Ericsson Financial Analysis

Margin analysis

(We will differentiate two periods on the graphs presented below, due to a change in accountability rules of the company in 2002)

Sales trend

We can differentiate three periods concerning sales trend:
- Between 1998 and 2000, Ericsson knew a strong growth period (+22% in average), mainly due to high demand in Europe, North and South America. During this period, Ericsson managed to increase its market share in mobile systems despite shortage in components. It also increased its market share in 2G infrastructure.
- 2001 is a watershed for the company; between 2001 and 2003, the sales fell by -18% in average. The market for fixed infrastructure declined by more than 30% in 2002. This situation led the company to cut costs and operate massive restructuring efforts and layoffs. However, even if the decline in sales is very serious, Ericsson managed to limit the damages by focusing on service sales (network integration, network management and consulting).
- 2004 is the beginning of the company recovery: Ericsson managed to increase its sales by 12% thanks to a new strategy based on new incentive systems, new training programs and Web investments to automate ordering system.

Concerning sales market areas, we can see on this bar chart that it remained quite stable during all the period in Europe in 2001, due to financial constraints on operators’ capital expenditure and in Latin America in 2002/03 because of bad macro economic conditions.
Cost of sales

Globally, we can underline that during the growth period, the cost of sales followed sales trend: gross margin remained stable around 40-45% of net sales (with a big difference in 2000, depending on the accountability system). Between 2001 and 2003, gross margin fell to 30% in average due to a drop in cost of sales not as important as the drop of sales. 2004 is the return of a healthy gross margin, due to a rise in sales and reduction in cost of sales.