Ericsson Returning to full health January 2004 Christopher Seilern +44 (20)

2 Ericsson – Returning to full health The bulk of restructuring is behind us. There are 50k fewer employees than in 2000 and accordingly, 2003 revenues will be 60% lower than in At the same time, Ericsson has spent more than SEK50bn on restructuring and FY04 will see the first profit in four years. Looking ahead, operating margin upside of almost 10%, will yield healthy earnings growth. Although the network market is currently depressed, 3G deployments and improving operator cash flows are looming. WCDMA and GPRS/EDGE take up are increasing rapidly, driving momentum, while at the same time, historically low operator capex levels are set to improve over the coming months. This should drive high single digit growth in the network market on a months time horizon. Valuation, although no longer cheap, still offers plenty of upside (FY05e: 1.3x EV/Sales and 20x PER), while margin expansion (+10% in coming two years) will continue to drive earnings growth. BUY, Fair Value SEK15.4

3 Networks Market: Forecast (Gartner) Infrastructure market to grow by CAGR e of 10% Europe/US CAGR of 11% as 3G transition strongest in established mrkts 2G/2.5G market will decline by 10% pa vs growth of 42% pa for 3G

4 Networks Market: Underperforming Momentum is improving – guidance has been lifted 2H vs1H – better FY04? Market forecasts still exceed vendor guidances (mainly WCDMA) We assume that Ericsson will continue to trail Nokia Ericsson underperforms Nokia Networks

5 Networks Market: Operator Capex FY02 Capex/Sales at 15 year lows (top 40 global operators) FY03 levels still likely to be depressed, but unlikely to extend BUT: 3G transition, economic recovery and improving operator balance sheets will drive network infrastructure investments

6 Networks Market: 3G Deployments 25% of operators have 3G services vs 11% one year ago Within one year, almost 90% of operators will have 3G services Investments to continue beyond 2004/5 as initial coverage likely to be thin

7 Ericsson: Huge Restructuring I Headcount reduced by 52’000 (more than 50% in 3 years) SEK51Bn in restructuring charges Margins down 24%, from +11% (FY00) to –13% (FY03) Revenues down almost 60%, from SEK274Bn (FY00) to SEK115Bn (FY03) - SO - Annualised Opex run rate down 56%, from SEK88Bn to SEK38Bn  Opex/Employee down 6% in last 18 months  Opex reduction target 1Q ahead of schedule  Annualised Opex run rate to be cut by further 10% to SEK34Bn by 3Q04 Headcount to be reduced by a further 7’000 Operating margins to rebound to 7% in FY04 and to 10% in FY05 Revenues to stabilise in FY04, and grow 5% in FY05 (ex FX)

8 Ericsson: Huge Restructuring II Annualised Opex run rate is most important metric Management cost control track record is very good Annualised Opex is increasingly efficient and set to improve further Opex/employee improvesOpex/employee tracks headcount reduction

9 Ericsson: Huge Restructuring III Margins and profits remained weak until late FY02, despite cost cutting… … but operating efficiency followed massive headcount reduction… … and will complement/boost effect of cost cutbacks Opex/employee improvesOpex/employee tracks headcount reduction

10 Ericsson: Huge Restructuring IV Cost controls, restructuring and rights issue have cleaned up balance sheet Receivables now at 73 days vs 102 days in FY00 Inventories now at 29 days vs 59 days in FY00 Further upside likely in balance sheet improvements Nokia

11 Ericsson share – outperform? One of the worst performers over 3m (-11% relative)… … but still one of the best performers over 12m (+24% relative) Current levels are a good buying opportunity !

12 Ericsson Valuation – Peers Price/Sales discount vs peers, even if restructuring has been priced in Significant Price/Sales discount vs US peers !

13 Ericsson Valuation – History / Nokia Price/Sales close to historical levels (1.6x) again Price/Sales discount vs Nokia slightly above historical average, but…  Margin leverage is much greater at Ericsson (18% vs 0% at Nokia)  Growth leverage is greater at Ericsson (100% networks, vs 18% at Nokia)

14 Ericsson Valuation – DCF 5% revenue CAGR and 9% FCF CAGR yield SEK15.1 Fair Value Working Capital will not grow until FY05 WACC 8.7%, Terminal growth 3.5%, Equity Risk Premium 4.0% !

15 Appendix

16 Appendix – Share price chart

17 Appendix – revenue/margin models

18 Appendix – technological transition

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