ERIC

Business Context and Reporting Period

This Form 20-F is the annual report for Telefonaktiebolaget LM Ericsson (Ericsson) for the fiscal year ended December 31, 2004. The report details the company's recovery from the telecommunications market downturn, highlighting a return to profitable growth, increased market share, and the successful completion of restructuring programs initiated in 2001-2003. The company operates globally, supplying network equipment and services to mobile and fixed network operators, with a strategic focus on end-to-end solutions and operational excellence.

Key Financial Metrics (2004)

Material Changes vs. Prior Period (2003)

• Revenue Growth: Net sales increased by 12% (SEK 14.2 billion) to SEK 131.97 billion, driven by a rebound in the mobile systems market and strong growth in GSM and WCDMA equipment.
• Profitability Turnaround: The company returned to profitability with an operating income of SEK 28.9 billion, a significant improvement from an operating loss of SEK 11.2 billion in 2003. Operating margins improved from -9.5% to a record 21.9%.
• Net Income: Net income swung from a loss of SEK 10.8 billion in 2003 to a profit of SEK 19.0 billion in 2004.
• Cost Efficiency: Operating expenses decreased to SEK 37.1 billion (28.1% of sales) from SEK 51.0 billion (34.0% of sales) in 2003, reflecting the completion of restructuring and improved efficiency.
• Joint Venture Performance: The share in earnings of the Sony Ericsson joint venture improved sharply from a loss of SEK 0.6 billion to a profit of SEK 2.3 billion.
• Balance Sheet Strength: Net cash increased from SEK 27.0 billion to SEK 42.9 billion. Long-term debt was reduced by SEK 13.6 billion through repayments.

Guidance, Outlook, and Risks

Management Commentary and Outlook

Management expects the mobile systems market to increase slightly in 2005. The company aims to maintain the performance levels achieved in 2004 to continue generating best-in-class margins. Strategic priorities include refining the long-term vision, reinforcing customer needs, improving ways of working, focusing on consumer-driven technology leadership, and launching new products. The company is transitioning from Swedish GAAP to International Financial Reporting Standards (IFRS) starting in 2005.

Risks and Contingencies

• Market Conditions: Demand remains unpredictable due to operator consolidation and capital expenditure cycles. A slowdown in operator spending could materially affect results.
• Customer Concentration: The ten largest customers account for approximately 49% of net sales. Loss of a key customer could have a significant adverse impact.
• Customer Financing: Ericsson provides financing to customers, particularly in emerging markets. Defaults or restructuring of these credits could lead to credit losses.
• Foreign Exchange: A significant portion of sales is in currencies other than SEK. A stronger SEK negatively impacts competitiveness and reported results.
• Technology and Competition: Rapid technological change and intense competition require continuous R&D investment and successful product launches.
• Legal Proceedings: The company is a defendant in class actions regarding health effects of mobile phones and faces tax disputes in Sweden regarding commission payments.

Important Facts for Investor Verification

• Dividend Proposal: The Board proposes a dividend of SEK 0.25 per share for 2004, the first dividend since 2000.
• IFRS Transition: Verify the impact of the transition to IFRS in 2005, which is expected to decrease 2004 net income by approximately SEK 1.5 billion due to retrospective capitalization of development costs.
• Credit Ratings: As of year-end 2004, credit ratings were below investment grade (Moody's Ba2, S&P BB+), though upgrades were noted in early 2005 (S&P raised to BBB-).
• Restructuring Completion: Confirm that no restructuring charges were recognized in 2004, as the major programs were completed ahead of schedule.
• Customer Financing Exposure: Review the exposure to customer financing credits (SEK 8.9 billion outstanding), with 60% related to Latin America.