsinki strengthens Ericsson’s broadcast and media services business. (Aug. 13) |
| • | Ericsson was awarded its Fifth Emmy® award for its JPEG2000 interoperability technology. JPEG2000 is a compression standard for broadcast applications for IP networks, distributing high picture quality content for live events. (Aug. 18) |
| • | Australian operator Telstra selected Ericsson for its next generation optical transport equipment and services. The agreement supports the introduction of software defined networking (SDN) and network functions virtualization (NFV) functionality. (Aug. 18) |
| • | Ericsson opened its first of three Global ICT Centers. The Swedish center houses the company’s complete portfolio and enables Ericsson’s cross-functional teams to work more efficiently, using the latest cloud technology. (Sept. 8) |
| • | Ericsson completed the small-cell portfolio with launch of RBS 6402 Indoor Picocell to address approximately 10 million commercial buildings worldwide. This is the first indoor picocell to deliver 300 Mbps LTE speeds with carrier aggregation. (Sept. 9) |
| • | Ericsson introduced MediaFirst, an end-to-end cloud-based TV platform. MediaFirst is offered as software as a service for creation, management and delivery of Pay TV. (Sept. 11) |
| • | Ericsson announced the discontinuation of modems development and the shift of parts of Modems’ workforce to radio network R&D. Ericsson took over the LTE thin modems operations when the ST-Ericsson JV was broken up in 2013. (Sept. 18) |
| • | Ericsson was selected by T-Mobile to provide equipment and services to expand its nationwide 4G LTE network, improve in-building, highway and rural performance. The contract includes LTE-Advanced and seamless service continuity for voice calls between LTE and Wi-Fi on select T-Mobile smartphones. (Sept. 23) |
| • | Ericsson announced Software 15A , introducing a new software model for networks, similar to the software model in the IT industry. The software model includes predefined software value packages and a software subscription component. (Sept. 23) |
October – December
| • | Ericsson completed the acquisition of the business of Ambient, a US-based smart grid communications provider. The Ambient platform enables multiple smart grid applications and technologies on a single infrastructure. (Oct. 1) |
| • | Network functions virtualization (NFV) successfully demonstrated with Japanese operator NTT DOCOMO. NFV enhances network flexibility, speeds up service introduction and increases resilience. (Oct. 14) |
| • | Ericsson strengthened its position in the cloud market. Ericsson announced the acquisition of Fabrix Systems (Sept. 12), Sentilla (Oct. 16) and the majority stake in Apcera (Sept. 22) as well as a partnership with Guardtime (Sept. 3). (Sept–Oct.) |
| • | Ericsson signed a five-year global framework agreement with international operator Telenor. The agreement covers hardware, professional services, support and maintenance for 2G, 3G and 4G networks. (Oct. 27) |
| • | Ericsson reports on ICT use in cities. The reports show that cities with low ICT maturity are improving their ICT maturity faster than high performing cities and that the internet facilitates smart choices in city life. (Nov. 10) |
| • | Ericsson’s Capital Markets Day provided an update on the progress on its Networked Society strategy. With a clear strategic agenda, Ericsson is transforming, with the aim to becoming a leading ICT company. (Nov. 13) |
| • | Reliance Communications and Ericsson signed a seven-year nationwide managed services contract. This expansion contract covers operation and management of wireline and wireless networks and field maintenance and operational planning of mobile networks. (Dec. 5) |
| • | Vodafone, Netherlands, was the first operator in the world to commercially deploy Ericsson Radio Dot System at Dutch Radboud University. Ericsson Radio Dot System allows quick indoor deployment and efficient integration into macro-network. (Dec. 10) |
| • | Ericsson signed a framework agreement with Ethio Telecom for network transformation regarding 2G/3G mobile communication equipment and related services. Products and services (such as design, planning, deployment, tuning, and optimization) will be used to transform the network and add capacity. (Dec. 16). |
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We are on a journey of transformation. Our industry is changing and we are changing to stay relevant to our customers and to capture opportunities both in our core business and in our targeted growth areas.
Dear reader
Value creation
Our sales of SEK 228 billion were stable for the full year 2014, with an operating margin of 7.4%. Growth in the Middle East, Europe and Asia compensated for a sales decline in North America and the operating margin improved in our core business. We improved cash flow from operating activities during the year and generated a full-year cash flow of SEK 18.7 billion, exceeding our cash conversion target of more than 70%. Our strong financial position has over the years secured our financial flexibility and enabled us to implement our strategy and to deliver consistent returns to our shareholders.
Going into 2015, we aim to continue to grow faster than the market combined with best-in-class margins and strong operating cash flow. In doing so, we will not only drive shareholder value creation but also generate value for our customers, employees and for society at large.
The pace of change in the market is increasing as the telecom, IT and media industries converge into a broader ICT industry. At the same time, ICT is starting to transform other industries. Both operators and vendors are deciding on different strategic routes depending on the assets they have. We are now at an inflection point where the Networked Society is starting to take shape around us. The transformation to the Networked Society, where anything that benefits from being connected will be connected, is driven by broadband, mobility and cloud.
The pace of change within the Company is also increasing as we take action to secure continued leadership in this transforming market. We are investing not only in our core areas of mobile infrastructure and telecom services, but also in targeted growth areas. We are streamlining our portfolio, with an increased focus on software and professional services. We are also investing in new competence to make sure that we can keep our technology and services leadership and be a trusted business partner to our customers.
Let me give you a few examples from recent years. We have reduced the number of hardware platforms, reduced the number
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of software stacks, made strategic investments and acquisitions in our targeted growth areas, divested our handset operations and discontinued our modem development. This streamlining of operations has made us stronger as a company and improved earnings in our core business.
However, our profit is not yet on the level where we want it to be. Current company transformation uncovers opportunities to leverage global skills and scale to increase efficiencies and reduce cost further. Therefore a global cost and efficiency program was presented at our Capital Markets Day in November. The ambition with the program is to achieve savings of approximately SEK 9 billion, including SEK 4.5 billion in operating expense savings, with full effect during 2017.
We aim to improve operating income by monetizing our footprint, building success in targeted growth areas and by efficiency improvements.
Excel in core and establish leadership in targeted areas
Our strategy builds on a combination of excelling in our core business and establishing leadership in targeted growth areas. We are market leaders in both mobile infrastructure and telecom services with a large installed base to build on. We continue to invest in R&D and services capabilities, relentlessly innovating and shaping the market as we move towards 5G.
At the same time, we invest in five targeted growth areas that are adjacent to our core business: IP Networks, Cloud, OSS and BSS, TV and Media and Industry and Society. They all have a high share of software and professional services, a high degree of recurring business and a higher growth rate than the core business.
We made good progress in these targeted areas during 2014, with sales growth above 10%, and we continued to invest both in our own R&D and in selected acquisitions and partnerships:
| • | The partnership with Ciena will support our Service Provider-SDN and IP Optical convergence ambitions. |
| • | The acquisition of a majority stake in Apcera strengthens our position in enterprise cloud. |
| • | The acquisition of MetraTech improves our cloud and enterprise billing capabilities within BSS. |
| • | Our acquisitions of Azuki Systems, Red Bee Media and Fabrix Systems extend our leadership in TV and media. |
Investing in the future
During 2014, we invested SEK 36 billion in R&D – which adds up to a total investment of SEK 166 billion over the past five years. Our technology leadership is built on our investments in R&D and evidenced by more than 37,000 granted patents, one of the strongest patent portfolios in the industry. Our expanding licensing business is based on our continued ambition to generate value from our intellectual property (IPR) portfolio.
We have a holistic approach to capital and resource allocation across the Company, where investments in services capabilities go hand in hand with investments in R&D and sales capabilities as well as in acquisitions and partnering.
Sustainability and corporate responsibility
Sustainability and corporate responsibility remained important during 2014, and we continue to lead the industry in working with sustainable development and responsible business practices to ensure positive triple-bottom-line (economic, environmental and social) growth in society. We focus our efforts where we can make the biggest difference. This involves improving the accessibility and affordability of mobile communication and improving energy performance and optimizing the use of materials in our products, solutions and in our own activities.
We are helping to address and minimize climate change and we are also tackling challenges and opportunities provided by urbanization for example through the Ericsson Industry & Society product portfolio. We are also emphasizing the importance of responsible business practice and employee engagement. We address growing challenges in areas such as responsible sourcing, health and safety, privacy and human rights with transparency and seek to build trust among our stakeholders. We have made visible progress during 2014, and will continue to ensure that technology is a force for positive, lasting change.
Long-term fundamentals
The long-term fundamentals in the industry remain attractive and the transformation journey that accelerated during 2014 will continue throughout 2015, and beyond. Going forward, I am convinced Ericsson has what it takes to generate sustainable value for shareholders and customers, and to continue to lead and shape the industry.
Hans Vestberg
President and CEO
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Technology and services leadership, combined with business expertise, global scale and skills, allows Ericsson to generate customer and shareholder value. The ability to transform is critical in the ICT industry (information and communication technology) and Ericsson strives to become a leader in this industry.
Over the past 100 years, Ericsson has continuously evolved its business portfolio, entered into new and adjacent markets, developed new products and solutions and adapted to new ways of working.
Ericsson reported four business segments in 2014: Networks, Global Services, Support Solutions and Modems1), each of which is responsible for a full profit & loss statement and for the development and maintenance of its specific portfolio of products, solutions and services.
The core assets of the Company are technology and services leadership and global scale and skills. Long-term customer relationships and the fact that Ericsson has remained in the forefront in a competitive, fast-moving market for more than 100 years, show the ability to deliver customer value. Approximately 40% of the world’s mobile traffic goes through networks delivered by Ericsson. The progress of the strategy implementation to extend the business to adjacent customer segments is visible in an increasing share of sales to non-operator customers.
| 1) | Development of modems was discontinued in 2014. |
The ambition is to grow faster than the market
Ericsson’s ambition is to grow sales faster than the market, which is estimated, by the Company, to grow at a compound annual growth rate (CAGR) of 3–5% from 2013 to 2017.
A growth faster than the market is based on excelling in the core business (“Radio, Core and Transmission” and “Telecom Services”) and establishing leadership in the targeted areas of IP Networks, Cloud, OSS and BSS, TV and Media as well as Industry and Society, while at the same time increasing the share of recurring revenues and intellectual property rights (IPR) revenues.
Best-in-class margins and strong cash flow
A market-leading position, global presence, regional and local competence as well as close customer relationships provide a solid foundation for profitable growth. A market-leading position is an enabler of the aim to create shareholder value by growing sales faster than the market and generating industry best-in-class margins and generating strong cash flows.
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A strong financial position, focus on profitable growth and operational efficiencies and the ambition to improve earnings in the core business remain the cornerstones of Ericsson’s financial ambitions, while continuously monetizing the footprint and making cost efficiency improvements. By industrializing, centralizing and automating, as well as leveraging a less capital intensive business mix, the ambition is to have strong operating cash flow development. A strong cash flow generation has enabled increased dividends, and also provided the financial strength to invest. Over the last five years, the annual total shareholder return has averaged 10%.
The financial strategy includes unlocking additional values through a global cost and efficiency program, reaching an annual run-rate saving of SEK 9 billion during 2017, compared to 2014. Efficiency measures include structural enhancements, supply efficiencies and an accelerating transformation of the service delivery organization.
TRANSFORMATION
Ericsson has always been at the forefront of transformation driven by ever-changing market conditions and major technological disruptions. This technological and financial capability to adapt and the will to change are major competitive strengths.
The ongoing market transformation is reflected in Ericsson’s business mix. Over the past 15 years, the business has evolved from being hardware-centric to becoming software-and services-centric. In 2014, 66% of Ericsson’s business was related to services and software, compared with 34% in 1999. With the share of software and services likely to continue to increase, Ericsson’s competitive hardware will still remain important as a performance differentiator.
Operator segmentation drives change in strategy
A clear customer segmentation is taking place, as operators take different roles in the transforming ICT market. Ericsson works closely with operators to support their different strategic ambitions, providing solutions and services that grow their business and meet their operational priorities.
In simple terms, network infrastructure consists of three layers: the network forms the base; the platforms represented by IT platforms and operations and business support systems (OSS and BSS) is the second layer, and the applications and services are at the top. Network performance, efficient processes and structured OSS and BSS implementations – which enable
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the proactivity, flexibility and performance that the business portfolio requires – have moved into focus, driven by high data volumes, demanding applications and new service offerings for consumers.
Operator segmentation will have a significant impact on Ericsson’s ambitions and strategies. The ambition is to identify where value can be created and growth can be captured. The transformation drives new requirements on the networks. This is a major reason as to why Ericsson has chosen a strategy to invest in the targeted areas of IP Networks, Cloud, OSS and BSS, TV and Media, as well as Industry and Society.
Ericsson sees three strategic operator segments emerging:
| • | Network developer |
| • | Service enabler |
| • | Service creator |
For all three operator segments, connectivity is, and will continue to be, the foundation for their businesses and the key factor for differentiation as user demand for performance of applications and app coverage, increases.
Network developer; Network performance
The operators who have chosen to address user demands through network performance and efficiency are the Network developers. They concentrate on the broadband experience through internet connectivity and communication services.
For these customers, the network performance is key, and Ericsson addresses operators’ demands with solutions for high performance network architecture. The Network developers use external service platforms to address the increased demand of applications and services, but their own ambitions are focused on high quality connectivity, cost-efficiency and on operating the network as a utility service with a good return on capital investment.
Service enabler; Capable network platforms
The operator segment, represented by the service enablers, focuses on establishing systems and platforms that enable new enterprise practices such as IT cloud services and business processes, as well as services to enrich the consumer experience. In terms of applications and services they use external service producers.
Their focus, on top of a well-performing network, is on billing, customer care and service assurance. Service enablers provide functionality on capable platforms that are easy for other industries to integrate into their respective business processes. They are capitalizing on mobile broadband growth by introducing new pricing and revenue models such as targeted offerings based on usage patterns, capacity, service bundles, multi-device plans and real-time features such as top-up plans. Ericsson addresses these needs with its OSS and BSS platforms and professional services offering which cater for the control and management of the operations and the identification of new revenue streams.
The large majority of the operators are thus represented by Network developers and Service enablers, but they only represent a smaller share of current total network investments.
Service creator; New services
The largest share of current investments can be related to the group of operators representing the Service creators, who have the ambition to create intelligent networks to allow the creation of new services. In addition to network performance and consumer experience, these operators take the lead in providing innovative new services.
They are active participants in the establishment of new ecosystems in adjacent markets, such as utilities, transport and public safety. Their strategic focus is broader than that of the other two roles as, in addition to connectivity and customer experience, they focus on expanding business in applications and services to increase the share of profits from other industries.
Service creators are increasing their investments in the development of new businesses in media and entertainment, cloud and IT services, machine-to-machine (M2M) communications and enterprise offerings, as well as in specific industry solutions. Still, they would not compromise on the IT systems part, such as the OSS and BSS platforms, to orchestrate the traffic flows.
The user experience is increasingly determined by the actual performance of applications or app coverage, and the network needs not only to provide access but to also safeguard and optimize the actual performance of the applications used. Ericsson’s strategy is to offer solutions that fit the demands of the Service creators and to develop these offerings to enable an expansion of market position and value creation, and to capture growth.
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As a market leader, Ericsson strives to lead industry transformation through mobility. In order to stay relevant in the future, and to generate further shareholder and customer value, Ericsson continues to implement the Networked Society strategy.
Ericsson’s ambition is to grow sales faster than the market which the Company estimates to increase by CAGR 3–5% (2013–2017). Growth is expected to be achieved primarily through organic growth, but also in combination with acquisitions and partnerships. The Company believes that the track record of moving into new areas and markets is reflected in the current market position and global scale. The strategy is to excel in the core business, establish leadership in targeted areas and expand business in new areas.
Excel in Core business
Ericsson’s two core businesses are “Radio, Core and Transmission” and “Telecom Services”
The Networked Society is Ericsson’s vision of a society where everything that benefits from being connected will be connected. The demand for increased mobility, better broadband and secure access to cloud-based services are the enablers of the Networked Society and thus the network infrastructure forms the foundation for business with operator customers.
Radio, Core and Transmission networks are based on industry standards which ensures global interoperability across all devices and all subscriptions. To enable value creation, the network is, and will be, based on a high-performance common infrastructure that offers seamless connectivity and delivers relevant services and content.
The rising number of smartphone subscriptions and changing user behavior drive the demand for better coverage, speed and capacity. Operators are responding by differentiating their services and adapting them to new business models.
Initially, Telecom Services business was highly dependent on the network infrastructure
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business and was dominated by the installation of network equipment. As competition in the operator market intensified and operators needed to focus on their core skills, Ericsson identified an expanded market opportunity in services. An evolution of capabilities was initiated, in order to match the market demand. Ericsson developed new business models, more independent of the network infrastructure business, and acquired small and medium-sized local service and consulting companies. The successful implementation of this business strategy resulted in a significant shift in business mix. In 2014, 42% of sales was derived from services.
Establish leadership in targeted areas
To capture growth, Ericsson will continue to reallocate capital and resources to areas beyond its core business. The targeted areas where the strategy is to establish leadership positions include IP Networks, Cloud, OSS and BSS, TV and Media as well as Industry and Society.
Ericsson is expanding into targeted areas because they:
| • | address markets that are expected to grow faster than the core business |
| • | are adjacent to the core business |
| • | have a significant share of software and services |
| • | have a larger share of recurring sales and tie up less working capital. |
Through solutions, network competence as well as service and business capabilities, Ericsson offers tools for its customers to differentiate themselves.
The Company will also expand its market exposure to new customers by re-using products, solutions and services skills in selected industries. Ericsson believes it can generate value by targeting customers in new industries, either because they have similar business models to telecom operators, or gain from mobile broadband and the larger opportunity for connectivity. Ericsson believes mobility is helping industries reinvent the way they create value and today, the Company engages directly with customers in three selected industry verticals – utilities, transport and public safety. The ambition is to address these adjacent industry verticals in a focused manner, using the existing product offering, core technology expertise, network competence and skills.
Expand business in new areas
In order to stay in the forefront, the long-term strategy also includes expanding into new areas. The ambition is to develop new areas into value creative businesses with cutting-edge offerings that are competitive and profitable.
Ericsson selectively invests in, explores, expands, and may also discontinue, business in new areas. In line with the strategy, the modems development was discontinued in 2014, and the capital was reallocated to areas which are expected to have stronger growth potential.
Managing the transition
In the transformation process, Ericsson will remain true to its core values of professionalism, respect and perseverance. The ability to implement the strategy depends on the Company’s ability to leverage on its current assets namely the technology and services leadership and its global scale and skills.
Ericsson believes that the strategy to become a leader in the ICT industry allows the Company to be in the midst of the market transformation as telecom, IT and media come together and form the foundation for the Networked Society.
The strategy implies that the Company needs to make progress on the present and the future at the same time, thus both in the core business and in the targeted areas.
The ability to implement the strategy is key to staying relevant and will be reflected in future earnings development and in the ability to create shareholder value.
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Ericsson is a market leader in its core business areas. The strategy is to excel in the core business, to improve earnings and to continue to lead and innovate. The ambition is to leverage on its installed base and make further investments in R&D to maintain a strong position. The core business areas are called “Radio, Core and Transmission” and “Telecom Services”.
CORE BUSINESS
RADIO, CORE & TRANSMISSION
In Radio, Core and Transmission, Ericsson supports its customers in the new ICT landscape by leveraging the advantages of technology leadership, a position which has resulted in a competitive portfolio of radio networks and core networks. Ericsson continues to invest in new capabilities to support customers in the transformation of their networks.
The offering includes high-performance networks that meet demanding customer requirements. The network equipment market which Ericsson is exposed to is estimated by the Company to increase sales by CAGR 2–4% (2013–2017).
The strategy is to excel with a leading portfolio for high-performance networks, by building on scale and operational efficiency to
| • | contribute to the best user experience for consumers |
| • | maximize business innovation and business efficiency for customers |
| • | maximize earnings for Ericsson. |
Ericsson wants to remain number one in solutions for operator networks and lead the transition to the network architecture that will enable the Networked Society.
Maintain performance leadership
By the end of 2020, Ericsson estimates that the number of mobile subscriptions will increase to 9.5 billion (from 7.1 billion in 2014) and that around 55% of the traffic that users will generate will be video. High network performance is a key competitive advantage when offering solutions to operators in their transition from circuit-switched to IP-based networks.
The capability to provide high-performance networks enables Ericsson to compete on quality and value, which is often reflected in a price premium. The Company believes that, with a user-centric approach, it can meet operator expectations on network performance, regarding speed, quality, personalization, simplicity and fast response time.
Radio
Over time, Ericsson believes that, even if the strategy implies that the business will comprise large infrastructure projects, capacity upgrades and the number of small-cell projects, which are an effect of network densification and indoor coverage build, are expected to increase as a share of total revenues.
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The increasing demand for small-cell solutions is based on arguments such as spectrum efficiency, reduced total cost of ownership (TCO) and improved user experience.
The key priority is that the software solutions and the functionality in the small-cell environment is the same as in the macro network, to allow for a viable business case for the operator. To meet this demand, Ericsson offers integrated solutions that enable the operator to implement an intelligent heterogeneous network that uses the available spectrum efficiently. This network combines small-cell networks and operator Wi-Fi networks with a densified and improved macro network. The result is a dense multi-layered network, where traffic flows seamlessly. Capacity is where the user needs it, especially indoors where an estimated 70% of mobile traffic is generated.
Transmission
Ericsson also offers backhaul solutions that match operators’ demands on cost-efficiency, scalability with low complexity, and that are resilient to failures with fast recovery times. Ericsson’s backhaul solutions use technologies such as microwave and optical fiber transmission, which are the major transmission solutions available to meet the capacity requirements set by the increased LTE and video traffic. Currently, microwave is the dominating transmission technology for mobile backhaul worldwide, with major arguments being that it enables cost-efficient and fast roll out of mobile broadband. The Company expects the share of microwave backhaul to remain high in the future, connecting around 50% of all radio sites in 2020.
Core network
The IP-based core network portfolio allows operators to use their complete network as a single business resource as opposed to the fragmentation and complexity of most legacy networks. Operators continue to evolve their communication services, by implementing solutions such as IMS, which is also used for providing voice over LTE (VoLTE).
Preparing for the next generation; 5G
The 5G mobile network is an evolution of the LTE networks, but with new frequencies, technologies and expanded business opportunities. 5G implementation in commercial mobile networks is expected in 2020, but Ericsson has already achieved speeds of 5 Gbps in live, over-the-air demonstrations. The next-generation network, 5G, addresses the relentless growth in mobile data demand, and is an efficient enabler of tailored mobile accesses to multiple industries.
With 5G, the network performance will be further enhanced to support demands on low latency in real time applications.
Ericsson is at the forefront of the development of this global standard.
An important aspect of the next-generation mobile technology, is that it is also an enabler of increased sustainability and improved efficiency in industry and society. The new global standard will be flexible and reliable for multiple industries and use cases.
CORE BUSINESS
TELECOM SERVICES
Ericsson wants to be an end-to-end business partner for network operators and other customers as the Networked Society becomes a reality. The global scale, skilled workforce, business understanding and extensive experience of managing carrier-class projects and multi-vendor networks make Ericsson the largest telecom services provider in the world, supporting operators in creating competitive, attractive and appealing offerings, while providing managed services to networks that serve more than 1 billion subscriptions worldwide. Ericsson addresses a telecom services market that is estimated by the Company to show a sales CAGR of 4–6% (2013–2017).
Ericsson pioneered managed services. The Company had a first mover advantage and the possibility to build scale, and continues to be the undisputed leader. The significant experience gained through 15 years in the managed services business has enabled the buildup of a best-practices pool. This is a significant competitive advantage enabling the Company to provide sophisticated methods, tools and processes as competitive capabilities for operators. Multi-vendor capability means that services can be provided to customers regardless of which vendor network they have as an installed base. The Company has different sets of skills covering everything from network equipment to
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software-support processes and the expertise required to design and manage end-to-end solutions ranging from mobile access networks and OSS, to service deployment platforms and BSS. Ericsson wants to further strengthen the number one position in telecom services and be a leading provider of professional services in ICT. The strength of the services business also proves the value of combining local capabilities with global scale.
Telecom services evolution
The current core offerings are directed to network operators. It includes professional services and network rollout. Professional services include: consulting and system integration (CSI), managed services, network design and optimization services and customer support. IT managed services are also included in the portfolio. Ericsson’s ambition is to simplify the management of every element in the operator network. This includes not only access and core, but also IT systems and the applications and services layer. The Company believes that any area in the operator network is addressable, but the business opportunity depends on the maturity of the network and the operations, the geographical location and the competitive situation of the operator.
Services-led transformation
With everything being connected, the demand for professional services increases.
The Ericsson transformation is expected to be led through these types of services. The strategy is to reuse telecom services capabilities and scale to grow in other industry domains and in new areas. This implies industrializing, globalizing and introducing new processes, methods and tools, so that Ericsson’s customers can deliver high performance services to their users.
Ericsson is also strengthening its CSI competences further. CSI specialists focus on helping operators transform their business strategy and processes to improve efficiency, thereby creating a competitive advantage. Analysis, integration design, product customization and solution management are usually part of the offered scope of CSI services.
The demand for consulting and integration is rapidly advancing as the Company builds skills and scale to expand the offering to become a trusted transformation partner in every part of the operator’s network.
As the network transforms, its complexity increases. With the increased complexity, the need and demand for professional services offerings – including consulting and systems integration, network design and optimization as well as managed services – has evolved. Network design and optimization is currently one of the fastest growing segments within professional services because of this complexity.
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CORE BUSINESS
BUSINESS MIX AND CYCLES
This section describes the business mix and business cycles of the core business.
Business mix in mobile infrastructure
The profitability in Radio, Core and Transmission depends on scale and the sustainability of the market leadership but also on the existing business mix. The combination of high quality hardware and software-based functionality as well as services offerings is Ericsson’s main competitive advantage in enabling high network performance.
Despite a decreasing share of total revenue, hardware remains a core element of the strategy. The Company strives to gradually increase software sales as the core business evolves and this, in combination with continuous operational efficiency improvements, will also affect the profitability development. In 2014, software sales account for around 40% of total software and hardware sales.
Software is an important link to new functionality and to high-performance networks both of which are key to capturing future growth opportunities, and enabling profitability improvements. Ericsson is leading the transformation of pricing models in the telecom industry by adapting the software pricing model to standard ICT and having an evolved transparent business model for infrastructure software sales. The Company believes that the way software is priced is critical to profitability, and the model will also facilitate customers’ cost predictability through improved transparency.
Business cycles in mobile infrastructure
The most traditional business model is in network infrastructure with its embedded software; delivering and rolling out physical networks including all necessary hardware and software. When Ericsson builds coverage there is a large share of hardware, and the project often includes network rollout services. The initial buildout or rollout phase is capital-intensive and has a lower-than-average gross margin. However, when the network is up and running and demands for capacity expansions arise, profitability increases, driven by an increased share of software sales and higher-margin hardware through network densification. In the expansion phase, the network rollout services, which were essential in the rollout phase, make way for professional services.
Business mix in telecom services
Large network-infrastructure projects were, and will continue to be, a key element of Ericsson’s business. When building network coverage across one or more geographical areas, the offering often includes network rollout services. A larger share of network rollout, as a share of total services sales, is usually dilutive to profitability. Thus, balancing the business mix between network rollout and professional services – customer support, network design and optimization, consulting and systems integration (CSI), network managed services – is central to the profitability.
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Business cycles in managed services
The managed services business model is different from the other services offerings as Ericsson takes over aspects of a customer’s business operation as a long-term commitment, over several years. The business model includes three phases of which the initial phase, the transition, is coupled with lower profitability, as it involves significant costs up front when staff and expertise are transferred from the customer to Ericsson. In the second phase, the transformation, Ericsson introduces its global processes, methods and tools and implements a global delivery model. In the third phase, Ericsson focuses on optimization and industrialization by simplifying, implementing and consolidating resources, processes, methods and tools to allow for improved profitability.
The Company has reached a good balance of contracts in the transition, transformation and optimization phases – with currently about 70% in the optimization phase – which have a beneficial effect on earnings and cash flow. Over time, the Company has advanced on the learning curve, which means that global synergies can be obtained, and thereby the initial phases can be shortened. This limits the negative impact on cash flow in the transition phase when going into new contracts.
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Global presence, software skills as well as the heritage of end-to-end and multi-technology expertise form a sound foundation for Ericsson’s business in targeted areas. The ability to implement the strategy depends on the capabilities to transform the targeted areas to value creative core businesses in the long term.
To remain relevant in the future market, Ericsson is investing in five targeted areas: IP Networks, Cloud, OSS and BSS, TV and Media as well as Industry and Society.
The Company intends to implement the strategy by building on existing capabilities in the core business and leveraging its technology and services leadership combined with global scale and skills.
The objective is to establish top three leadership positions in these targeted areas.
Ericsson already has a number one position in some of these areas, such as in OSS and BSS and in IPTV and media delivery, and intends to further strengthen the offering.
The targeted areas combined represented a market of USD 110–130 billion in 2013, with an estimated sales CAGR of about 10% (2013–2017).
The targeted areas thus have a higher growth rate than the core business. They also have some characteristics that are important – a high degree of software and professional services, more recurring revenues and less working capital. Since the target areas are adjacent to the core business, Ericsson believes that its global services expertise and software skills form a sound foundation for the business in these areas.
The introduction of new pricing models for software sales, with an up-front payment of a permanent license, usually supplemented by a support and maintenance contract is expected by Ericsson to imply a higher degree of recurring revenues.
The targeted areas play a significant role in the evolution of customers’ networks to match the demands of the Networked Society. As the targeted areas require a high degree of services and have a high degree of software, they also support the development of the business mix to one where services and software clearly dominate.
Currently, a majority of the total business in targeted areas relates to services. Approximately half of the sales growth up until 2020 is estimated to be derived from the targeted areas. Income from these areas is expected to be accretive to operating margin over time.
Ericsson believes the combined strength of the product and professional services portfolio will be a competitive advantage.
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TARGETED AREA
IP NETWORKS
Ericsson believes it can build on a leading position in mobile backhaul and packet core networks to grow the footprint in IP Networking for operators, where the Company wants to take a top three position. The market for IP Networks is expected to grow sales by CAGR 3–5% (2013–2017).
The market for IP Networks is driven by technology disruption and the prevailing IT paradigm. An evolved network architecture has become a critical enabler of the fast introduction of new services and of the efficient handling of the increasing amount of data traffic. The legacy telecom networks were designed to deliver a limited number of services, such as voice and text messages, while the new IP-based multi-service networks create opportunities for operators to unlock the full potential of mobility, video and the cloud. It allows for increasingly virtualized network features, adding flexibility and paving the way for cooperation with new partners.
The network needs to be aware of consumers, services, devices, location in order to scale bandwidth and connections, while being much simpler to operate and maintain. This is enabled through unified management and orchestration including capabilities such as service provider software defined networking (SDN) and service awareness. With the support of Service Provider SDN, operators can orchestrate network resources on different layers for different purposes under the same management system.
IP networking solutions and Service Provider SDN are the key enablers to building a future network that is smart, simple, scalable and capable of delivering superior performance.
TARGETED AREA
CLOUD
Ericsson intends to use its network experience and competence to create compelling cloud solutions and strives to be number 1 in operator telecom cloud. The strategy includes the development of a broad range of offerings.
The IT paradigm and technology disruption drives the demand for cloud solutions to enable more flexible access to real time services. Ericsson strives to ensure that products are ready for deployment in any type of cloud environment, and that applications are suitable for moving to virtualized environments.
Network functions virtualization (NFV) offers a way to rationalize and simplify operations as well as speed up innovation, primarily for parts of the core and transport networks. The technology enables the network to allocate resources to IP-based services and applications according to capacity demand. Through NFV, combined with software defined networking (SDN), the hardware and software are decoupled and the functionality is virtualized.
An architecture built on cloud allows the operator to instantly deploy, modify and scale services and applications, and it enables an easier adaption of network characteristics and resources to serve the dynamic and real-time nature of new services. The virtual infrastructure is thus extended beyond the traditional computing and storage resources.
NFV and SDN together open up the opportunity for operators to implement services more quickly and flexibly and to reduce opex and to some extent capex.
Ericson recently added telecom cloud transformation as a CSI (consulting and systems integration) offering to enable operators to provide high-performance services in the virtualized network.
In 2014, Ericsson acquired a majority stake in Apcera to strengthen the cloud offering for the Enterprise IT market and entered into partnership with Guardtime to deliver secure clouds.
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TARGETED AREA
OPERATIONS AND BUSINESS SUPPORT SYSTEMS (OSS AND BSS)
Ericsson has a complete end-to-end OSS and BSS software offering and consulting, systems integration and IT managed services capabilities. OSS and BSS systems allow operators to manage the network, provide high-quality user experience and quickly introduce new services and charge for them.
The fragmented OSS and BSS market is expected by the Company to increase sales by CAGR 5–7% (2013–2017). Ericsson believes that its software expertise and real-time network experience are competitive advantages in this market.
The ambition is to extend the installed OSS and BSS base while also expanding the service offerings for transformation.
The OSS and BSS software offerings are based on a modular architecture, which means that the products are configurable and easily integrated and thereby also less expensive to maintain. Focus is on process-oriented, pre-integrated software suites to differentiate the offering and to speed up time to market.
Ericsson supports the transformation of OSS and BSS through these software suites combined with consulting and systems integration services, so that operators can adapt to rapidly changing and competitive markets. Through simplified processes and better business efficiency, Ericsson helps operators reduce total cost of ownership.
Most importantly though, OSS and BSS transformations can provide competitive advantages for operators through better targeted offerings to their customers, better user experience and improved customer service.
In Ericsson’s role as a consolidator of operators’ OSS and BSS systems, scale is an important foundation for generating profitability.
As the number of connected devices increases, so does the number of individualized subscriptions and price plans, and this increase will require real-time processing. Based on Ericsson’s real-time data expertise, its charging and billing software suite allow for quick introduction of new pricing models and offerings that enable value creation.
The software suite allows operators to provision, and charge for, the user services in an efficient way. It also offers operational efficiency through efficient data monetization including charging and billing, policy management and actionable insight via telecom analytics.
The OSS system provides the foundation for an integrated solution for network services and over-the-top (OTT) services, as well as big data and analytics. This means that the OSS and BSS solutions enable the operators to manage user interactions and capitalize on the revenue streams that data generates, through offering efficient management of the operators’ customers as well as of their networks.
The software suite and related services match the key operator success factors of user experience, business efficiency and innovation.
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TARGETED AREA
TV AND MEDIA
Ericsson’s ambition is to be the transformation partner of choice as the TV and Media industry undergoes change. The connectivity and capability of broadband is redefining the user, business and technology aspects of digital entertainment.
Ericsson has over 20 years of experience of content creation, exchange, distribution and delivery of TV. Ericsson expects the TV and Media market to have a sales CAGR of 11–13% (2013–2017).
Ericsson aims to enable the evolution of TV by creating innovative solutions that enable content owners, broadcasters, TV service providers, and network operators to efficiently deliver, manage and monetize new TV experiences. The Company does this by combining a product portfolio that spans the TV value chain, complemented by systems integration and broadcast managed services.
The offering includes a software portfolio of TV platforms, end-to-end video delivery network solutions for video compression that enable new consumer services such as digital TV, High Definition (HD) and 3D.
Ericsson launched the Ericsson MediaFirst TV Platform in 2014, a software-defined platform for the creation, management and delivery of next generation Pay TV. It is an end-to-end cloud-based platform for TV service providers.
Ericsson’s media delivery network (MDN) solution empowers IP network owners with a suite of tools to efficiently manage video traffic, and ensure user experience while enabling new revenues. With network control and efficiency from content to consumer, it positions operators for fast time-to-market and monetization.
The broadcast market is in the midst of a technology disruption, caused by the over-the-top (OTT) companies, and the need for operational efficiency, which drives demand for outsourcing of broadcast services and for IP transformation. Ericsson has expanded its established model for network and IT managed services to deliver broadcast services. These services capabilities enable broadcasters to make significant capex and opex savings through automating processes and standardization in processes, methods and tools, while applying Ericsson’s global delivery model and services capabilities. Ericsson assumes responsibility for technical platforms, which means that the broadcaster can reduce time to market and minimize business continuity risks.
Ericsson’s solutions address the demands of the traditional broadcasters, as well as those of new entrants. Both customer segments face the challenge of adapting to a fast-changing and complex technological landscape. The combination of products and consulting, systems integration, training, and broadcast managed services allow Ericsson to advise, guide, support, implement and manage its customers’ transformation in the evolution of TV.
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TARGETED AREA
INDUSTRY AND SOCIETY
There is a high demand for connectivity and intelligent systems in markets such as utilities, transport and public safety. Ericsson believes that many of the demands in these market segments, which it refers to collectively as “Industry & Society”, can be met with the Company’s existing portfolio.
Ericsson’s capabilities, combined with its proven record of commercializing advanced ICT solutions, provides a solid foundation for bringing innovative capabilities into industry verticals while providing efficiencies of scale.
The ambition is to strengthen the number one position in solutions for operators to become a leading professional services provider in three adjacent selected industry verticals; initially utilities, transport and public safety.
The rapid uptake of connected devices and self-service applications is changing the way companies do business. The mobile network is fundamental to this development. Under the designation of Industry and Society, the industry verticals of utilities, transport and public safety play an important role in Ericsson’s strategy to grow in adjacent industries, reusing and extending the current portfolio of both products and services.
These selected industries are rapidly transforming driven by mobility and evolving technologies entering the market, such as smart grids, intelligent transport systems and multimedia services. The technology shifts offer new business opportunities for Ericsson.
Ericsson’s technology and services leadership form the foundation on which to expand the business by addressing new customers across the selected industry-vertical industries. The Company brings innovative thinking, a deep understanding of a wide variety of communications technologies and experience in designing, deploying and managing services globally for the Networked Society.
One of the innovative offerings is the Connected Vehicle Cloud which targets the global automotive industry’s existing and future demands for scalability, security and flexibility in the provisioning of connected car services to drivers and passengers.
The selected industries are also facing increased demand on sustainability and efficiency – demands that Ericsson can address by leveraging its technology leadership in its core business.
The telecom network and related services that Ericsson offers, including network infrastructure and professional services, meet communication needs that the industry verticals require, and helps to fulfill requirements of high reliability and high speed. The need for broadband connectivity is becoming critical, and, in Ericsson’s view, proprietary networks are no longer necessary to cater for the vast needs in specific industries.
The resources in technology, consulting, systems integration and managed services on a global scale enables Ericsson to address adjacent industries. The selected industries can benefit from Ericsson’s mobility expertise and services innovation, while the Company expands its footprint into new high-growth markets and brings disruptive change into the rapidly transforming industries.
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Ericsson reallocates capital and resources to support the strategy. Investments in services capabilities goes hand in hand with investment in product development, sales capabilities and in acquisitions and partnering.
Ericsson has always been a company driven by innovation – in technology and business. The Company’s long-term leadership in technology and services is a result of continuous efforts to invest in the ability to deliver customer value and to be relevant in the future.
R&D investment
R&D investments are the foundation for maintaining a technology leadership position. Investments in R&D keep the product portfolio and customers in front of a rapidly transforming market and to safeguard, secure and improve technology leadership. Ericsson will continue to invest a substantial part of R&D in the core area of Radio, Core and Transmission, to further enhance the capabilities in areas such as small cells and 5G. R&D investments in software are significant, as mobile networks are increasingly software-centric.
Ericsson will prioritize R&D investments in targeted areas to win technology leadership positions in these areas. R&D investments in the targeted areas will help the company expand the positions in areas such as IP Networks and Cloud.
Continuous focus will also be on finding better ways to do things internally, including how to further improve R&D agility. Lean and agile workflows in R&D has enabled Ericsson to bring innovations faster to the market and to increase operational efficiency.
During 2014, Ericsson opened its first ICT center in Sweden where R&D engineers can work beyond borders more easily and efficiently, bringing innovation and providing industry-leading cloud-enabled technology faster to the market. Two additional ICT centers are expected to be opened in 2015 – one in Canada and another in Sweden.
Investment in services capabilities
In Telecom Services, the global knowledge base enables Ericsson to develop new solutions that can be reused to offer benefits to customers. Locally, in each region, Ericsson professionals work with customers to develop innovative, scalable solutions. Best practices are shared across regions, boosting quality and efficiency. When a successful customer solution is proven in one region, it can be rolled out globally. Ericsson has invested in common global processes, methods and tools to enable synergies and efficiency gains to safeguard the global scale advantage.
Acquisitions and partnering
Ericsson has made specific acquisitions to strengthen the offerings in the targeted areas. In core areas, especially in Radio, Core and Transmission, the acquisition activities have mainly been related to consolidation activities and to create synergies to extend the leadership position. The strategy to establish leadership in targeted areas includes investing to accelerate growth and to improve Ericsson’s competitive position through small bolt-on acquisitions and strategic partnering agreements.
The ambitions of M&A and partnering activities are to fill portfolio gaps, to improve scale and skills and, above all, to strengthen the ability to create value. The activities address both product and services companies. In 2014, Ericsson invested in companies like Red Bee Media, MetraTech and Apcera and also partnered with Guardtime in the area of secure cloud.
Investment in sales competence
Investment in new competence is required for new solutions in the targeted areas, not only for R&D but also in sales resources as well as in service delivery resources to allow for economies of scale.
In 2014, Ericsson increased investments in sales capabilities particularly for Cloud and IP. Industry and Society customers were first addressed in three regions to learn how to sell and deliver in this customer segment. After the initial phase, sales processes and ways of working are reused in other regions to get scale.
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Licensing of intellectual property rights (IPR) contributes to a fair return on R&D investments and is a key element in Ericsson’s growth strategy.
The royalty-based IPR (Intellectual Property Rights) licensing business is a key element in the strategy to capture growth. Higher IPR revenues have an accretive impact on profitability.
Aligning with the strategic direction and ambition to grow faster than the market, these revenues are expected to continue to increase. The IPR strategy is to enlarge IPR licensing revenues by expanding the technology licensing portfolio to cover other products and by broadening Ericsson’s customer base beyond handset manufacturers and into new industries.
The Company has created a licensing portfolio, representing the value of technology knowhow and R&D. The portfolio includes both technology and patent licensing. The defensive value of the IPR portfolio protects the sales of Ericsson’s products and services as cross-licensing agreements are signed with other major IPR holders. The offensive value allows Ericsson to commercialize and obtain a fair return on the IPR portfolio. Both these values are direct returns of the investments made in R&D. Over the past five years, annual R&D investments have been on average 33 billion and revenues from the IPR licensing business has increased over time but decreased slightly in 2014, to SEK 9.9 billion.
In technology licensing, Ericsson provides specifications to proprietary technologies such as different interfaces, while the patent licensing includes giving access to essential patents for different technology standards.
Ericsson complies with its commitment, to standardization bodies, to license essential patents on fair, reasonable and non-discriminatory (FRAND) terms, which implies that accumulated costs are kept at a reasonable level. Ericsson’s view is that owners of essential patents should be compensated proportionally to their technology contribution to the standard. An example of a cross-licensing agreement is the multi-year license agreement between Samsung and Ericsson. The agreement covers patents for 2G, 3G, and 4G standards for networks and handsets.
Ericsson’s innovative portfolio is the result of the work of 25,000 R&D engineers. Most of the patents developed within the R&D organization are in wireless technology. Ericsson is involved in industry-wide standardization processes regarding mobile technologies and standards. By addressing the issue of spectrum by improving spectral efficiency with new technologies or features, and taking part in the industry decision-making regarding new suitable frequency bands, Ericsson has helped to render the development of many new technologies and patents. With more than 37,000 patents granted, the Company has one of the industry’s strongest patent portfolios.
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The strategic direction is to:
Excel in core business
Radio, Core and Transmission and Telecom Services.
Establish leadership in targeted areas
IP Networks, Cloud, OSS & BSS, TV and Media and Industry & Society.
Expand in new areas
with future possibilities and growth.
To best reflect the business focus, Ericsson reported four business segments 1) in 2014
Radio, Core and Transmission, as well as IP Networks and Cloud report into Networks, while Telecom Services report into Global Services. The product and software deliveries of OSS and BSS, TV & Media, report into Support Solutions, while services related to these areas report into Global Services. Industry and Society reports into Global Services. Many of the areas therefore have elements of both product and services.
Each business segment contains various shares of sales from the targeted areas. Sales in targeted areas showed a growth of more than 10% in 2014.
| 1) | Modems segment did not contribute material revenues, as development of modems was discontinued in 2014. |
Read more in the Board of Directors’ Report on page 38.
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SEGMENT NETWORKS
Ericsson provides the network infrastructure needed for mobile and fixed communication, including 2G, 3G and 4G radio networks, and IP core and transport networks.
Within segment Networks, the strategy is to lead the radio evolution, grow IP networking and transform to cloud core.
Networks delivers products and solutions needed for mobile and fixed communication, including 2G, 3G and 4G radio networks, IP and transmission networks, core networks and cloud.
The main offerings include:
| • | The multi-standard RBS 6000 radio base station supports all the major mobile technologies including GSM/EDGE, CDMA, WCDMA/HSPA and LTE in a single cabinet. |
| • | The IP and transmission solutions are based on the SSR 8000 portfolio. The SSR 8000 is a high-capacity platform that improves network performance and supports service differentiation in fixed and mobile networks. The momentum for the multi-application router, has continued with 146 contracts signed since its launch in December 2011. |
| • | The Ericsson Blade Server platform includes functionality for handling network control in fixed and mobile core networks. The IP Multi-media Subsystem (IMS) solutions enable operators to offer communication in new ways, such as Voice over LTE (VoLTE), high-definition video calling and conferencing, multi-party chat with presence information, and screen sharing, while reducing costs. IMS enables Voice over LTE (VoLTE), High Definition Video and the Ericsson Cloud System. |
| • | The Ericsson Cloud System is a platform for providing cloud services and to enable virtualization of network functions according to NFV, and where Service Provider SDN enables the distribution of the virtualized functionality. |
| • | Optimized transmission/backhaul products includes microwave and optical transmission solutions for mobile and fixed networks. The transmission network constitutes the links between the core network and access nodes. |
Networks’ major business models have so far been based on network coverage and network capacity expansions and upgrades. The revenue mix consists mainly of hardware and software. Gross margins are affected by the business mix between sales of upgrades and expansions and coverage or new build-outs. Network coverage build-out, which is mainly hardware related, is to a large extent done on site, supported by Ericsson’s network rollout services, while upgrades and expansions usually involve software and professional services, and are often delivered remotely. The Company is transforming its business model to be more software based, with an increasing share of royalty and license-based revenues.
GSM/EDGE technology has by far the widest reach today, covering more than 85% of the global population. The areas yet to be reached by GSM/EDGE are in some countries that are sparsely populated. Demand for WCDMA/HSPA is driven by increased user demand for internet access, the growing affordability of smartphones and regulatory requirements to connect the unconnected. In terms of capacity and demand for superior network performance, mobile data traffic continued to grow rapidly in 2014. The rising number of smartphone subscriptions is a key driver for mobile data traffic growth, together with the fact that users are consuming more data per subscription – mainly driven by video. Total smartphone subscriptions reached 2.7 billion during 2014, and the number of subscriptions for mobile PCs, tablets and mobile routers reached 300 million. The majority of mobile broadband subscribers are connected using 3G/WCDMA networks, but increasing numbers are gaining 4G/LTE access. Ericsson expects LTE to keep expanding from 400 million subscriptions in 2014, reaching around 3.5 billion in 2020.
2G/GSM/EDGE networks are still an important part of the ecosystem and a complement to 3G/WCDMA/HSPA and 4G/LTE coverage.
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SEGMENT GLOBAL SERVICES
Ericsson’s approximately 65,000 services professionals around the world deploy, operate and evolve networks and related support systems. Global Services includes professional services and network rollout.
The business strategy within Global Services is to extend and excel in the core business: network roll-out, customer support and managed services, while growing the business in consulting and systems integration as well as in IT managed services and broadcast services.
The Company’s global set of processes, methods and tools are major competitive advantages and support the strategy to benefit from the global scale in targeted areas and especially in broadcast services and media services and in the selected industry verticals of transport, public safety and utility industries. The telecom services business, represented 43% of net sales in 2014 (43% in 2013). Within Global Services, Managed Services and Consulting & Systems Integration continue to drive growth.
Through approximately 65,000 services professionals and four global service centers, which offer a universal approach to managed services based on years of innovation and global best practice, Ericsson deploys, operates and evolves networks and related support systems. The Company delivers managed services, product-related services, consulting and systems integration services and broadcast services.
The ambition is to support operators to improve their revenues, increase their operational efficiency and to transform their networks. Ericsson strives to create value by combining technical, services and customer experience expertise.
The offerings include:
| • | Network managed services for designing, building, operating and managing the day-to-day operations of the customer’s network or solution; maintenance; network sharing solutions; plus shared solutions such as hosting of platforms and applications. Complex issues are handled, such as convergence, quality and capacity management, so that operator resources can focus on strategy, marketing and customer care. |
| • | IT managed services, whereby Ericsson assumes responsibility for aspects such as application life-cycle management, application development, quality assurance and day-to-day operations and maintenance for both applications and infrastructure. |
| • | Broadcast services for TV and media companies. Services include responsibility for technical platforms and operational services related to TV content management, play out and service provisioning of a TV broadcaster’s business. Ericsson has the capability to consult, integrate and manage business operations for TV and media, reusing skills, methods and tools from network managed services. Broadcast services help to enhance the efficiency of the business operations of content owners and broadcasters, providing significant operational and capital savings through assuming responsibility for technical platforms, enabling speeding time to market and minimizing business continuity risks. The investment in Red Bee Media in 2014 further enhanced the broadcast services capabilities. |
| • | Product-related services: Services to expand, upgrade, restructure, or migrate networks; network-rollout services; customer support; and network optimization services. Network design and optimization services ensure that networks can handle high levels of data traffic while maintaining service quality and user experience. |
| • | Consulting and systems integration (CSI): technology and operational consulting; integration of multi-vendor equipment; design and integration of new solutions and transformation projects. CSI services assist operators in driving business transformation and ensuring competitiveness while facing the challenges of this new environment. Ericsson is expanding the established model for network and IT managed services to adjacent areas such as cloud services, TV and media, and selected industry verticals. The Company also offers services related to the planning, building and optimizing of OSS including service fulfillment and service assurance. |
| • | Services for Industry and Society; reusing existing portfolio for non-telecom customers in the areas of utilities, transport and public safety. |
The product mix is divided between network rollout services and professional services of which managed services is a significant part. The proportion of network build outs as well as managed services deals in the transition phase affects the gross margin of Global Services. As sales are based on various services offerings the challenge is to manage and optimize cost of sales. R&D investments are limited. Unlike the professional services business, rollout services of extensive networks are working-capital intensive.
Each year, Ericsson manages more than 1,400 major projects for network build, expansion or migration for all major standards of mobile and fixed networks worldwide. On average, 100 of these are large, complex turnkey projects. The Company provides managed services to networks that serve more than 1 billion subscribers in approximately 100 countries. These networks are typically multi-vendor, multi-technology environments, with more than half the equipment from non-Ericsson sources.
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SEGMENT SUPPORT SOLUTIONS
The Support Solutions segment focuses on software for operations and business support systems (OSS and BSS), as well as TV and media management, and m-commerce.
The portfolio is designed around measurable performance improvement in an operator’s business processes, with software that is scalable, configurable and provides end-to-end capabilities.
The offerings includes:
| • | Operations support systems (OSS) and business support systems (BSS) solutions for telecom operators. The growth of mobile broadband is leading operators to develop their OSS and BSS solutions in order to monetize the increasing amount of data traffic that flows in the networks, while at the same time managing the increasing complexity of networks and services. OSS software solutions; support operators’ management of existing networks and the introduction of new technologies and services, through software products for service enablement, fulfillment and assurance as well as telco analytics, orchestration and cloud management. Business Support Systems (BSS) handle revenue management (prepaid, post-paid, convergent charging and billing), mediation and customer care solutions. BSS manages how services are delivered and paid for. Products for revenue assurance and billing and revenue management help maintain customer relationship and keep track of revenues |
| • | TV & Media solutions: a suite of standards-based products for the creation, management and delivery of evolved TV experiences on any device over any network. Ericsson’s TV platforms – enabling TV service providers to deliver on the TV Anywhere future – are powering more than 110 TV services for over 18 million subscribers. Through the acquisition of Tandberg Television in 2007 and Microsoft’s Mediaroom in 2013, Ericsson is now the leader in the video compression IPTV and business, with multi-screen solutions for TV |
| • | M-Commerce; solutions to enable mobile financial services for domestic and international money transfer, payment transactions and services between mobile subscribers and operators and other service providers. |
| • | Industry and Society; solutions for the industry and society market, Ericsson adapts existing solutions for new applications. The service enablement platform has been used to create the Connected Vehicle Cloud and billing-as-a-service products are reused for connected devices applications. |
Sales are dominated by software and the business is R&D-intensive, with limited working capital. In order to be profitable, continuous centralization and harmonization of R&D is important in order to keep the product portfolio together. Ericsson is executing on recent acquisitions, while transforming the business model from one that is based on a revenue intake from traditional telecom software licenses to one that puts emphasis on recurring software sales based on subscription-base software as a service (SaaS) offerings.
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REGIONAL DEVELOPMENT
Ericsson is a global company, with customers in more than 180 countries. The Company has been present in many countries, such as China, Brazil and India, for more than 100 years.
The expertise and local knowledge gained through working closely with customers create global scale, which is an important pillar of the business success.
It is important to find a beneficial mix between different businesses and regions in order to secure a good balance between growth and profitability. The differing nature of the businesses as well as regions reflects Ericsson’s global position and the ambition to be regionally diversified is part of the overall strategy to mitigate the impact from imbalances and dependencies.
Ericsson has ten geographical regions which vary in size and where the maturity of the operators and the markets differ. The solutions-based go-to-market approach is built on close cooperation between business units and regions. Each region is organized the same way. The relationship between the regions and the business units is such that the business units develop the products and the regions cultivate relationship with its customers and address customers’ needs. This also spurs innovation, as it allows the regions to identify local needs and when these are translated into solutions, the innovations can be spread globally.
To manage the extensive managed services business in an efficient way, services are delivered locally from the ten regions and globally from four Global Service Centers where large-scale activities are concentrated. The Global Service Centers are located in India, China, Mexico and Romania.
Over the past five years, the North American region has increased the share of total Group sales, driven by intense operator activity.
Ericsson is a market leader both in telecom services and mobile broadband infrastructure In the North American market. After a couple of years with major LTE network buildouts, the business in North America was driven by network quality and capacity expansion business in 2014. This was a consequence of the increase in user demand for mobile data. Business slowed down during the latter part of 2014 as operators focused on cash flow optimization. The overall market fundamentals are strong with continued need for capacity investments and densification, driven by video and the introduction of new services such as VoLTE. This market is in the forefront when it comes to network development and LTE usage, and several of the targeted areas, such as OSS and BSS, IP, Cloud as well as TV and Media, have a strong potential.
Ericsson has established a position in 4G in China, as mainland China has started a large scale roll out of LTE and over 1.2 billion LTE-subscriptions are expected by the end of 2020. Sales in 2014 were driven by delivery of 4G/LTE coverage type of contracts, primarily to one Chinese customer. Future capacity sales will be dependent on subscriber uptake in the LTE networks.
Ericsson has a strong installed base in Europe, partly as a result of the modernization projects of European networks in 2011–2013, which was a prerequisite for the transformation. In 2014, business in Europe was driven by investments in network quality and capacity combined with managed services. Vodafone started to invest in a multi-year “project Spring” to increase coverage and capacity in several European countries. Operator consolidations continued to be on the agenda partly driven by an increasing need for network investments. Business in Russia developed favorably during the year driven by mobile broadband infrastructure investments.
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ERICSSON 24/7 – GLOBAL PRESENCE
Ericsson is a global player, with customers in more than 180 countries. The Company has been present in many countries, such as China, Brazil and India, for more than 100 years. The go-to-market organization is based in 10 geographical regions.
NORTH AMERICA, – 8%
Sales declined, driven by lower network sales as a result of large mobile network coverage projects coming to an end, and increased operator focus on cash flow in the second half of the year. Sales in Support Solutions and Professional Services continued to grow, driven by OSS and BSS modernization.
MEDITERRANEAN, – 5%
Sales decreased as the European modernization projects came to an end while managed services contributed positively to sales.
LATIN AMERICA, +3%
Sales increased, driven by mobile broadband coverage projects and network quality investments, partly offset by currency restrictions.
WESTERN AND CENTRAL EUROPE, +7%
The European modernization projects came to an end in 2014. Sales growth was increasingly driven by investments in network quality and capacity during the year.
NORTHERN EUROPE AND CENTRAL ASIA, +6%
Sales increased, driven primarily by mobile broadband deployments in Russia with sales of SEK 6.7 (5.6) billion. Professional Services sales grew, driven by network design and optimization services. TV & Media business showed positive development.
NORTH EAST ASIA, +1%
Sales increased in mainland China and Taiwan as a result of delivering on previously awarded 4G/LTE contracts. The increase was partly offset by reduced network investment levels in Korea and Japan.
MIDDLE EAST, +22%
Sales growth was driven by mobile broadband investments related to new licenses and growth in data traffic in both advanced and developing markets.
SUB-SAHARAN AFRICA, –13%
Sales declined but recovered in the second half of the year, mainly driven by operator focus on network traffic and quality management. This resulted in a continued demand for managed services.
INDIA, +25%
Sales growth was driven by mobile broadband infrastructure investments. Increased smartphone penetration drove growth in mobile data usage.
SOUTH EAST ASIA AND OCEANIA, 0%
Sales remained flat. Growth in major rollout projects in Australia compensated for a decline in Indonesia where major 3G projects peaked in 2013.
OTHER, –2%
Includes revenues generated across all regions through licensing, broadcast services, power modules, Ericsson-LG Enterprise and other businesses. Sales declined somewhat due to exit of the telecom and power cable businesses in 2013 as well as lower IPR revenues. Broadcast services grew, driven by the acquired Red Bee Media business that was fully consolidated in 2014.
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Ericsson’s People Strategy is clear – to attract the best, to develop the best, and to establish a high performing organization of engaged employees.
Right from the start, the ingenuity and professionalism of the people have taken Ericsson forward in a world of continuous technical and societal developments. The Company and the employees share the vision of a sustainable Networked Society, and the continuous transformation of the business builds a culture of creativity and innovation.
Ericsson’s future success largely depends on the ability to attract, develop, motivate and retain the talent needed to uphold and develop the business. Competition for skilled professionals in the ICT industry remains intense. To help Ericsson reach its full potential and maintain its leading position, the People Strategy has three objectives: attract the best talent, develop the best talent, and establish a high performing organization of engaged employees.
Attracting the best talent
The Ericsson brand is well known in the ICT space. To attract the talent and skills needed to transform the business, strong efforts are being made to reach out even further. Ericsson is active in the global social media with the “You + Ericsson” concept, telling powerful people stories and presenting global opportunities. Through the employee referral program, the Company engages its top talent to attract other top talent from the marketplace. Ericsson is continuously working with universities all over the world to increase the exposure to new talent in the different markets in which the Company operates. To attract exceptional talent, Ericsson takes a holistic approach to becoming an employer of choice across the world, with the consistent Ericsson values, but the Company also brings local nuances to meet local needs. Ericsson wants to be recognized as the Company that fulfills both the personal and career ambitions of a potential employee.
Continuous focus on competence
In order to stay relevant and remain a pioneer and a thought leader in the Networked Society, Ericsson needs to keep continuous focus on competence. The Company has a strategic approach to learning, using a two-tier framework. Top-down, the process identifies gaps for strategic competences in relation to a specific position or geography. These targeted gaps are being closed through development and deployment of global learning programs. Ericsson has structured formal and on the job training programs to build competences in emerging technology areas and in best practices with a special focus on sales, services and product development teams. Bottom-up, each employee together with his or her manager identifies competence gaps and develop an annual development plan so that they continue to grow and advance.
Ericsson invests in impactful and innovative ways of learning that can be accessed by everyone at all times, such as collaborative learning through a new virtual campus with live experts sharing knowledge or through Ericsson Play, a new mobile video sharing and learning platform. Certifications and assessments support the learning program to ensure that competence is obtained. The comprehensive career and competence model, supported by online and classroom training from Ericsson Academy and on-the-job development, helps employees to build their careers and develop capabilities that contribute to the Company’s continued success.
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Engagement and leadership
The level of engagement from the people remains very high. The last employee survey had a 93% response rate. The Employee Engagement Index measures employees’ overall motivation and commitment to the Company’s success. Ericsson’s score for 2014 is 78% which puts the Company amongst the top-scoring ICT companies included in this benchmark. One of the contributing factors to the high score was leadership. Strong leaders are essential for Ericsson to keep the technology and services leadership amid evolving business conditions. Therefore, the Company applies a rigorous talent planning process and run structured leadership programs at all levels. The leadership pipeline is under continual review to ensure that the right leadership capabilities are developed to take the business forward.
Diversity of thought
With customers in more than 180 countries around the world, Ericsson strives for the leadership teams and employee base to be as diverse as the world around. The Company’s definition of diversity extends beyond gender, race, religion, ethnicity, age and other established categories to focus on diversity of thought, the prime driver of the innovative culture.
In Ericsson’s experience, diverse teams are the most productive and stable. The diversity is supported by a truly inclusive workplace, in which people are valued for the different perspectives, ideas and experiences that they bring.
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SUSTAINABILITY AND CORPORATE RESPONSIBILITY
By advocating Technology for Good, Ericsson aims to lead the industry in providing significant and measurable contributions to a sustainable Networked Society.
In the Networked Society, Ericsson is the leading advocate of Technology for Good, the transformative power of mobility, broadband and cloud solutions to help tackle global sustainable development challenges. In the Company’s sustainability and corporate responsibility work, Ericsson has two main focus areas: to reduce risks, and to create positive impacts for people, business and society. The below areas are integrated in the Ericsson business:
| • | Conducting business responsibly |
| • | Environment, energy and climate change |
| • | Creating positive socio-economic impacts |
Conducting business responsibly
Embedding responsible business practices into the Ericsson operations ensures that the Company is running the business responsibly and capable of managing risks on a global scale. No matter what country or environment Ericsson operates in, global policies apply in terms of sound business practices, social responsibility and environmental protection.
Ericsson is committed to upholding the ten UN Global Compact Principles in the areas of human rights, labor standards, the environment and anti-corruption as well as to the UN Guiding Principles on Business and Human Rights (UNGP).
Ericsson’s key areas of commitment and actions are the respect for human rights in the ICT field, fostering anti-corruption, applying responsible sourcing practices, improving environmental performance and upholding high standards for labor rights as well as occupational health and safety.
The Company has a strong global governance process through the Ericsson Group Management System (EGMS) that supports efforts to create business value and minimize negative impacts. The robustness of the processes have systematically been improved over time.
In 2014, Ericsson updated its Code of Business Ethics to align it with the UNGP, with particular focus on human rights. Ericsson’s most salient human rights issues are the right to privacy and freedom of expression. Human rights focus is growing in many of the Company operations. One example is through Ericsson’s Sales Compliance Board, which provides a cross- functional forum for handling, for example, human rights risks as part of the sales process. In 2014, more than 300 cases were reviewed and 6% of the cases reviewed by the Sales Compliance Board were rejected.
In 2014, at the request of the Sales Compliance Board, Human Rights Impact Assessments of Iran and Myanmar were conducted and still ongoing in Iran, in accordance with the UNGP.
In the area of Occupational Health and Safety, 22 workplace fatalities were reported. Of these 1 was an Ericsson employee while suppliers reported 21, including 1 public fatality.
Environment, energy and climate change
Substantial greenhouse gas reductions can be achieved in a wide variety of ways by using ICT in different sectors. During 2014, Ericsson reduced societal carbon emission by implementing ICT-enabled solutions such as smart meters and smart transport solutions.
Ericsson’s second Energy and Carbon report, published in 2014, analyzes the ICT sector’s own environmental impact in terms of energy use and greenhouse gas emissions. The report shows that, while the expansion of ICT is stimulating economic growth and development, the resulting increase in carbon emissions is expected to be marginal, compared to the substantial reduction of greenhouse gases that can be achieved.
Ericsson and UN-Habitat produced a report in 2014,“The Role of ICT in the New Urban Agenda,” describing how ICT supports the sustainable cities of the future and offered recommendations to policymakers on the creation of an ICT-enabling environment to bridge digital divides.
The Company’s latest generation of network infrastructure equipment provides better performance than previous generations, while consuming less energy. The work on improving energy efficiency continues across the entire portfolio, to enable an increased connectivity of cities, industries and societies. The carbon
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footprint of Ericsson’s own activities has steadily decreased. Progress is on track towards the five-year target of reducing CO2 emissions per employee by 30% and keeping absolute CO2 emissions at 2011 levels, despite forecast growth in sales and number of employees.
Creating positive socio-economic impacts
Mobility, broadband and the cloud can greatly enable socio-economic development. But for people to benefit, affordability and accessibility are key. Ericsson has been actively involved in advocating the role of ICT in the Sustainable Development Goals (SDGs) for the post-2015 agenda that seek to address such challenges.
In 2014, the Task Force on Sustainable Development for the Broadband Commission on Digital Development, chaired by Ericsson President and CEO Hans Vestberg, produced a report, “Means of Transformation,” offering practical guidance for governments on leveraging ICT in support of the SDGs.
Ericsson’s objective to positively impact 2.5 million people directly through Technology for Good initiatives by 2016 was achieved in 2014. The bar has now been raised even higher, aiming to positively impact 4.8 million by the end of 2015.
In 2014, Ericsson focused on using ICT to transform humanitarian response and scaling solutions for greater impact. Ericsson and the International Rescue Committee announced a partnership using mobile technology to improve the frontline response of humanitarian workers in health, natural disasters and conflict-driven humanitarian crisis.
Ericsson Response is the global Ericsson employee volunteer initiative formed in the year 2000 to provide communications expertise, equipment and resources to assist humanitarian relief organizations.
In 2014, active missions assisting the Emergency Telecommunications Cluster focused on: continuing support to the Philippines in the aftermath of the 2013 typhoon; collaborating with the World Food Programme in war-torn South Sudan to provide communications and expertise to support long-term humanitarian efforts in refugee and Internally Displaced Persons (IDP) camps; and in Iraq, by deploying volunteers to facilitate communications for humanitarian workers in IDP camps.
Ericsson and operators in the Middle East launched the Refugees United service for the nearly 1.4 million Syrian refugees residing in Iraq, Jordan and Turkey at the launch of service. Another key focus was Ebola infection-prevention in Guinea, Liberia and Sierra Leone. Ericsson worked with multiple partners to support community health workers with about 1,400 mobile devices, with specific health apps, and provided UN and humanitarian workers with emergency telecoms support through Ericsson Response.
The Company also seeks to scale its impact in other key focus areas, including:
| • | Education – as lead technology partner in Connect to Learn, a global education initiative with the Earth Institute at Columbia University and Millennium Promise. The program is now in 16 countries, engaging 12 mobile operators, benefiting about 45,000 students. In 2014, the program was launched in Myanmar in partnership with the UK Department for International Development, through the Girls’ Education Challenge with the aim of reaching 14,000 marginalized girls over the next two years. |
| • | Financial inclusion – Ericsson’s m-commerce solutions can enable many of the approximately 2.5 billion people who are unbanked globally to access financial services. In 2014, ASBANC, Peru’s National Bank Association, recognized Ericsson’s global scale and integrated solution as well as its commitment to Technology for Good, and selected Ericsson as a partner to design and implement its Mobile Money project, the country’s largest private initiative for financial inclusion. |
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Dear shareholders
For the fourth time, it is my pleasure, as Chairman of the Board of Ericsson, to reflect on another year of performance and progress. As a Board, we are deeply involved both in helping develop a long-term strategic vision and responding to more immediate opportunities and challenges.
The ability to balance today’s reality with a rapidly evolving future has always been part of Ericsson’s culture, and has sustained its success for more than a century. Never before has this culture been more important. Customers face numerous challenges, and by adapting the product and services portfolio to meet their needs, Ericsson can take advantage of the many business opportunities that are emerging. In a sense, business has always been this way, but the rate and scale of change in today’s macro environment are exceptional.
The task of ensuring long-term development in this environment is both exciting and challenging. As a Board, we must consider what this industry will look like 10 or perhaps 20 years from now, so that investments and resources can be allocated responsibly. Ericsson’s ambition is to lead future developments and it is satisfying to see Ericsson positioning itself effectively as a leader in the transformative Networked Society.
In 2014, Ericsson and the Board concentrated on three major areas: strategy, governance and talent management.
In its strategic work, the Board always invests considerable time evaluating several strategic alternatives. In 2014, this led to an important decision: that Ericsson should exit the modem business – a long journey is now completed. To strengthen Ericsson’s position in its targeted areas, the Board decided on several strategic acquisitions.
The Board is committed to maintaining Ericsson’s high standards of corporate governance, sustainability and responsible business practice. Ericsson is a large global company and it is essential that high standards are met across markets. Ericsson aims high: every part of the company is required to meet demanding financial, social and environmental standards. Ericsson works constantly to uphold these standards, and as a result has won and retains the trust of its stakeholders.
Companies are only as good as the people they hire. The Board is appreciative of CEO and President Hans Vestberg and his leadership team for their dedication in attracting and developing some of the best talent in our industry, a vital component in securing Ericsson’s leading position. The Company is naturally interested in succession planning, particularly at executive levels but also in technology and commercial management. Ericsson’s values of respect, professionalism and perseverance require good talent management.
Ericsson’s capital structure is another of the Board’s major responsibilities and an area of great interest to shareholders and the capital market. In approaching this responsibility, the Board carefully considers the previous year’s earnings and balance sheet, coming years’ business plans, and projections of economic development. Maintaining industry leadership requires significant R&D investment as well as continued focus on developing our core business, and expanding into new and targeted areas. With all this taken into account, the Board’s proposal is to increase the dividend from SEK 3.00 in 2013 to SEK 3.40 per share for 2014.
As a leader in an industry that is leading change across all industries, Ericsson is an extraordinary company. It is a privilege to be part of Ericsson’s journey and a pleasure to serve as the Chairman.
Leif Johansson
Chairman of the Board of Directors
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Full-year highlights
| • | Sales were SEK 228.0 (227.4) billion, flat compared with 2013. |
| • | Operating income was SEK 16.8 (17.8) billion, with an operating margin of 7.4% (7.8%). Gross margin improved due to a higher share of capacity business, offset by increased operating expenses and currency hedge losses. |
| • | Segment Networks showed an operating margin of 12% (10%) driven by improved business mix and earlier actions to improve commercial and operational efficiency. |
| • | Cash flow from operating activities was SEK 18.7 (17.4) billion. Cash conversion was 84%, above the target of 70%. |
| • | The Board of Directors proposes a dividend for 2014 of SEK 3.40 (3.00) per share. |
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Business in 2014 1)
In 2014, Ericsson showed stable sales development with a solid operating margin. A sales decline in North America of –8% was compensated by growth in the Middle East, Europe and Asia. Operating margin improved in the core business, driven by a higher share of capacity sales and efficiency enhancements. This was partly offset by currency hedge losses, investments in targeted areas as well as losses related to the modems operations. (Reported operating margin decreased in 2014.)
The more than 100 IPR licensing agreements signed to date show the value of Ericsson’s R&D investments and enable industry players to continue to innovate and bring exciting products to the market. In 2014, IPR revenues showed a steady positive development. Ericsson remains committed to licensing its standard-essential patents on fair, reasonable and non-discriminatory (FRAND) terms.
At the Capital Markets Day (CMD) in November, Ericsson outlined the progress on its Networked Society strategy, with focus on market development, growth agenda, transformation and profitability. In line with the strategy, the Company has invested into the targeted areas: IP networks, Cloud, TV & Media, Industry & Society and OSS & BSS. Sales in targeted areas showed a growth of more than 10% in 2014.
Ericsson continues to proactively identify efficiency opportunities in the Company. The cost and efficiency program presented at the CMD, with the ambition to achieve savings of approximately SEK 9 billion, with full effect during 2017, is progressing. Activities for the discontinuation of the modems business are included in the program and are ahead of plan.
Ericsson improved the cash flow from operating activities, and generated a cash flow of SEK 18.7 (17.4) billion. For the third consecutive year, the Company exceeded its cash conversion target of more than 70%. This resulted in a solid balance sheet, enabling Ericsson to continue to implement its strategy and to deliver consistent returns to its shareholders.
The Board of Directors proposes a dividend for 2014 of SEK 3.40 (3.00) per share, an increase of 13%.
| 1) | The figures in this section are IFRS figures. However, commentary is based on non-IFRS figures, unless stated otherwise. |
| See Financial results of operations on page 35 for the reconciliation of non-IFRS figures. |
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Financial highlights
Financial results of operations 1)
In this Board of Directors’ report, unless otherwise indicated, commentary on sales, gross margin, operating income and net income reflects adjustments made on full year 2013 for the initial payment from Samsung following the January 2014 licensing agreement with Samsung. The table below presents the reconciliation between reported IFRS figures and the non-IFRS figures upon which the comments are based.
Reconciliation IFRS – Non-IFRS measures
| IFRS | Adjustment initial Samsung IPR payment 1) |
Non-IFRS | ||||||||||||||||||||||
| 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||
| Net sales |
228.0 | 227.4 | –2.1 | 228.0 | 225.3 | |||||||||||||||||||
| Cost of sales |
–145.6 | –151.0 | –145.6 | –151.0 | ||||||||||||||||||||
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| Gross income |
82.4 | 76.4 | 0.0 | –2.1 | 82.4 | 74.3 | ||||||||||||||||||
| Operating expenses |
–63.4 | –58.5 | –63.4 | –58.5 | ||||||||||||||||||||
| Other operating income and expenses |
–2.2 | 0.1 | –2.2 | 0.1 | ||||||||||||||||||||
| Share in earnings of associated companies |
–0.1 | –0.1 | –0.1 | –0.1 | ||||||||||||||||||||
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| Operating income |
16.8 | 17.8 | 0.0 | –2.1 | 16.8 | 15.7 | ||||||||||||||||||
| Financial items |
–1.0 | –0.7 | –1.0 | –0.7 | ||||||||||||||||||||
| Taxes |
–4.7 | –4.9 | 0.5 | –4.7 | –4.4 | |||||||||||||||||||
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| Net income |
11.1 | 12.2 | 0.0 | –1.6 | 11.1 | 10.6 | ||||||||||||||||||
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| 1) | The initial payment from Samsung in Q4 2013 was SEK 4.2 billion of which SEK 2.1 billion relates to 2013. |
| The adjustment impacts segments Networks and Support Solutions. |
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Reported sales were flat and amounted to SEK 228.0 (227.4) billion. Strong sales growth in China, the Middle East and India was offset by lower sales in North America and Japan, where several larger mobile broadband coverage projects were completed.
During the year, the SEK has weakened towards a number of currencies, including the USD, which has had a gradual positive impact on sales.
Reported sales for segments Networks and Global Services were flat compared with 2013, while Support Solutions reported sales grew by 3%.
IPR and licensing revenues amounted to SEK 9.9 (10.6) billion. For 2013, IPR revenues included an initial payment of SEK 4.2 billion from Samsung for patent licensing.
The mix of sales by commodity was: Software 24% (24%), hardware 34% (34%) and services 42% (42%).
Restructuring charges amounted to SEK 1.5 (4.5) billion and were mainly related to the continued implementation of the service delivery strategy. Implementation started on the cost and efficiency program announced in November 2014. As part of the continuous business transformation, annual restructuring normally generates charges of approximately SEK 2 billion. In addition, the cost and efficiency program is expected to generate approximately SEK 3–4 billion in restructuring charges in 2015–2017.
With current visibility, total restructuring charges for 2015 are estimated at approximately SEK 3–4 billion.
Gross margin increased to 36.2%, due to a business mix with a higher share of capacity sales, lower restructuring charges and efficiency enhancements. The Global Services share of Group sales was flat at 43%, where the share of Network Rollout sales declined to 12% (14%) as a result of fewer large coverage projects.
Total operating expenses increased to SEK 63.4 (58.5) billion due to increased organic expenses in targeted areas and acquisitions such as Microsoft Mediaroom as well as inclusion of the modems operations.
In line with the strategy to establish leadership in targeted areas, the Company has increased its R&D activities, primarily in IP and Cloud. In addition, the modems operations were taken over from the ST-Ericsson joint venture. This resulted in total R&D expenses of SEK 36.3 (32.2) billion in 2014.
Other operating income and expenses decreased to SEK –2.2 (0.1) billion of which SEK –2.8 (0.5) billion relates to negative currency hedge effects. They derive from the hedge contract
| 1) | The figures in this section are IFRS figures. However, commentary is based on non-IFRS figures, unless stated otherwise. |
| See above table for the reconciliation of non-IFRS figures. |
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balance in USD, which has further decreased in value. The SEK has weakened towards the USD between December 31, 2013 (SEK/USD rate 6.46) and December 31, 2014 (7.79).
Operating income increased slightly to SEK 16.8 billion, positively impacted by an improved gross margin. (Reported operating income decreased slightly in 2014.) Operating income was negatively impacted by higher operating expenses, and negative effects from hedge contracts. Operating margin was 7.4%.
Financial net amounted to SEK –1.0 (–0.7) billion. The difference is mainly attributable to foreign currency revaluation effects.
The tax rate for 2014 was 30% compared with 29% in 2013. Tax costs were SEK –4.7 (–4.9) billion.
Net income increased to SEK 11.1 billion, for the same reasons as for the increase in operating income. (Reported net income decreased in 2014.)
EPS diluted was SEK 3.54.
Cash flow
Cash flow from operating activities was positive at SEK 18.7 (17.4) billion.
Total investing activities amounted to SEK 7.5 (11.1) billion. Investments in property, plant and equipment were SEK 5.3 (4.5) billion, representing 2% of sales. Acquisitions and divestments, net, were SEK 4.4 (2.7) billion. The acquisitions are strategic investments made to strengthen the position in targeted areas. In 2014, approximately SEK 8 billion of debt outstanding was repaid:
| • | A SEK 4 billion EIB loan, with original maturity in 2015, was repaid. |
| • | A USD 300 million bond, with original maturity in 2016, was repaid. |
| • | A EUR 219 million bond matured and was repaid in full. |
Working capital
Days sales outstanding (DSO) increased to 105 (97) days mainly due to geographical mix and negative currency effects. Inventory turnover days increased to 64 (62) days due to a larger share of projects and negative currency effects.
Accounts payable days increased to 56 (53) days.
Provisions amounted to SEK 4.4 (5.4) billion at year end, reflecting implementation of previous years’ efficiency programs and headcount reductions.
Financial position
The average maturity of long-term borrowings as of December 31, 2014, was 5.7 years, compared with 5.1 years at the end of 2013.
The net cash decreased from SEK 37.8 billion to SEK 27.6 billion as a result of increased post-employment benefits of SEK 10.6 billion due to lower discount rates.
Ericsson has an unutilized Revolving Credit Facility of USD 2.0 billion.
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Employees
In 2014, the net number of employees increased by 3,715. At the end of 2014, the total number of employees was 118,055 (114,340) of which 19,251 joined Ericsson during the year. 15,536 employees left Ericsson, reflecting the natural attrition rate and ongoing Company transformation.
Research and development, patents and licensing
In line with the strategy to establish leadership in targeted areas, the Company has increased its R&D activities, primarily in IP and Cloud. In addition, the modems operations were taken over from the ST-Ericsson joint venture. This resulted in total R&D expenses of SEK 36.3 (32.2) billion.
Research and development, patents and licensing
| 2014 | 2013 | 2012 | ||||||||||
| Expenses (SEK billion) |
36.3 | 32.2 | 32.8 | |||||||||
| As percent of Net sales |
15.9 | % | 14.2 | % | 14.4 | % | ||||||
| Employees within R&D as of December 311) |
25,700 | 25,300 | 24,100 | |||||||||
| Patents1) |
37,000 | 35,000 | 33,000 | |||||||||
| IPR revenues, net (SEK billion) |
9.9 | 10.6 | 6.6 | |||||||||
| 1) | The number of employees and patents are approximate. |
Seasonality
The Company’s sales, income and cash flow from operations vary between quarters, and are 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.
Most recent five-year average seasonality
| First quarter |
Second quarter |
Third quarter |
Fourth quarter |
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| Sequential change |
–22 | % | 8 | % | 0 | 23 | % | |||||||||
| Share of annual sales |
22 | % | 24 | % | 24 | % | 30 | % | ||||||||
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 material effect on the Company’s financial condition, revenues, expenses, result of operations, liquidity, capital expenditures or capital resources.
Capital expenditures
For 2014, capital expenditures were SEK 5.3 (4.5) billion, representing 2% of sales. Expenditures are largely related to test sites and equipment for R&D and network operation centers as well as manufacturing and repair operations.
Investments are being made in three new global ICT centers, of which two are in Sweden and one is in Canada. The centers will support R&D and services in developing and verifying solutions more efficiently and bringing innovation faster to the market. The first center, in Linköping, Sweden, was opened in 2014.
Apart from these investments, Ericsson believes that the Company’s property, plant and equipment and the facilities the Company occupies are suitable for its present needs in most locations.
Annual capital expenditures are normally around 2% of sales. This corresponds to the needs for keeping and maintaining the current capacity level. The Board of Directors reviews the Company’s investment plans and proposals.
As of December 31, 2014, no material land, buildings, machinery or equipment were pledged as collateral for outstanding indebtedness.
The Company believes it has sufficient cash and cash generation capacity to fund expected capital expenditures without external borrowings in 2015.
Capital expenditures 2010–2014
| SEK billion |
2014 | 2013 | 2012 | 2011 | 2010 | |||||||||||||||
| Capital expenditures |
5.3 | 4.5 | 5.4 | 5.0 | 3.7 | |||||||||||||||
| Of which in Sweden |
2.4 | 1.9 | 1.3 | 1.7 | 1.4 | |||||||||||||||
| Share of annual sales |
2.3 | % | 2.0 | % | 2.4 | % | 2.2 | % | 1.8 | % | ||||||||||
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Business results—Segments
Networks 1)
Sales were flat. Sales declined in North America, where two large LTE coverage projects were completed. In addition, operators in the US increased their focus on cash flow optimization during the second half of the year, with reduced network investments as a consequence. The decline in the North American business was partly offset by increased mobile broadband sales in the Middle East. Large LTE network deployments continued in mainland China.
In 2014, operators increased their focus on improving network performance as a key differentiator. This, in combination with continued data traffic increase, and introduction of new services such as VoLTE, led to increased capacity business in Radio, IMS and IP.
Operating income improved significantly compared with last year due to increased capacity business, earlier actions to improve commercial and operational efficiency and lower restructuring charges. This was partly offset by a negative effect from currency hedges of SEK –2.1 (0.5) billion and higher operating expenses, mainly in IP and Cloud. Restructuring charges amounted to SEK –0.4 (–2.2) billion.
Global Services
Sales for Global Services were flat compared with 2013 despite strong development in Managed Services and in Network Design and Optimization.
There was continued momentum for Professional Services with double-digit sales growth during the second half of the year. Sales in targeted areas developed positively and in line with plan. Network Rollout sales declined, primarily due to a lower share of coverage projects.
Global Services operating income was flat compared with 2013. The Network Rollout margin gradually improved during the year due to the declining dilutive effect from the European network modernization projects.
Professional Services operating margin declined to 12% (14%), partly due to negative currency hedge effects and partly due to the high share of managed services contracts in the transformation phase.
Restructuring charges declined to SEK –0.8 (–2.0) billion. Implementation of the service delivery strategy to move local service delivery resources to global centers continued, but at a slower pace during the first half of the year.
Support Solutions 1)
Reported sales grew by 3%, driven by growth in OSS and in TV & Media through the Mediaroom acquisition. Regions North America and North East Asia showed strong growth while Latin America and Sub-Saharan Africa declined, primarily due to lower BSS sales.
Operating income declined slightly, partly due to lower sales in legacy systems and partly due to acquired operating expenses.
Modems
Ericsson took over the LTE thin-modem operations as part of the breakup of the joint venture with STMicroelectronics in 2013. Since the integration, the modems market developed in a direction that reduced the addressable market for thin modems. In addition, there is strong competition, price erosion and an accelerating pace of technology innovation. Success in this evolved market requires significant R&D investments. In 2014, Ericsson announced the discontinuation of further development of modems and the shift of approximately 500 R&D resources to Networks to pursue growth opportunities in the radio business.
Operating income was SEK –2.0 billion. The discontinuation of the modems business will lead to a significant reduction in costs. Good progress has been made in 2014, and activities are ahead of plan. End-of-life agreements have been signed with existing customers.
| 1) | The figures in this section are IFRS figures. However, commentary is based on non-IFRS figures, unless stated otherwise. |
| See Financial results of operations on page 35 for the reconciliation of non-IFRS figures. |
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Business results—Regions
| • | North America: Sales declined, driven by lower network sales as a result of large mobile network coverage projects coming to an end, and increased operator focus on cash flow in the second half of the year. Sales in Support Solutions and Professional Services continued to grow, driven by OSS and BSS modernization. |
| • | Latin America: Sales increased, driven by mobile broadband coverage projects and network quality investments, partly offset by currency restrictions. |
| • | Northern Europe and Central Asia: Sales increased, driven primarily by mobile broadband deployments in Russia with sales of SEK 6.7 (5.6) billion. Professional Services sales grew, driven by network design and optimization services. TV & Media business showed positive development. |
| • | Western and Central Europe: The European modernization projects came to an end in 2014. Sales growth was increasingly driven by investments in network quality and capacity during the year. |
| • | Mediterranean: Sales decreased as the European modernization projects came to an end, while managed services contributed positively to sales. |
| • | Middle East: Sales growth was driven by mobile broadband investments related to new licenses and growth in data traffic in both advanced and developing markets. |
| • | Sub-Saharan Africa: Sales declined but recovered in the second half of the year, mainly driven by operator focus on network traffic and quality management. This resulted in a continued demand for managed services. |
| • | India: Sales growth was driven by mobile broadband infrastructure investments. Increased smartphone penetration drove growth in mobile data usage. |
| • | North East Asia: Sales increased in mainland China and Taiwan as a result of delivering on previously awarded 4G / LTE contracts. The increase was partly offset by reduced network investment levels in Korea and Japan. |
| • | South East Asia and Oceania: Sales remained flat in 2014. Growth in major roll-out projects in Australia compensated for a decline in Indonesia where major 3G projects peaked in 2013. |
| • | Other: Sales declined somewhat due to exit of the telecom and power cable businesses in 2013 and lower IPR revenues. Broadcast services grew, driven by the acquired Red Bee Media business that was fully consolidated in 2014. |
Sales per region and segment 2014 and percent change from 2013
| Networks | Global Services | Support Solutions | Total | |||||||||||||||||||||||||||||
| SEK billion |
2014 | Change | 2014 | Change | 2014 | Change | 2014 | Change | ||||||||||||||||||||||||
| North America |
26.1 | –9 | % | 25.0 | –12 | % | 3.5 | 34 | % | 54.5 | –8 | % | ||||||||||||||||||||
| Latin America |
10.7 | –5 | % | 10.8 | 14 | % | 1.0 | –10 | % | 22.6 | 3 | % | ||||||||||||||||||||
| Northern Europe and Central Asia |
8.0 | 10 | % | 4.1 | –1 | % | 0.3 | 10 | % | 12.4 | 6 | % | ||||||||||||||||||||
| Western and Central Europe |
8.1 | 6 | % | 11.0 | 8 | % | 0.6 | 1 | % | 19.7 | 7 | % | ||||||||||||||||||||
| Mediterranean |
9.6 | –11 | % | 12.6 | 0 | % | 0.8 | 12 | % | 23.0 | –5 | % | ||||||||||||||||||||
| Middle East |
11.6 | 36 | % | 8.5 | 12 | % | 1.2 | –11 | % | 21.3 | 22 | % | ||||||||||||||||||||
| Sub-Saharan Africa |
3.9 | –21 | % | 4.3 | 3 | % | 0.6 | –39 | % | 8.7 | –13 | % | ||||||||||||||||||||
| India |
4.1 | 32 | % | 3.1 | 15 | % | 0.5 | 55 | % | 7.7 | 25 | % | ||||||||||||||||||||
| North East Asia |
18.0 | 8 | % | 8.9 | –14 | % | 0.7 | 82 | % | 27.6 | 1 | % | ||||||||||||||||||||
| South East Asia and Oceania |
8.4 | –6 | % | 7.0 | 10 | % | 0.5 | –4 | % | 15.9 | 0 | % | ||||||||||||||||||||
|
Other1) |
9.1 | –10 | % | 2.3 | 61 | % | 3.1 | –12 | % | 14.7 | 2) | –2 | % | |||||||||||||||||||
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| Total |
117.5 | 0 | % | 97.7 | 0 | % | 12.7 | 3 | % | 228.0 | 0 | % | ||||||||||||||||||||
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| Share of total |
51 | % | 43 | % | 6 | % | 100 | % | ||||||||||||||||||||||||
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| 1) | Region “Other” includes licensing revenues, broadcast services, power modules, mobile broadband modules, Ericsson-LG Enterprise and other businesses. |
| The power cable business was divested in 2013. |
| 2) | Total sales for Region “Other” includes SEK 0.2 billion for Modems. |
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Corporate Governance
In accordance with the Annual Accounts Act ((SFS 1995:1554), Chapter 6, Sections 6 and 8) and the Swedish Corporate Governance Code (the “Code”), a separate Corporate Governance Report, including an Internal Control section, has been prepared and attached to this Annual Report.
Continued compliance with the Swedish Corporate Governance Code
Ericsson is committed to complying with best-practice corporate governance standards on a global level wherever possible. For 2014, Ericsson does not report any deviations from the Code.
Business integrity
Ericsson’s Code of Business Ethics summarizes the Group’s basic policies and directives governing its relationships internally, with its stakeholders and with others. It also sets out how the Group works to secure that business activities are conducted with a strong sense of integrity.
Board of Directors
At the Annual General Meeting, held on April 11, 2014, Leif Johansson was re-elected Chairman of the Board and Roxanne S. Austin, Sir Peter L. Bonfield, Nora Denzel, Börje Ekholm, Alexander Izosimov, Ulf J. Johansson, Sverker Martin-Löf, Kristin Skogen Lund, Hans Vestberg, Jacob Wallenberg and Pär Östberg were re-elected members of the Board. Pehr Claesson, Kristina Davidsson and Karin Åberg were appointed employee representatives by the unions, with Rickard Fredriksson, Karin Lennartsson and Roger Svensson as deputies.
Management
Hans Vestberg has been President and CEO of the Group since January 1, 2010. The President and CEO is supported by the Group management, consisting of the Executive Leadership Team (ELT).
A global management system is in place to ensure that Ericsson’s business is well controlled and has the ability to fulfill the objectives of major stakeholders within established risk limits. The management system also monitors internal control and compliance with applicable laws, listing requirements and governance codes.
Remuneration
Remuneration to the members of the Board of Directors and to Group management, as well as the Guidelines for remuneration to Group Management resolved by the Annual General Meeting 2014, are reported in Notes to the consolidated financial statements—Note C28, “Information regarding members of the Board of Directors, the Group management and employees”.
The Board of Directors’ proposal for guidelines for remuneration to Group management
The Board of Directors proposes no material changes to the current guidelines for remuneration to Group management for the period up to the 2016 Annual General Meeting.
Executive Performance Stock Plan
The Company has a Long-Term Variable Compensation program (LTV). It builds on a common platform of investment in, and matching of, Ericsson shares. It consists of three separate plans: one targeting all employees, one targeting key contributors and one targeting senior managers. The program is designed to encourage long-term value creation in alignment with shareholders’ interests. The aim of the plan for senior managers is to attract, retain and motivate executives in a competitive market through performance-based share-related incentives and to encourage the build-up of significant equity stakes. The performance criteria for senior managers under the Executive Performance Stock Plan are approved by the Annual General Meeting. Performance criteria for the 2015 Executive Performance Stock Plan will be communicated in the notice to the Annual General Meeting.
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The targets for the 2012, 2013 and 2014 Executive Performance Stock Plans are shown in the illustration on page 40. The performance criteria are:
| • | Up to one-third of the award will vest if the target for compound annual growth rate of consolidated net sales is achieved. For the 2014 plan, net sales for base year 2013 has been adjusted by SEK 2.1 billion for the impact of the Samsung IPR agreement. |
| • | Up to one-third of the award will vest if the target for compound annual growth rate of consolidated operating income, including earnings in joint ventures and restructuring, is achieved. For the 2013 plan, base year 2012 excludes a non-cash charge of SEK 8.0 billion for ST-Ericsson. For the 2014 plan, operating income for the base year 2013 has been adjusted by SEK 2.1 billion for the impact of the Samsung IPR agreement. |
| • | Up to one-third of the award will vest if cash conversion is at or above 70% during each of the years and vesting one-ninth of the award for each year the target is achieved. The cash conversion target was reached in 2014, 2013 and 2012. |
Before the number of performance shares to be matched are finally determined, the Board of Directors shall examine whether the performance matching is reasonable considering the Company’s financial results and position, conditions on the stock market and other circumstances, and if not, reduce the number of performance shares.
Material contracts
Material contractual obligations are outlined in Note C31, “Contractual obligations.” These were entered into in the ordinary course of business and were 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. Such provisions are not unusual for certain types of agreements, such as financing agreements and certain license agreements. However, considering among other things the Company’s strong financial position, none of the agreements currently in effect would entail any material consequence to Ericsson due to a change in control of the Company.
Risk management
Risks are defined in both short-term and long-term perspective. They are categorized into industry and market risks, commercial risks, operational risks and compliance risks. Ericsson’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. Decisions are made or escalated according to defined delegation of authority. Financial risks are coordinated through Group Function Finance. |
| • | Risks are dealt with during the strategy process, annual planning and target setting, continuous monitoring through monthly and quarterly steering group meetings and during operational processes (customer projects, customer bid/contract, acquisition, investment and product development projects). They are subject to various controls such as decision tollgates and approvals. |
At least twice a year, in connection with the approval of strategy and targets, risks are reviewed by the Board of Directors.
A central security unit coordinates management of certain risks, such as business interruption, information security and physical security. The Crisis Management Council deals with events of a serious nature.
For information on risks that could impact the fulfillment of targets and form the basis for mitigating activities, see the other sections of the Board of Directors’ report, Notes C2, “Critical accounting estimates and judgments,” C14, “Trade receivables and customer finance,” C19, “Interest-bearing liabilities,” C20, “Financial risk management and financial instruments” and the chapter Risk factors.
Sourcing and supply
Ericsson’s hardware largely consists of electronics. For manufacturing, the Company purchases customized and standardized components and services from several global providers as well as from local and regional suppliers. Certain types of components, such as power modules, are produced in-house.
The production of electronic modules and sub-assemblies is mostly outsourced to manufacturing services companies, of which the vast majority are in low-cost countries. Final configuration of products is largely done in-house and on-demand. This consists of assembling and testing modules and integrating them into
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complete units. Final assembly and testing are concentrated to a few sites. Ericsson has 12 manufacturing sites in Brazil, China, Estonia, India, Italy, Mexico and Sweden.
A number of suppliers design and manufacture highly specialized and customized components. The Company generally negotiates global supply agreements with its primary suppliers. Ericsson’s suppliers are required to comply with the requirements of Ericsson’s Code of Conduct.
In general, Ericsson has alternative supply sources and seeks to avoid single source supply situations.
Variations in market prices for raw materials generally have a limited effect on total cost of goods sold. For more information, see the chapter Risk factors.
Sustainability and Corporate Responsibility
The Company has a strong focus on social, environmental and responsible business standards. This supports Ericsson’s ambition to be a relevant and responsible driver of positive change. The Company aims to create positive impacts and minimize risks.
Ericsson’s approach to Sustainability and Corporate Responsibility (CR) is integrated into its core business operations throughout its value chain and performance is regularly measured and assessed. The Board of Directors is apprised of Sustainability and CR issues twice per year, or as needed on an ad hoc basis. Group policies and directives are implemented to ensure consistency across global operations. Ericsson publishes an annual Sustainability and Corporate Responsibility Report, which provides additional information.
Responsible business practices
Since 2000, Ericsson has supported the UN Global Compact, and endorses its ten principles regarding human rights and labor standards, anti-corruption and environmental protection.
Since 2012, Ericsson has reported its Communication on Progress at the Global Compact Advanced level. The Ericsson Group Management System (EGMS) includes a Code of Business Ethics, a Code of Conduct and a Sustainability Policy which reflect responsible business practices. These practices are reinforced by employee awareness training, workshops and monitoring, including a global assessment plan run by an external assurance provider.
The Code of Conduct was updated in 2014 to include stronger human rights language in accordance with the UN Guiding Principles on Business and Human Rights as well as stronger labor standards.
Ericsson has an anti-corruption program which focuses on prevention but also accountability. The program is reviewed and evaluated by the Audit Committee of the Board of Directors annually. In 2014, a new anti-corruption e-learning was launched for suppliers.
Human rights
The Code of Business Ethics reflects the Company’s ongoing commitment to respect human rights. Ericsson has actively worked to integrate United Nations Guiding Principles on Business and Human Rights into its governance framework since 2011. A Sales Compliance Board evaluates risk to human rights impacts with respect to four criteria: country, customer, product and purpose. Ericsson joined the Shift Business Learning Program in 2012 to further strengthen its framework on Human Rights. The learning included conducting Human Rights Impact Assessments in Myanmar and ongoing in Iran, in accordance with the UN Guiding Principles.
Responsible sourcing
All suppliers must comply with the requirements of Ericsson’s Code of Conduct. The Company has 197 employees, covering all regions, who are trained as Code of Conduct auditors. The Company uses a risk-based approach to ensure that the high risk portfolio areas, and highest risk markets, are targeted first. For prioritized areas, Ericsson performs regular audits and works with suppliers to ensure measurable and continuous improvements. Findings are followed up to ensure that improvements are made.
Ericsson addresses the issue of conflict minerals, including compliance with the US Dodd-Frank Act and the disclosure rule adopted by the U.S. Securities and Exchange Commission (SEC) through measures in its sourcing and product management processes. The Company also actively works with suppliers on this issue and engages in industry initiatives such as the Conflict-Free Sourcing Initiative (CFSI), driven by the Global e-Sustainability Initiative (GeSI), and the Electronic Industry Citizenship Coalition (EICC).
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|
Reducing environmental impact
Continuously improving sustainability performance is fundamental to Ericsson’s strategy and a priority remains improving the life-cycle carbon footprint. The Company works to reduce negative environmental impacts while delivering solutions that enable a low-carbon economy. As energy use of products in operation remains the Company’s most significant environmental impact, Ericsson works proactively with mobile operators to encourage network and site energy optimization, through innovative products, software,
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solutions and advisory services. Processes and controls are in place to ensure compliance with relevant product-related environmental, customer and regulatory requirements. An important aspect of Ericsson’s Design for Environment is materials management and efficiency.
In 2014, Ericsson strengthened its focus on providing solutions to help other sectors of the economy, primarily utilities and transport, to offset carbon emissions. In line with this focus area, Ericsson set a target for 2015; to reduce societal carbon emissions by a factor of 2 in relation to carbon emissions from Ericsson’s own activities in 2014, by implementing ICT-enabled solutions, such as smart meters and smart transport solutions.
Ericsson has a long-term objective to maintain absolute CO2e emissions from its own activities for business travel, product transportation and facilities energy use in 2017 at the same level as in 2011. To achieve this long-term objective, the Company aims to reduce CO2e emissions per employee by 30% over five years. The Company achieved a 10% reduction of CO2e emissions per employee in 2014.
Ericsson Ecology Management is a program to take responsibility for products at the end of their life and to treat them in an environmentally preferable way. The program also ensures that Ericsson fulfills its producer responsibility and is offered to all customers globally free of charge, not only in markets where it is required by law.
When taking back the Company’s products, more than 98% of the materials is recycled.
Occupational health and safety
Providing a safe and healthy workplace is of fundamental importance to Ericsson. The ambition is zero fatalities and the long-term objective is based on continuous improvements in order to reduce the number and severity of Occupational Health and Safety (OHS) incidents. The OHS system helps to protect Ericsson’s employees and others engaged in company business.
Certain operations undergo internal audits as well as regular third-party assurance audits according to the OHSAS 18001 standard. Ericsson has taken a comprehensive approach by not only reporting its own fatalities but also addressing partners and suppliers working with high-risk activities. This includes providing requirements and controls but also guidance and training. Competence and awareness is key to reducing major incidents and must be based on trust and transparency, in which reporting of incidents is encouraged. Key performance indicators are published in the Sustainability and Corporate Responsibility report.
A program “Zero Incidents in High-Risk Environments” was established 2014 to reduce severe incidents internally and in the supply chain by further enhancing sub-contractor management, assessment criteria, inspections and consequence management. Occupational health and safety was significantly strengthened and prioritized by integrating it into the Sustainability and Corporate responsibility organization.
Radio waves and health
Ericsson employs rigid product testing and installation procedures with the goal of ensuring that radio wave exposure levels from products and network solutions are below established safety limits. The Company also provides public information on radio waves and health, and supports independent research to further increase knowledge in this area. Since 1996, Ericsson has co-sponsored over 100 studies related to electromagnetic fields and health, primarily through the Mobile Manufacturers Forum.
To assure scientific independence, firewalls were in place between the industrial sponsors and the researchers conducting these studies. Independent expert groups and public health authorities, including the World Health Organization, have reviewed the total amount of research and have 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.
Reporting according to GRI 3.0
Ericsson publishes an annual Sustainability and Corporate Responsibility report and full key performance data is made available on the Ericsson website according to the Global Reporting Initiative (GRI). The performance data is assured by a third party.
Legal proceedings
On January 12, 2015, Apple filed a lawsuit asking the United States District Court for the Northern District of California to find that it does not infringe a small subset of Ericsson’s patents. On January 14, 2015, following Apple’s legal action, Ericsson filed a complaint in the United States District Court for the Eastern District of Texas requesting a ruling on Ericsson’s proposed global licensing fees with Apple. During the past two years of negotiations, the companies have not been able to reach an agreement on licensing of Ericsson’s patents that enable Apple’s mobile devices to connect with the world and power many of their applications. Ericsson filed the suit in order to receive an independent assessment on whether Ericsson’s global licensing offer complies with Ericsson’s FRAND commitment.
The global license agreement for mobile technology between Ericsson and Apple has expired and Apple has declined to take a new license on offered FRAND terms.
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On February 26, 2015, Ericsson filed two complaints with the International Trade Commission (ITC) and seven complaints in the United States District Court for the Eastern District of Texas against Apple, asserting 41 patents covering many aspects of Apple’s iPhones and iPads. The patents include standard essential patents related to the 2G and 4G/LTE standards as well as other patents that are critical to non-standardized features and functionality of Apple devices. Ericsson seeks exclusion orders in the ITC proceedings and damages and injunctions in the District Court actions.
In 2013, Adaptix Inc. (“Adaptix”) filed two lawsuits against Ericsson, AT&T, AT&T Mobility and MetroPCS Communications in the US District Court for Eastern District of Texas alleging that certain Ericsson products infringe five US patents purportedly assigned to Adaptix. The trial is currently anticipated to take place in May 2015 and Adaptix seeks damages and an injunction.
On May 20, 2014, Adaptix filed three more patent infringement lawsuits against Ericsson in the same court regarding three US patents, all of which are also included in the 2013 lawsuit. One of the 2014 lawsuits accuses Ericsson’s LTE products and Sprint’s use thereof of infringement, one accuses Ericsson’s LTE products and Verizon’s use thereof of infringement, and one accuses Ericsson’s LTE products and T-Mobile’s use thereof of infringement.
In January 2015, Adaptix filed one more lawsuit in the same court alleging that Ericsson’s LTE products, and Sprint and Verizon’s use thereof, infringe one U.S. patent.
In addition to its complaint filed in 2013 with the Tokyo District Court, Adaptix filed another lawsuit in Japan in September 2014 alleging that Ericsson’s LTE products infringe another Japanese patent. In the lawsuits in Japan, Adaptix is also seeking damages and an injunction.
In 2013, Ericsson filed a patent infringement lawsuit in the Delhi High Court against Indian handset company Micromax, seeking damages and an injunction. As part of its defense, Micromax filed a complaint with the Competition Commission of India (CCI) and the CCI has decided to refer the case to the Director General’s Office for an in-depth investigation.
In January 2014, the CCI opened another investigation against Ericsson based on claims made by Intex Technologies (India) Limited. Ericsson has made numerous attempts to sign a license agreement with both Micromax and Intex on Fair, Reasonable and Non-discriminatory (FRAND) terms.
In 2012, Wi-LAN Inc., a Canadian patent licensing company, filed a complaint against Ericsson in the US District Court for the Southern District of Florida alleging that Ericsson’s LTE products infringe three of Wi-LAN’s US patents.
In June 2013, Ericsson’s motion for summary judgment was granted and in August 2014, the decision was reversed by the United States Court of Appeals for the Federal Circuit. As a result, the case is back before the Florida court. Trial is currently scheduled for May 2015.
In 2011, TruePosition sued Ericsson, Qualcomm, Alcatel-Lucent, the European Telecommunications Standards Institute (ETSI) and the Third Generation Partnership Project (3GPP) in the US District Court for the Eastern District of Pennsylvania for purported federal antitrust violations. The complaint alleged that Ericsson, Qualcomm and Alcatel-Lucent illegally conspired to block the adoption of TruePosition’s proprietary technology into the new mobile positioning standards for LTE, while at the same time ensuring that their own technology was included into the new standards. In July 2014, Ericsson and TruePosition reached an amicable settlement. As part of the settlement, Ericsson did not pay TruePosition any money to settle the case and TruePosition withdrew its allegations of wrongdoing against Ericsson.
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Parent Company
The Parent Company business consists mainly of corporate management, holding company functions and internal banking activities. It also handles customer credit management, performed on a commission basis by Ericsson Credit AB.
The Parent Company has 5 (5) branch offices. In total, the Group has 81 (81) branch and representative offices.
Financial information
Income after financial items was SEK 25.6 (7.2) billion. The Parent Company had no sales in 2014 or 2013 to subsidiaries, while 54% (30%) of total purchases of goods and services were from such companies.
Major changes in the Parent Company’s financial position for the year included:
| • | In 2012, a provision of SEK 3.3 billion was recognized, which provides for Ericsson’s share of obligations for the wind-down of ST-Ericsson. In 2013 and 2014, SEK 2.6 billion has been utilized or reversed, which resulted in a net liability of SEK 0.7 billion. |
| • | Increased current and non-current receivables from subsidiaries of SEK 9.6 billion. |
| • | Decreased other current receivables of SEK 0.2 billion. |
| • | Decreased cash, cash equivalents and short-term investments of SEK 3.5 billion. |
| • | Decreased current and non-current liabilities to subsidiaries of SEK 3.8 billion. |
| • | Increased other current liabilities of SEK 3.0 billion. |
At year-end, cash, cash equivalents and short-term investments amounted to SEK 55.0 (58.5) billion.
Share information
As of December 31, 2014, the total number of shares in issue was 3,305,051,735, of which 261,755,983 were Class A shares, each carrying one vote, and 3,043,295,752 were Class B shares, each carrying one tenth of one vote. Both classes of shares have the same rights of participation in the net assets and earnings. The two largest shareholders at year-end were Investor AB and AB Industrivärden holding 21.50% and 15.20% respectively of the voting rights in the Parent Company.
In accordance with the conditions of the Long-Term Variable Compensation Program (LTV) for Ericsson employees, 10,517,620 treasury shares were sold or distributed to employees in 2014. The quotient value of these shares was SEK 5.00, totaling SEK 52.6 million, representing less than 1% of capital stock, and compensation received for shares sold and distributed shares amounted to SEK 129.2 million.
The holding of treasury stock at December 31, 2014 was 63,450,558 Class B shares.
The quotient value of these shares is SEK 5.00, totaling SEK 317.3 million, representing 1.9% of capital stock, and the purchase price amounts to SEK 490.3 million.
Proposed disposition of earnings
The Board of Directors proposes that a dividend of SEK 3.40 (3.00) per share be paid to shareholders duly registered on the record date April 16, 2015, 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 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 11,237,175,899 | |||
| Amount to be retained by the Parent Company |
SEK 26,633,889,879 | |||
| Total non-restricted equity of the Parent Company |
SEK 37,871,065,778 | |||
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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 49.5% (53%) and a net cash amount of SEK 27.6 (37.8) 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.
The proposed dividend does not limit the Group’s ability to make investments or raise funds, and it is the Board of Directors’ assessment that the proposed dividend is well-balanced considering the nature, scope and risks of the business activities as well as he capital requirements for the Parent Company and the Group in addition to coming years’ business plans and economic development.
Subsequent events
Effective January 15, 2015 Johan Wibergh left his previous position as Executive Vice President and Head of Segment Networks, to take on a role outside of Ericsson. Wibergh joined Ericsson in 1996 and has since held a number of executive positions within the company. Since 2008, Wibergh has also been part of Ericsson’s Executive Leadership Team.
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Although stepping down from his position immediately, Johan Wibergh will remain available to Ericsson until April 30, 2015 when he formally leaves the company. Effective January 15, 2015, Hans Vestberg will, in addition to his role as President and CEO, assume the role as Head of Segment Networks.
Rockstar Consortium LLC (Rockstar) is a company that was formed in 2011 by Apple, Blackberry, Ericsson, Microsoft, and Sony to purchase approximately 4,000 patent assets out of the original about 6,000 from the Nortel bankruptcy estate. On December 23, 2014, it was agreed among the owners of Rockstar and RPX Corporation (RPXC) that RPX should purchase the remaining patents of Rockstar. The transaction occurred in 2015 and the impact on income will not be material in 2015.
Board assurance
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 adopted by the EU, and give a fair view of the Group’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.
46
Table of Contents
Ericsson Annual Report on Form 20-F 2014
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, changes in equity and cash flows present fairly, in all material respects, the financial position of Telefonaktiebolaget LM Ericsson and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, 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, 2014, based on criteria established in Internal Control—Integrated Framework (2013) 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 “Management’s Report on Internal Control over Financial Reporting”. 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) and International Standards on Auditing. 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.
Stockholm, March 31, 2015
| By: | /s/ PricewaterhouseCoopers | |
| Name: | PricewaterhouseCoopers AB |
47
Table of Contents
Ericsson Annual Report on Form 20-F 2014
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated income statement
| January–December, SEK million |
Notes | 2014 | 2013 | 2012 | ||||||||||||
| Net sales |
C3, C4 | 227,983 | 227,376 | 227,779 | ||||||||||||
| Cost of sales |
–145,556 | –151,005 | –155,699 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Gross income |
82,427 | 76,371 | 72,080 | |||||||||||||
| Gross margin (%) |
36.2 | % | 33.6 | % | 31.6 | % | ||||||||||
| Research and development expenses |
–36,308 | –32,236 | –32,833 | |||||||||||||
| Selling and administrative expenses |
–27,100 | –26,273 | –26,023 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Operating expenses |
–63,408 | –58,509 | –58,856 | |||||||||||||
| Other operating income and expenses |
C6 | –2,156 | 113 | 8,965 | 1) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Operating income before shares in earnings of joint ventures and associated companies |
16,863 | 17,975 | 22,189 | |||||||||||||
| Operating margin before shares in earnings of joint ventures and associated companies (%) |
7.4 | % | 7.9 | % | 9.7 | % | ||||||||||
| Share in earnings of joint ventures and associated companies |
C3, C12 | –56 | –130 | –11,731 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Operating income |
C3 | 16,807 | 17,845 | 10,458 | ||||||||||||
| Financial income |
C7 | 1,277 | 1,346 | 1,708 | ||||||||||||
| Financial expenses |
C7 | –2,273 | –2,093 | –1,984 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Income after financial items |
15,811 | 17,098 | 10,182 | |||||||||||||
| Taxes |
C8 | –4,668 | –4,924 | –4,244 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net income |
11,143 | 12,174 | 5,938 | |||||||||||||
| Net income attributable to: |
||||||||||||||||
| Stockholders of the Parent Company |
11,568 | 12,005 | 5,775 | |||||||||||||
| Non-controlling interest |
–425 | 169 | 163 | |||||||||||||
| Other information |
||||||||||||||||
| Average number of shares, basic (million) |
C9 | 3,237 | 3,226 | 3,216 | ||||||||||||
| Earnings per share attributable to stockholders of the Parent Company, basic (SEK)2) |
C9 | 3.57 | 3.72 | 1.80 | ||||||||||||
| Earnings per share attributable to stockholders of the Parent Company, diluted (SEK)2) |
C9 | 3.54 | 3.69 | 1.78 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| 1) | Includes gain on sale of Sony Ericsson of SEK 7.7 billion. |
| 2) | Based on Net income attributable to stockholders of the Parent Company. |
48
Table of Contents
Ericsson Annual Report on Form 20-F 2014
Consolidated statement of comprehensive income
| January–December, SEK million |
2014 | 2013 | 2012 | |||||||||
| Net income |
11,143 | 12,174 | 5,938 | |||||||||
| Other comprehensive income |
||||||||||||
| Items that will not be reclassified to profit or loss |
||||||||||||
| Remeasurements of defined benefits pension plans including asset ceiling |
–10,017 | 3,214 | –451 | |||||||||
| Tax on items that will not be reclassified to profit or loss |
2,218 | –1,235 | –59 | |||||||||
| Items that may be reclassified to profit or loss |
||||||||||||
| Cash flow hedges |
||||||||||||
| Gains/losses arising during the period |
— | 251 | 1,668 | |||||||||
| Reclassification adjustments for gains/losses included in profit or loss |
— | –1,072 | –568 | |||||||||
| Adjustments for amounts transferred to initial carrying amount of hedged items |
— | — | 92 | |||||||||
| Revaluation of other investments in shares and participations |
||||||||||||
| Fair value remeasurement |
47 | 71 | 6 | |||||||||
| Changes in cumulative translation adjustments |
8,734 | –1,687 | –3,947 | |||||||||
| Share of other comprehensive income of joint ventures and associated companies |
579 | –14 | –486 | |||||||||
| Tax on items that may be reclassified to profit or loss |
5 | 179 | –363 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total other comprehensive income, net of tax |
1,566 | –293 | –4,108 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total comprehensive income |
12,709 | 11,881 | 1,830 | |||||||||
| Total comprehensive income attributable to: |
||||||||||||
| Stockholders of the Parent Company |
12,981 | 11,712 | 1,716 | |||||||||
| Non-controlling interests |
–272 | 169 | 114 | |||||||||
|
|
|
|
|
|
|
|||||||
49
Table of Contents
Ericsson Annual Report on Form 20-F 2014
Consolidated balance sheet
| December 31, SEK million |
Notes | 2014 | 2013 | |||||||||
| Assets |
||||||||||||
| Non-current assets |
||||||||||||
| Intangible assets |
C10, C26 | |||||||||||
| Capitalized development expenses |
3,570 | 3,348 | ||||||||||
| Goodwill |
38,330 | 31,544 | ||||||||||
| Intellectual property rights, brands and other intangible assets |
12,534 | 12,815 | ||||||||||
| Property, plant and equipment |
C11, C26, C27 | 13,341 | 11,433 | |||||||||
| Financial assets |
||||||||||||
| Equity in joint ventures and associated companies |
C12 | 2,793 | 2,568 | |||||||||
| Other investments in shares and participations |
C12 | 591 | 505 | |||||||||
| Customer finance, non-current |
C12 | 1,932 | 1,294 | |||||||||
| Other financial assets, non-current |
C12 | 5,900 | 5,684 | |||||||||
| Deferred tax assets |
C8 | 12,778 | 9,103 | |||||||||
|
|
|
|
|
|||||||||
| 91,769 | 78,294 | |||||||||||
| Current assets |
||||||||||||
| Inventories |
C13 | 28,175 | 22,759 | |||||||||
| Trade receivables |
C14 | 77,893 | 71,013 | |||||||||
| Customer finance, current |
C14 | 2,289 | 2,094 | |||||||||
| Other current receivables |
C15 | 21,273 | 17,941 | |||||||||
| Short-term investments |
C20 | 31,171 | 34,994 | |||||||||
| Cash and cash equivalents |
C25 | 40,988 | 42,095 | |||||||||
|
|
|
|
|
|||||||||
| 201,789 | 190,896 | |||||||||||
|
|
|
|
|
|||||||||
| Total assets |
293,558 | 269,190 | ||||||||||
|
|
|
|
|
|||||||||
| Equity and liabilities |
||||||||||||
| Equity |
||||||||||||
| Stockholders’ equity |
C16 | 144,306 | 140,204 | |||||||||
| Non-controlling interest in equity of subsidiaries |
1,003 | 1,419 | ||||||||||
|
|
|
|
|
|||||||||
| 145,309 | 141,623 | |||||||||||
| Non-current liabilities |
||||||||||||
| Post-employment benefits |
C17 | 20,385 | 9,825 | |||||||||
| Provisions, non-current |
C18 | 202 | 222 | |||||||||
| Deferred tax liabilities |
C8 | 3,177 | 2,650 | |||||||||
| Borrowings, non-current |
C19, C20 | 21,864 | 22,067 | |||||||||
| Other non-current liabilities |
1,797 | 1,459 | ||||||||||
|
|
|
|
|
|||||||||
| 47,425 | 36,223 | |||||||||||
| Current liabilities |
||||||||||||
| Provisions, current |
C18 | 4,225 | 5,140 | |||||||||
| Borrowings, current |
C19, C20 | 2,281 | 7,388 | |||||||||
| Trade payables |
C22 | 24,473 | 20,502 | |||||||||
| Other current liabilities |
C21 | 69,845 | 58,314 | |||||||||
|
|
|
|
|
|||||||||
| 100,824 | 91,344 | |||||||||||
|
|
|
|
|
|||||||||
| Total equity and liabilities1) |
293,558 | 269,190 | ||||||||||
|
|
|
|
|
|||||||||
| 1) | Of which interest-bearing liabilities and post-employment benefits SEK 44,530 (39,280) million. |
50
Table of Contents
Ericsson Annual Report on Form 20-F 2014
Consolidated statement of cash flows
| January–December, SEK million |
Notes | 2014 | 2013 | 2012 | ||||||||||||
| Operating activities |
||||||||||||||||
| Net income |
11,143 | 12,174 | 5,938 | |||||||||||||
| Adjustments to reconcile net income to cash |
C25 | 11,200 | 9,828 | 13,077 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| 22,343 | 22,002 | 19,015 | ||||||||||||||
| Changes in operating net assets |
||||||||||||||||
| Inventories |
–2,924 | 4,868 | 2,752 | |||||||||||||
| Customer finance, current and non-current |
–710 | 1,809 | –1,259 | |||||||||||||
| Trade receivables |
1,182 | –8,504 | –1,103 | |||||||||||||
| Trade payables |
1,265 | –2,158 | –1,311 | |||||||||||||
| Provisions and post-employment benefits |
–859 | –3,298 | –1,920 | |||||||||||||
| Other operating assets and liabilities, net |
–1,595 | 2,670 | 5,857 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| –3,641 | –4,613 | 3,016 | ||||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Cash flow from operating activities |
18,702 | 17,389 | 22,031 | |||||||||||||
| Investing activities |
||||||||||||||||
| Investments in property, plant and equipment |
C11 | –5,322 | –4,503 | –5,429 | ||||||||||||
| Sales of property, plant and equipment |
522 | 378 | 568 | |||||||||||||
| Acquisitions of subsidiaries and other operations |
C25, C26 | –4,442 | –3,147 | –11,529 | 1) | |||||||||||
| Divestments of subsidiaries and other operations |
C25, C26 | 48 | 465 | 9,452 | ||||||||||||
| Product development |
C10 | –1,523 | –915 | –1,641 | ||||||||||||
| Other investing activities |
–3,392 | –1,330 | 1,540 | |||||||||||||
| Short-term investments |
6,596 | –2,057 | 2,151 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Cash flow from investing activities |
–7,513 | –11,109 | –4,888 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Cash flow before financing activities |
11,189 | 6,280 | 17,143 | |||||||||||||
| Financing activities |
||||||||||||||||
| Proceeds from issuance of borrowings |
1,282 | 5,956 | 8,969 | |||||||||||||
| Repayment of borrowings |
–9,384 | –5,094 | –9,670 | |||||||||||||
| Proceeds from stock issue |
— | — | 159 | |||||||||||||
| Sale/repurchase of own shares |
— | 90 | –93 | |||||||||||||
| Dividends paid |
–9,846 | –9,153 | –8,632 | |||||||||||||
| Other financing activities |
–277 | –1,307 | –118 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Cash flow from financing activities |
–18,225 | –9,508 | –9,385 | |||||||||||||
| Effect of exchange rate changes on cash |
5,929 | 641 | –1,752 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Net change in cash |
–1,107 | –2,587 | 6,006 | |||||||||||||
| Cash and cash equivalents, beginning of period |
42,095 | 44,682 | 38,676 | |||||||||||||
|
|
|
|
|
|
|
|||||||||||
| Cash and cash equivalents, end of period |
C25 | 40,988 | 42,095 | 44,682 | ||||||||||||
|
|
|
|
|
|
|
|||||||||||
| 1) | Includes payment of external loan of SEK –6.2 billion attributable to the acquisition of Telcordia. |
51
Table of Contents
Ericsson Annual Report on Form 20-F 2014
Consolidated statement of changes in equity
Equity and Other comprehensive income 2014
| SEK million |
Capital stock |
Additional paid in capital |
Retained earnings |
Stock- holders’ equity |
Non- controlling interest |
Total equity |
||||||||||||||||||
| January 1, 2014 |
16,526 | 24,731 | 98,947 | 140,204 | 1,419 | 141,623 | ||||||||||||||||||
| Net income |
||||||||||||||||||||||||
| Group |
— | — | 11,624 | 11,624 | –425 | 11,199 | ||||||||||||||||||
| Joint ventures and associated companies |
— | — | –56 | –56 | — | –56 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Other comprehensive income |
||||||||||||||||||||||||
| Items that will not be reclassified to profit or loss |
||||||||||||||||||||||||
| Remeasurements related to post-employment benefits |
||||||||||||||||||||||||
| Group |
— | — | –10,014 | –10,014 | –3 | –10,017 | ||||||||||||||||||
| Tax on items that will not be reclassified to profit or loss |
— | — | 2,218 | 2,218 | — | 2,218 | ||||||||||||||||||
| Items that may be reclassified to profit or loss |
||||||||||||||||||||||||
| Cash flow hedges |
||||||||||||||||||||||||
| Gains/losses arising during the year |
||||||||||||||||||||||||
| Group |
— | — | — | — | — | — | ||||||||||||||||||
| Reclassification adjustments for gains/losses included in profit or loss |
— | — | — | — | — | — | ||||||||||||||||||
| Revaluation of other investments in shares and participations |
||||||||||||||||||||||||
| Group |
— | — | 47 | 47 | — | 47 | ||||||||||||||||||
| Changes in cumulative translation adjustments |
||||||||||||||||||||||||
| Group |
— | — | 8,578 | 8,578 | 1) | 156 | 8,734 | |||||||||||||||||
| Joint ventures and associated companies |
— | — | 579 | 579 | — | 579 | ||||||||||||||||||
| Tax on items that may be reclassified to profit or loss2) |
— | — | 5 | 5 | — | 5 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total other comprehensive income, net of tax |
— | — | 1,413 | 1,413 | 153 | 1566 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total comprehensive income |
— | — | 12,981 | 12,981 | –272 | 12,709 | ||||||||||||||||||
| Transactions with owners |
||||||||||||||||||||||||
| Stock issue |
— | — | — | — | — | — | ||||||||||||||||||
| Sale/repurchase of own shares |
— | — | 106 | 106 | — | 106 | ||||||||||||||||||
| Stock purchase plans |
||||||||||||||||||||||||
| Group |
— | — | 717 | 717 | — | 717 | ||||||||||||||||||
| Joint ventures and associated companies |
— | — | — | — | — | — | ||||||||||||||||||
| Dividends paid |
— | — | –9,702 | –9,702 | 3) | –144 | –9,846 | |||||||||||||||||
| Transactions with non-controlling interest |
— | — | — | — | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2014 |
16,526 | 24,731 | 103,049 | 144,306 | 1,003 | 145,309 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| 1) | Changes in cumulative translation adjustments include changes regarding revaluation of goodwill in local currency of SEK 4,794 million (SEK –204 million in 2013 and SEK 1,400 million in 2012), and realized gain/losses net from sold/liquidated companies, SEK 3 million (SEK –20 million in 2013 and SEK –461 million in 2012). |
| 2) | For further disclosures, see Note C8, “Taxes.” |
| 3) | Dividends paid per share amounted to SEK 3.00 (SEK 2.75 in 2013 and SEK 2.50 in 2012). |
52
Table of Contents
Ericsson Annual Report on Form 20-F 2014
Equity and Other comprehensive income 2013
| SEK million |
Capital stock |
Additional paid in capital |
Retained earnings |
Stock- holders’ equity |
Non- controlling interest |
Total equity |
||||||||||||||||||
| January 1, 2013 |
16,526 | 24,731 | 95,626 | 136,883 | 1,600 | 138,483 | ||||||||||||||||||
| Net income |
||||||||||||||||||||||||
| Group |
— | — | 12,135 | 12,135 | 169 | 12,304 | ||||||||||||||||||
| Joint ventures and associated companies |
— | — | –130 | –130 | — | –130 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Other comprehensive income |
||||||||||||||||||||||||
| Items that will not be reclassified to profit or loss |
||||||||||||||||||||||||
| Remeasurements related to post-employment benefits |
||||||||||||||||||||||||
| Group |
— | — | 3,214 | 3,214 | — | 3,214 | ||||||||||||||||||
| Tax on items that will not be reclassified to profit or loss |
— | — | –1,235 | –1,235 | — | –1,235 | ||||||||||||||||||
| Items that may be reclassified to profit or loss |
||||||||||||||||||||||||
| Cash flow hedges |
||||||||||||||||||||||||
| Gains/losses arising during the year |
||||||||||||||||||||||||
| Group |
— | — | 251 | 251 | — | 251 | ||||||||||||||||||
| Reclassification adjustments for gains/losses included in profit or loss |
— | — | –1,072 | –1,072 | — | –1,072 | ||||||||||||||||||
| Revaluation of other investments in shares and participations |
||||||||||||||||||||||||
| Group |
— | — | 71 | 71 | — | 71 | ||||||||||||||||||
| Changes in cumulative translation adjustments |
||||||||||||||||||||||||
| Group |
— | — | –1,687 | –1,687 | 0 | –1,687 | ||||||||||||||||||
| Joint ventures and associated companies |
— | — | –14 | –14 | — | –14 | ||||||||||||||||||
| Tax on items that may be reclassified to profit or loss |
— | — | 179 | 179 | — | 179 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total other comprehensive income, net of tax |
— | — | –293 | –293 | — | –293 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total comprehensive income |
— | — | 11,712 | 11,712 | 169 | 11,881 | ||||||||||||||||||
| Transactions with owners |
||||||||||||||||||||||||
| Stock issue |
— | — | — | — | — | — | ||||||||||||||||||
| Sale/repurchase of own shares |
— | — | 90 | 90 | — | 90 | ||||||||||||||||||
| Stock purchase plans |
||||||||||||||||||||||||
| Group |
— | — | 388 | 388 | — | 388 | ||||||||||||||||||
| Joint ventures and associated companies |
— | — | — | — | — | — | ||||||||||||||||||
| Dividends paid |
— | — | –8,863 | –8,863 | –290 | –9,153 | ||||||||||||||||||
| Transactions with non-controlling interest |
— | — | –6 | –6 | –60 | –66 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| December 31, 2013 |
16,526 | 24,731 | 98,947 | 140,204 | 1,419 | 141,623 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
53
Table of Contents
Ericsson Annual Report on Form 20-F 2014
Equity and Other comprehensive income 2012
| SEK million |
Capital stock |
Additional paid in capital |
Retained earnings |
Stock- holders’ equity |
Non- controlling interest |
Total equity |
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| January 1, 2012 |
16,367 | 24,731 | 102,007 | 143,105 | 2,165 | 145,270 | ||||||||||||||||||
| Net income |
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| Group |
— | — | 17,411 | 17,411 | 163 | 17,574 | ||||||||||||||||||
| Joint ventures and associated companies |
— | — | –11,636 | –11,636 | — | –11,636 | ||||||||||||||||||
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| Other comprehensive income |
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| Items that will not be reclassified to profit or loss |
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| Remeasurements related to post-employment benefits |
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| Group |
— | — | –451 | –451 | — | –451 | ||||||||||||||||||
| Joint ventures and associated companies |
— | — | 50 | 50 | — | 50 | ||||||||||||||||||
| Tax on items that will not be reclassified to profit or loss |
— | — | –59 | –59 | — | –59 | ||||||||||||||||||
| Items that may be reclassified to profit or loss |
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| Cash flow hedges |
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| Gains/losses arising during the year |
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| Group |
— | — | 1,668 | 1,668 | — | 1,668 | ||||||||||||||||||
| Joint ventures and associated companies |
— | — | –25 | –25 | — | –25 | ||||||||||||||||||
| Reclassification adjustments for gains/losses included in profit or loss |
— | — | –568 | –568 | — | –568 | ||||||||||||||||||
| Adjustment for amounts transferred to initial carrying amount of hedged items |
— | — | 92 | 92 | — | 92 | ||||||||||||||||||