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Elektrobit Group Oyj - EB, ELEKTROBIT CORPORATION, INTERIM REPORT, JANUARY TO SEPTEMBER 2009

October 29, 2009

EB, ELEKTROBIT CORPORATION, INTERIM REPORT, JANUARY TO SEPTEMBER 2009


STOCK EXCHANGE RELEASE
Free for publication on October 29, 2009 at 8.00 am. (CET+1)
EB, ELEKTROBIT CORPORATION, INTERIM REPORT, JANUARY TO SEPTEMBER 2009
 
EB'S OPERATING CASH FLOW POSITIVE AND 3Q FINANCIAL PERFORMANCE ACCORDING TO THE EXPECTATIONS
 
SUMMARY 3Q 2009
 
-  Net sales amounted to EUR 33.5 million (EUR 34.5 million, 3Q 2008), representing a -2.7 per cent decrease year-on-year.
-  Operating loss improved to EUR -0.8 million (EUR -12.9 million, 3Q 2008).
-  Operating cash flow amounted to EUR 4.6 million (EUR -7.7 million, 3Q 2008). The net cash flow increased to EUR 1.8 million (EUR -7.6 million, 3Q 2008).
-  Cash and other liquid assets totaled to EUR 62.2 million (EUR 67.2 million, 3Q 2008)
-  Equity ratio remained at a high level of 71.1% (69.5%, 3Q 2008)
-  Earnings per share were EUR -0.00 (EUR -0.11, 3Q 2008)
 
Decrease of -10.3 per cent in the net sales (EUR 37.4 million, 2Q 2009) is mainly due to the typical seasonality effect in R&D services business as stated in the outlook given for the second half of 2009.  
 
EB'S CEO JUKKA HARJU:
"EB's net sales and consequently the operating result were at the expected level and generated clearly positive cash flow, despite the market environment prevailed challenging. However, the operating result is by no means satisfactory and profitability improvement maintains to be our most important short term target."
 
 
FINANCIAL PERFORMANCE DURING JANUARY - SEPTEMBER 2009
(Comparisons are given to January-September 2008, unless otherwise indicated)
 
EB's net sales during January - September 2009 decreased -7.4 per cent to EUR 113.7 million (EUR 122.8 million). Operating loss from business operations amounted to EUR -0.3 million and the non-recurring costs totaled to EUR -1.6 million, resulting to the operating loss of EUR -1.9 million (EUR -34.2 million).
 
The Automotive Business Segment's net sales during January - September 2009 amounted to EUR 44.7 million (EUR 44.6 million) representing a slight growth of 0.3 per cent. The operating loss reduced to EUR -4.0 million (EUR -9.8 million). The significant improvement of operating result with flat turnover reflects the profitability improvement measures taken.
 
The Wireless Business Segment's net sales during January - September 2009 amounted to EUR 68.6 million (EUR 77.9 million), representing a decline of -11.9 per cent. Operating result from business operations amounted to EUR 2.5 million and the non-recurring costs totaled to EUR -1.2 million, resulting to the operating profit of EUR 1.3 million (EUR -23.6 million). The significant improvement of operating result with lower turnover year-on-year was mainly due to the execution of the earlier announced profitability improvement program.
 
The total R&D investments during the reporting period were EUR 10.5 million (EUR 30.5 million), equaling 9.2 per cent of the net sales (24.8 per cent in 2008). The significant reduction of the R&D investments was mostly due to the change of the business model (and consequent exit from developing own products) in Mobile WiMAX in October 2008 and exit from RFID technology business in February 2009.
 
 
 
- Cash flow from Business Operations amounted to EUR 0.9 million (EUR -24.1 million).
- Equity ratio was 71.1% (69.5%).
- Net gearing was -39.5% (-32.2%).
 
 
QUARTERLY FIGURES
 
The distribution of the Group's overall net sales and profit, MEUR:
 
3Q 09
2Q 09
1Q 09
4Q 08
3Q 08
Net sales
33.5
37.4
42.8
49.5
34.5
Operating profit (loss)
-0.8
-1.1
0.0
-8.5
-12.9
Operating profit (loss) without non-recurring costs
-0.8
-0.4
0.9
-2.8
-11.3
Result before taxes
-0.6
-0.7
-0.9
-11.8
-14.4
Result for the period
-0.5
-1.6
-1.1
-14.0
-14.6
 
The distribution of the net sales by Business Segment, MEUR:
 
3Q 09
2Q 09
1Q 09
4Q 08
3Q 08
Automotive
14.8
13.5
16.4
18.7
15.9
Wireless
18.6
23.7
26.3
30.7
18.5
Corporation total
33.5
37.4
42.8
49.5
34.5
 
The distribution of the net sales by market area, MEUR and %:
 
3Q 09
2Q 09
1Q 09
4Q 08
3Q 08
Asia
1.8
5.5%
2.5
6.8%
4.4
10.3%
3.1
6.2%
0.9
2.6%
Americas
11.1
33.1%
12.5
33.5%
11.9
27.7%
10.9
22.0%
7.1
20.7%
Europe
20.6
61.4%
22.3
59.7%
26.6
62.1%
35.5
71.8%
26.4
76.7%
 
Net sales (external) and operating profit development by Business Segments and Other businesses, MEUR:
 
3Q 09
2Q 09
1Q 09
4Q 08
3Q 08
Automotive
Net sales
Operating profit (loss)
 
14.8
-0.9
 
13.5
-2.5
 
16.4
-0.7
 
18.7
-2.3
 
15.9
-4.1
Wireless
Net sales
Operating profit (loss)
 
18.6
-0.1
 
23.7
0.9
 
26.3
0.5
 
30.7
-4.9
 
18.5
-8.1
Other businesses
Net sales
Operating profit (loss)
 
0.2
0.2
 
0.2
0.4
 
0.1
0.2
 
0.1
-1.3
 
0.1
-0.7
Total
Net sales
Operating profit (loss)
 
33.5
-0.8
 
37.4
-1.1
 
42.8
0.0
 
49.5
-8.5
 
34.5
-12.9
 
 
BUSINESS SEGMENTS' MAIN EVENTS DURING 3Q 2009
 
EB's reporting is based on the Automotive and Wireless Business Segments.
 
AUTOMOTIVE
 
The Automotive Business Segment consists of in-car software products, navigation software for after market devices (PND, personal navigation devices) and R&D services for the automotive industry with leading car manufacturers, car electronics suppliers (Tier 1) and automotive chipset suppliers as customers. By combining its software products and engineering services EB is creating unique, customized solutions for its automotive customers.
 
During the third quarter of 2009, the net sales of the Automotive Business Segment amounted to EUR 14.8 million (EUR 15.9 million, 3Q 2008), representing a year-on-year decline of -6.6 per cent. The decline in net sales reflects the challenging automotive market conditions in which customers constrained their R&D investments. Despite of the slight decline in net sales, the operating result improved significantly to EUR -0.9 million (EUR -4.1 million, 3Q 2008) due to the taken profitability improvement measures.
 
Automotive Business Segment continued the execution of its announced strategy including investments into EB's automotive software products and global solution services to its customers.
 
The joint venture between EB and AEV (Audi Electronics Venture GmbH) named e.solutions GmbH started its operations in July. It concentrates on the development of a software framework and control system for in-vehicle infotainment systems.
 
In September EB and NEC Electronics announced their collaboration for AUTOSAR solutions including availability of an AUTOSAR 3.0 compatible software package with basic software and comprehensive tool chain for various hardware platforms. This enables easy design of application software without the need for new developments.
 
 
WIRELESS
 
The Wireless Business Segment comprises the following businesses:
- Wireless Solutions provides customized solutions and R&D services for wireless industry and other industries utilizing wireless technologies.
- Wireless Communications Tools provides test tools for measuring, modeling and emulating radio channel environments.
 
During the third quarter of 2009, the net sales of the Wireless Business Segment amounted to EUR 18.6 million (EUR 18.5 million, 3Q 2008), representing a slight increase of 0.2 per cent. The operating loss was EUR -0.1 million (EUR -8.1 million, 3Q 2008). The significant improvement of operating result with flat turnover year-on-year was mainly due to the execution of the earlier announced profitability improvement program.
 
EB continued to further develop its offering towards customized solutions by integrating own and 3rd party technologies and providing own R&D services. Even though the challenging economic situation prevailed in the mobile communication R&D services market, Wireless Solutions business managed to keep the volumes of R&D services at expected level. The demand for satellite-terrestrial network device solutions continued to be strong during the quarter.
 
The sales of wireless communications emulation and design tools continued to be driven mainly by development of LTE systems and devices.
 
In July EB announced that the EB-designed satellite-terrestrial smartphone, used by TerreStar Networks, successfully completed a first ever handset-to-handset VoIP call over satellite network, highlighting EB's strength in device development.
 
In August EB announced it has joined the Symbian Foundation. EB holds a seat on the Release Council, which coordinates the integration of contributions to the Symbian source code into stable and timely platform and tools releases.
 
In September the EB MID Reference Device was recognized as a finalist at the annual 4G World Awards for Best Mobile Internet Device. Further in September EB introduced multimedia improvements to its MID reference design.
 
The earlier announced closing of the EB Turku site was finalized by the end of September.
 
 
MARKET OUTLOOK
 
As a consequence of the general economic environment, both automotive and wireless communication market growth is unlikely before the global economic environment starts to improve.
 
The share of electronics and software in cars has grown significantly during the past years and it is expected that the trend of increased use of software in automotive continues to prevail in the market. The majority of the innovation and differentiation in the automotive industry is brought about by software and electronics. In order to enable faster innovation, to improve quality and development efficiency and to reduce complexity related to software, the use of standard software solutions is expected to increase. The estimated automotive software general market growth rate of some 15 per cent (Frost & Sullivan) is negatively affected by the current downturn of the automotive industry. According to Strategy Analytics the global market for automotive electronic systems fell by 3 per cent in 2008 and is forecasted to fall by a further 15 per cent in 2009, due to the global recession. However, the underlying growth of the automotive software market is expected to continue past the crisis and the cost pressures of the automotive industry are expected to accelerate the need of productized, efficient software solutions EB is offering. EB's net sales cumulating from the automotive industry is currently driven by the development of new cars and platforms and is not directly dependent on production volumes of the car industry. While customers remain very cost conscious there are early signs that the demand starts to slowly recover.
 
The global mobile infrastructure market is decreasing and the consolidation of the industry is expected to continue. LTE standard is gaining strength while the momentum of Mobile WiMAX standard has been decreasing. Going forward, EB's business driven by LTE is increasing while EB's future sales revenues are not materially dependent on Mobile WiMAX technology. The global mobile phone market is leveling off and it is expected to decrease in volume in short-term. The value share is expected to move towards higher-end due to the increased demand for new features and services. New open software architectures and platforms are creating opportunities for companies such as EB with strong integration capabilities.
 
The mobile satellite communication service industry is introducing new data and mobile communication services with new operators being formed and traditional ones upgrading their solutions and offerings. Mastering of multi-radio technologies and end-to-end system architectures covering both terminal and network technologies, has gained importance in the complex wireless technology industry. The demand for EB's satellite-terrestrial device solutions is expected to continue. The satellite-terrestrial and Mobile Satellite Services (MSS) market demand is expected to start moving from the current reference design phase towards the launch of commercial products and services. This can create new service and product related business opportunities for companies such as EB.
 
The mobile communication R&D services market continues to be challenging and the continuing price pressure drives increasing off-shoring in the industry. However, attractive niches continue to exist (OVUM). Because of the economical slowdown, companies will review their R&D costs and project portfolios resulting in reduction of the overall R&D expenditures and activities during the next couple of years, resulting in less demand for external R&D services. However, continuing OEMs need to reduce their fixed costs and increase flexibility that can create new opportunities for partnering for companies such as EB.
 
The overall wireless communications tools market was weak following the current economic downturn. However, there is a need for advanced development tools for 3GPP LTE technology and that is expected to remain as a driver for the demand in the medium and long term. EB provides world leading channel emulation tools for the development of MIMO based 3GPP LTE and other advanced radio technologies.
 
 
RESEARCH AND DEVELOPMENT DURING 3Q 2009
 
EB continued to invest in R&D in the automotive software products and tools and radio channel emulation products.
 
The total R&D investments during the third quarter of 2009 were EUR 3.5 million (EUR 8.9 million, 3Q 2008), equaling 10.5 per cent of the net sales (25.7 % in 2008). The reduction was mostly due to the change of the business model (and consequent exit from developing own products) in Mobile WiMAX in October 2008 and exit from RFID technology business in February 2009.
 
 
OUTLOOK FOR THE SECOND HALF OF 2009
 
The more general market outlook by the businesses is presented under the Market Outlook section.
 
Improving the profitability further continues to be the main focus of EB during the second half of 2009.
 
EB expects the net sales during the second half of 2009 to be lower than during the first half of 2009 (EUR 80.2 million). The operating result in the second half of 2009 is expected to be at the level of or lower than the operating profit from business operations without non-recurring items in the first half of 2009 (EUR 0.5 million).
 
As earlier announced in the Interim Report January - June 2009, the third quarter of 2009 is estimated to be weaker than the latter part of the half due to the holiday period and the nature of R&D services business.
 
 
RISKS AND UNCERTAINTIES
 
EB has identified a number of business, market and finance related factors that can affect the level of sales and profits. Those of the greatest significance on a short term are those affecting the utilization and chargeability levels and average hourly prices of R&D services. On the ongoing financial period the global economic slowdown may affect the demand for the EB's services, solutions and products and provide pressure on e.g. volumes and pricing. It may also increase the risk for credit losses.  As the EB's customer base consists mainly of companies operating in the fields of automotive and telecommunications, the company is exposed to market changes in these industries. EB believes that expanding the customer base will reduce dependence on individual companies and that the company will thereby be mainly affected by the general business climate in automotive and telecommunication industries. However, some parts of EB's business are more sensitive to customer dependency than others. The more general market outlook by the businesses is presented under the Market Outlook section.
 
EB's operative business risks are mainly related to following items: uncertainties and short visibility on customers' product program decisions, their make or buy decisions and on the other hand, their decisions to continue, downsize or terminate current product programs, ramping up and down project resources, timing and on the other hand successful utilization of the most important technologies and components, competitive situation and potential delays in the markets, timely closing of customer and supplier contracts with reasonable commercial terms, delays in R&D projects, activations based on customer contracts, obsolescence of inventories and technology risks in product development causing higher than planned R&D costs.  In addition there are typical industry warranty and liability risks involved in selling EB's services, solutions and products. Revenues expected to come from new products for existing and new customers include normal timing risks.
 
More information on the risks and uncertainties affecting EB can be found on the Company website at www.elektrobit.com
 
 
STATEMENT OF FINANCIAL POSITION AND FINANCING
 
The figures presented in the statement of financial position of September 30, 2009, are compared with the statement of financial position of December 31, 2008 (EUR 1,000).
 
 
Net cash flow from operations during the period under review:
 
The amount of accounts and other receivables, booked in current receivables, was EUR 55.6 million (EUR 61.9 million on December 31, 2008). Accounts and other payables, booked in interest-free current liabilities, were EUR 27.7 million (EUR 38.7 million on December 31, 2008).
 
The amount of non-depreciated consolidation goodwill at the end of the period under review was EUR 18.5 million (EUR 18.3 million on December 31, 2008).
 
The amount of gross investments in the period under review was EUR 2.4 million, consisting of replacement investments. Net investments for the reporting period totaled EUR 1.5 million. The total amount of depreciation during the period under review was EUR 7.5 million, including EUR 1.6 million of depreciation owing to business acquisitions.
 
The amount of interest-bearing debt at the end of the reporting period was EUR 17.8 million. The distribution of net financing expenses on the income statement was as follows:
 
 
EB's equity ratio at the end of the period was 71.1 per cent (64.9 per cent at the end of 2008).
 
The figures from the period under review includes the statutory reserves EUR 3.2 million.
 
EB follows a hedging strategy, the objective of which is to ensure the margins of business operations in changing market circumstances by minimizing the influence of exchange rates. In accordance with the hedging strategy, the agreed customer commitments net cash flow of the currency in question is hedged. The net cash flow is determined on the basis of sales receivables, payables, the order book and the budgeted net currency cash flow. The hedged foreign currency exposure at the end of the review period was equivalent to EUR 10.5 million.
 
 
PERSONNEL
 
EB employed an average of 1610 people between January and September 2009. At the end of September, EB had 1556 employees (1735 at the end of 2008). A significant part of EB's personnel are product development engineers. 
 
 
CHANGES IN COMPANY'S MANAGEMENT
 
EB appointed M.Sc (Eng.), M.Sc (Econ.) Jukka Harju as CEO of the Company as of June 4, 2009. Along with the appointment Harju resigned from the membership of the EB's Board of Directors and from the Chairmanship of the Board's committee for Automotive Segment. Jorma Halonen, member of EB's Board of Directors, was elected as the new Chairman of the Automotive committee. In addition to Halonen, Seppo Laine, Staffan Simberg and Erkki Veikkolainen continued to serve as EB Board members and Juha Hulkko continued as the Chairman of the Board.
 
CEO Pertti Korhonen resigned from EB as of June 3, 2009.
 
EB's Board of Directors and Corporate Executive Board can be found from the Company's Internet pages at: www.elektrobit.com/corporate_governance .
 
 
FLAGGING NOTIFICATIONS
 
There were no changes in ownership during the period under review that would have caused flagging notifications which are obligations for disclosure in accordance with Chapter 2, section 9 of the Securities Market Act.
 
 
Oulu, October 29, 2009
 
EB, Elektrobit Corporation
The Board of Directors
 
 
Further Information:
Jukka Harju
CEO
Tel. +358 40 344 5501
 
Panu Miettinen
CFO
Tel. +358 40 344 5338
 
 
Distribution:
NASDAQ OMX Helsinki
Principal media
 
 
INVITATION TO PRESS CONFERENCE ON EB'S 3Q 2009 RESULT
 
EB, Elektrobit Corporation's Interim Report January - September 2009 will be published on Thursday, October 29, 2009 at 8.00 am (CET+1). The release will be available at EB's website immediately after that.
 
EB will hold a conference call for media, analysts and institutional investors on the same day at 12.00 am (CET+1). The presentation will be shown simultaneously in the Internet through WebEx. The conference will be held in English.
 
To join the conference call please dial +358 20 699 101. The access code is 757344#
 
To follow the presentation online through WebEx, please go to www.elektrobit.com/investors. In technical problems, please go to www.elektrobit.com/webcast/instructions or call number +358 40 344 5148.
 
The recording of the conference call and the presentation will be available after the conference on EB's website www.elektrobit.com/investors.
 
October 22, 2009
EB, Elektrobit Corporation
Corporate Communications
 
 
 
EB, ELEKTROBIT CORPORATION, INTERIM REPORT JANUARY - SEPTEMBER 2009
(unaudited)
The Interim Report has been prepared in accordance with IAS 34 Interim Financial Reporting.
 
 
 
 
 
NOTES TO THE INTERIM REPORT
 
Accounting principles for the Interim Report:
The Interim Report has been prepared in accordance with IAS 34 Interim Financial Reporting. The same accounting policies and methods of computation are followed in the interim report as compared with annual financial statements.
 
The Group has adopted following standards:
 
IAS 1 (Revised) Presentation of Financial Statements. The revision mainly addresses the presentation in the income statement and the statement of changes in equity.
 
IFRS 8 Operating Segments. The new standard replaces IAS 14 Segment Reporting. Under IFRS 8, the reporting is based on the management's internal reporting system and measurement principles. The new standard doesn't have any impact on the comparative information. From January 1, 2009 the reporting segments have been the same, Automotive and Wireless, as they are according to the IAS 14 standard. Items not allocated to segments are included under Other items.
 
Explanatory comments about the seasonality or cyclicality of reporting period operations:
The Company operates in business areas which are subject to seasonal fluctuations.
 
The nature and amount of items affecting assets, liabilities, equity, net income, or cash flows which are unusual because of their nature, size or incidence:
The result of the reporting period comprises non-recurring restructuring costs of EUR -1.6 million.
 
Dividends paid:
The General Meeting held on March 19, 2009 decided in accordance with the proposal of the Board of Directors that no dividend shall be distributed.
 
SEGMENT INFORMATION (MEUR)
 
 
 
Material events subsequent to the end of the interim period not reflected in the financial statements for the interim period:
There are no such material events subsequent to the end of the interim report period that have not been reflected in this report.
 
The effect of changes in the composition of the group structure during the interim period:
On February 2, 2009 EB exited from RFID technology business by selling 7iD Technologies GmbH to the acting management of the said company in Austria. On June 22, 2009 EB and AEV (Audi Electronics Venture GmbH) established a joint venture named e.solutions GmbH. EB holds a 51% stake of the new company, and thus it will be recorded as EB's subsidiary in the consolidated financial statement. AEV holds the remaining 49% stake.